Understandability and Transparency of the Financial Statements of ...

5.4.1.1 Financial Statements
Financial statements enable their users to determine how the charity‟s funds were
received and spent (Connolly & Dhanani, 2009). In fact the concept of accountability
seems inextricably linked with the view that financial statements should provide
information to satisfy the information needs of users (Connolly & Hyndman, 2004).
This underlines the definition of accounting as "the process of identifying, measuring
and communicating economic information to permit informed judgments and decisions
by users of the information” (American Accounting Association, 1966, p. 1). The
American Accounting Association (1966) also developed four guidelines for
communicating this information: (1) Appropriateness to expected use; (2) Disclosure of
significant relationships; (3) Uniformity of practices within and among entities; and (4)
Consistency of practices through time.
The fourth guideline is particularly relevant to the charities sector, as an English study
of 1,000 users of annual reports (Charity Commission, 2004) found that 60% of
respondents considered the ability to compare important information between charitable
organisations would affect their decision about which organisation to support. This
reinforces Connolly and Hyndman‟s (2001) supposition that the dissemination of
accounting information is an important aspect of discharging accountability. In
particular, financial statements are generally recognised as key documents in the
discharge of accountability to upward stakeholders (Connolly & Hyndman, 2004).
Accurate and relevant information about organisations in the charities sector is essential
for real accountability and for trust and confidence in the sector (Charity Commission,
2004). Access to charities‟ financial statements has recently become possible in New
Zealand due to the development of a Charities Register. This register will ultimately
provide public access to the financial accounts of all registered charities (Charities
Commission, 2006f). This will support Brandeis (cited in Fishman, 2007, p. 123) who
said in 1914 that “sunlight is the best disinfectant”. This was reiterated by Fisher
(2006a, p. 1) who felt that “opening the books” of charities will provide more
transparency for contributors to charities.
Various authors have (Connolly & Dhanani, 2009; Connolly & Hyndman, 2003)
highlighted the limited role financial statements actually take in discharging
accountability, as they do not explicitly link to the success, or otherwise, of the charity‟s
activities. This supports Cordery & Baskerville (2005) who consider that beneficiaries
often would have their accountability better met with comparable non-financial
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