Understandability and Transparency of the Financial Statements of ...

Western Australia, all financial statements must be audited (Institute of Chartered
Accountants in Australia, 2009a). For companies, the requirement for audit arises from
the Corporations Act 2001. For other types of charitable legal structures, for example
trusts, the requirement for audit may be written within the founding document, i.e. trust
deed, charter or specific enacting legislation (Institute of Chartered Accountants in
Australia, 2006, 2007, 2009a).
Regardless of the requirements in the previous mentioned countries, several studies
have highlighted problems with auditors of charities (Kitching, 2009; Mohiyaddin,
2009; Newberry, 1992; Palmer et al., 2001; Rees & Dixon, 1983). These problems
impact on audit quality which affects donor decisions. Kitching (2009) found that
donors give more to charities aligned with the large chartered accounting firms, as large
firms were deemed to produce a higher quality audit (Kitching, 2009). These findings
were also supported in a recent New Zealand study by Mohiyaddin (2009).
However, Mohiyaddin (2009) also found that most New Zealand charities are small
charities and cannot afford the larger chartered accounting firms fees. Her study found
that small firm auditors seem to audit charities without full adherence to the auditing
standards and financial reporting standards. This was supported by earlier New Zealand
studies (Newberry, 1992; Rees & Dixon, 1983) which found numerous problems. In
particular, Rees & Dixon (1983) found major independence issues, since 58% of
auditors in their study prepared the financial statements that they were auditing.
Problems in auditing compliance have been raised by the New Zealand Government as
a contributing factor to several recent finance company failures (Power, 2009). Simon
Power, the Minister of Commerce, is proposing to establish a system that would limit
the carrying out of statutory audits to licensed individuals with demonstrated auditor-
specific capabilities (Ministry of Economic Development, 2009a). Unfortunately,
statutory audits do not currently include charities, who are currently specifically
excluded from the new oversight and licensing systems, unless they are issuers
(Ministry of Economic Development, 2009a). It is concerning that the introduction of a
„statutory audit‟ will lead to two different levels of auditing. This seems to be implying
that auditors need to be of good quality if they are auditing finance companies, but not
necessarily of the same quality if auditing charities. This is disappointing given the
identified problems with charities‟ auditors. If stakeholders wish to rely on the audit
report as a mechanism for discharging accountability, there needs to be an improvement
in the quality of charitable auditing.
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