Understandability and Transparency of the Financial Statements of ...

Whilst the sample in this thesis is small, this state of affairs cannot continue without
irreparably damaging the profession of accounting. Well-meaning accountants are
perpetuating this by continuing to accept unpaid or low paid work and not giving that
work the quality and time expected of a qualified accountant. This continues the
expectation by charities that it is possible to pay minimally for financial statements to
be prepared, thus facing a rude shock when their accounts are either audited or prepared
by a chartered accountant who follows appropriate standards and thus values their work
accordingly. This will usually result in huge fee increases for the charity and major
changes to their financial statements.
Compounding this poor level of quality in the preparation of financial statements is the
low level of understandability of many working, either paid or unpaid, for charities
which will next be discussed.
6.5.2 Understandability
Chapter Two identified that New Zealand operates under a system of GAAP that utilises
IFRSs as the accounting basis. As highlighted in Chapter Three section 3.1.2 one of the
keys to understandability is comparability. This is achieved when „correct‟ GAAP is
used so that comparisons are then achievable between similar organisations.
The IASB considers it is essential that financial statement information be
understandable by users of financial statements. However, the IASB emphasises that
"For this purpose,[the reading of financial statements] users are assumed to have a
reasonable knowledge of business and economic activities” (International Accounting
Standards Board, 2005 paragraph 18, page 22). David Schmid of Price Waterhouse
Coopers goes further and considers that so long as accounting standards disclose
information that fairly reflects the reality of the organisation, a stakeholder can do their
own sums and choose whether to support that, in this case, charity (Anonymous, 2007).
This assumes that stakeholders have both an understanding of economic activities and a
certain level of knowledge, which this study found was not an appropriate assumption
for charities.
This low level of understanding is particularly shown by the following interviewees
where charities placed reliance on auditors to tell them what to do:
Occasionally they [auditor] says things like “oh you should get an updated
valuation and put it in here [the balance sheet]”, but they [the auditors] haven‟t
told me how to do it. (Interviewee 23 T)
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