Understandability and Transparency of the Financial Statements of ...

This situation is not unique to New Zealand charities but can also be seen in Australia,
as the following case study (Parker, 2003, p. 368 & 369) shows.
Then for two years, Servo published audited consolidated accounts of its entire
group. Subsequently, continuing director concerns about the consolidated
accounts‟ impact on public perceptions of Servo assets and income led to
Servo‟s annual accounts reverting to the original unconsolidated format.
The Board based its decision upon an apparent view that to safeguard Servo‟s
income sources and financial viability, disaggregated financial statements were
the preferable form of financial disclosure.
This emphasis on „looking poor‟ is not a recent occurrence in charities and was initially
highlighted by Bird and Morgan Jones (1981). It is disappointing that some thirty years
later many of the reasons „why‟ charities use particular accounting methods are based on
the need to look poor. This issue is elaborated further in Chapter Eight (section 8.3.2)
where the tension between „look poor‟ to attract funding, and ensuring charities are
financially viable is considered.
This section explained the key reasons why particular accounting methods were used,
which is at the crux of this research, which sought to explain why charities were acting
as they did. As well as „looking poor‟ the other main reasons identified in this study
included the lack of professional standards being maintained by accountants within the
sector. When this was combined with the low level of understandability this has led to
some charities‟ financial statements becoming quite meaningless. This situation needs
to be resolved either by education or prescribing standards, both ideally supported by
the Charities Commission, as further inaction is detrimental to the credibility of the
charities sector as a whole.
6.6 Summary
Whilst much research has been conducted on what accounting methods various charities
utilise, there has been a gap in the literature of „why‟ charities utilise that particular
method. This research has identified three key reasons for the choice of accounting
treatments. The first relates to the lack of compliance with appropriate professional
standards by accountants working in the charities sector. The second identifies the low
level of financial understandability by many working or volunteering within charitable
organisations. Finally, it is the aim of many charities to „look poor‟ as they seek to gain
more funding and this impacts the accounting method used, thereby going against the
requirement for neutrality and freedom from bias when preparing financial statements.
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