Understandability and Transparency of the Financial Statements of ...

A lack of adequate performance accountability, particularly if it were
highlighted in the media, could discourage potential donors.
Performance measurements give a visibility to the resources, activities and
achievements of a charitable organisation, which leads to better informed discussions
and decisions. Connolly and Hyndman (2004) also believe that the need to discharge
accountability through the publication of performance information acts as a disciplining
pressure and encourages management to concentrate on the issues that are of importance
to their stakeholders (Connolly & Hyndman, 2004).
However, many authors vehemently oppose the imposition of any form of performance
measurement on charities, including Riddell, who argued that:
The reason they [charities] exist is to respond to the cry for help from poor
people and that it is wholly inappropriate – even morally wrong – to judge
[charities] by the impact of the funds provided. (Ebrahim, 2003, p. 192)
This chapter will describe the current performance accountability focus on the
measurement of outputs before moving on to how charities should be reporting to
stakeholders i.e. a proposed framework for performance accountability. Finally, the
chapter will consider possible future impacts if the proposed framework is followed,
including possible impacts on funders and the role rating agencies could have in
measuring and interpreting performance accountability.
8.2 Current Performance Accountability
This section examines the current emphasis on measuring charities‟ performance
through output reporting. Output measurement focuses on determining what proportion
of donations has been directly spent on administration and fundraising rather than
directly spent on beneficiaries.
Two issues were identified in Chapter Three (section 3.2.4). The first issue was what
was the prevailing view regarding reporting separately the expenditure overheads ratio.
This study found that many charities report expenses by nature, e.g. salaries, as reflected
in Question 25 of the Charities Commission‟s Annual Return Form (Charities
Commission, 2008c), rather than by function, thereby obscuring fundraising expenses.
The second issue was the question of whether the focus on reporting the expenditure
overheads ratio separately was appropriate or whether emphasis should be placed on
value given to beneficiaries. Before determining the problems with output reporting it is
important to gain an understanding of what the term „output‟ means.
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