Understandability and Transparency of the Financial Statements of ...

7.3 Monitoring
As discussed in Chapter Two there is an assumption that the people involved in
charities are trustworthy and hence charities are free from traditional oversight, as the
commitment of their shareholders were thought sufficient to produce positive results
(Mueller et al., 2005).
A survey commissioned by the England and Wales Charity Commission found that a
large part (88%) of trust in charities is based on an „inherent belief‟ in charities being
altruistic and thus trustworthy in nature, rather than any rational knowledge on how they
operate (Opinion Leader Research, 2005). Opinion Leader Research (2005) identified
that there was a lack of oversight and limited knowledge over how charities are
managed. They considered that this “suggests that trust in charities could be based on
shaky foundations and that it is potentially vulnerable to the same kind of decline seen
in trust in the public and private sectors” (Opinion Leader Research, 2005, p. 23) .
To have support in case the inherent belief in trustworthiness is unfounded, there is a
need for both external and internal monitoring of charities. Externally, the most
common form of monitoring is conducted by the Charities Regulatory Body, in New
Zealand‟s case the Charities Commission. Internally, the Charity‟s Board can pay a part
in oversight either personally or by ensuring assurance is performed on the charity‟s
financial statements. Finally, the charity themselves may choose to implement some
internal controls to ensure operational activities are strengthened.
Before going further, an explanation is needed of the monitoring bodies identified in
Chapter Two and where, if at all, these will be analysed. Rather than focusing solely on
the monitoring aspects of charities‟ funding bodies and rating agencies these will be
considered in Chapter Eight in relation to the wider view of reporting to stakeholders
and how this can be transparent and understandable for all stakeholders. Monitoring by
taxation agencies is covered in this chapter in relation to justification of taxation
forgone. Next, monitoring that takes place by the Charities Commission is investigated.
7.3.1 Charities regulatory bodies
Cullen et al. (2001, p. 33) in their report entitled „Tax and charities: A government
discussion document on taxation issues relating to charities and non-profit bodies‟
bemoaned the lack of monitoring in the charities sector:
Apart from random Inland Revenue audits and the provisions of the Charitable
Trusts Act, there is no process for monitoring whether [charitable] entities are
pursuing the charitable purposes for which they were set up.
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