Buying from a board member's business
What a non-profit should do when it buys from a business owned by a board member or a manager's relative, and what its financial statements must disclose.
By Achekam · · 5 min read · For Non-profit businesses in South Africa, Nigeria, Kenya
In a small community, the best printer in town may well be owned by the treasurer of your board. The caterer who knows your events best may be the programme manager's sister. A board member may offer the use of their company's boardroom for free. None of this is wrong in itself. Non-profits are built on networks of people who care, and those people often run businesses.
What turns an ordinary purchase into a problem is secrecy, or a decision made by the person who benefits from it. Funders, auditors and donors do not expect a non-profit to avoid every connection. They expect it to recognise the connection, manage the decision properly and disclose it. Here is how.
Who counts as a related party
IAS 24, the standard on related party disclosures, says a person, or a close member of that person's family, is related to a reporting entity if that person has control, joint control or significant influence over it, or is a member of its key management personnel. The IFRS Foundation summarises the standard on its IAS 24 page.
In a non-profit, that usually takes in:
- Board members or trustees, who direct the organisation.
- The chief executive or director and other senior managers who run it day to day.
- Close family members of any of these people.
A business owned or run by any of them is where most related supplier questions arise. Your accountant can help you apply the standard's full definition to your own structure, including any businesses those people control.
It counts even when nothing is charged
IAS 24 defines a related party transaction as a transfer of resources, services or obligations between the entity and a related party, regardless of whether a price is charged.
That catches more than purchases. A board member's firm providing free office space, a trustee lending a vehicle, a director's company printing a campaign at a discount: all of these are related party transactions. Generous ones are still worth recording, because a funder reading the accounts needs to know the organisation depends on them.
The conflict of interest policy does the real work
The National Council of Nonprofits lists common non-profit financial policies, such as how cash is handled, how travel expenses are reimbursed, the board's role in reviewing the executive director's pay and how assets are invested. It calls a conflict of interest policy perhaps the most important of all.
A workable policy asks three things of the person with the connection:
- Declare it, in writing, as soon as the possibility of a purchase arises, and keep a register of declared interests updated every year.
- Step out of the decision. They do not take part in choosing the supplier, approving the order or approving payment, and they leave the room for that discussion.
- Have it minuted. The board or committee minutes record the declaration, who decided, and why the supplier was chosen.
The policy should also say who may approve a related purchase, and when it must go to the full board.
Competing quotes and a written reason
The strongest evidence that a related supplier was chosen on merit is a fair comparison with others.
In Achekam, supplier quotations are captured against a requisition and one is selected. Choosing a quotation that is not the cheapest needs a written reason, which is kept, and a quotation can also be disqualified with a reason. Suppliers come from one supplier list with duplicate checks by name or VAT number, so a related company cannot appear twice under slightly different names to look like two independent bidders.
A worked example in words. The organisation needs its annual report designed and printed. The communications officer raises a requisition and invites three printers to quote, including the treasurer's company, which has declared its interest. All quotations are captured against the requisition. The treasurer's company is not the cheapest, but it can print in time for the funders' meeting and the cheapest cannot. The selection is made by the director, who records that reason in the written note Achekam requires, and the board minutes note the treasurer's declaration and absence from the decision.
Patterns worth a second look
Some arrangements are designed to look independent when they are not. Achekam's procurement integrity review, sold as its own add-on, raises questions about warning patterns such as competing quotations that share contact or bank details, or a supplier paid into an employee's bank account. One limit to know: its check for purchases split to stay under a threshold does nothing until a threshold is set, and the app cannot set one.
The review looks at quotations and payments. The relationships themselves, who is related to whom, still live in your register of declared interests, so keep that register current and check new suppliers against it.
What the financial statements must disclose
IAS 24's objective is to ensure that financial statements contain the disclosures needed to draw attention to the possibility that the entity's financial position and results may have been affected by related parties and by transactions and outstanding balances, including commitments, with them.
Where there have been related party transactions during the periods covered, IAS 24 requires disclosure of the nature of the related party relationship and information about the transactions and outstanding balances, including commitments, that users need to understand their potential effect. In practice, the annual financial statements should let a reader see, for example, that the organisation bought printing from a company owned by a board member, what it bought, and whether anything was still owed at year end. Your accountant will draft the note; your job is to give them a complete list.
Keep the list as you go
Ask every board member and senior manager to update their declaration of interests now, and keep a running list of related suppliers so the year-end list is ready. For the procurement add-on, read the procurement integrity review, and for how funders view supplier choices, choosing suppliers funders will accept.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
