Understandability and Transparency of the Financial Statements of ...

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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. 180
In New Zealand both the Controller and Auditor-General (2008, p. 41) and the NZICA (2007b, p. 19) define outputs as “the goods and services produced by the reporting entity”. Outputs are reported in terms of what proportion of total operating expenditure relates to the beneficiaries of the charity, i.e. the total costs of services provided to beneficiaries (Institute of Chartered Accountants in Australia, 2009a). This section reviews the problems associated with this form of performance accountability, including the reluctance to fund overheads. Next, the problems associated with this focus on overheads are analysed, in particular the difficulty in comparing expenditure overheads ratios. 8.2.1 Difficulty in comparing ratios This focus on efficiency measures, in particular the expenditure overheads ratio of expenditure overheads to revenues, means that some charities have been accused by the media and donors of high expenditure on management and administration costs when their ratios are compared with those of other charities. However, as Dhanani (2009, p. 187) emphasised this can be misleading because charity ratios may differ significantly based on “actual organisational activities and areas of need rather than the efficiency with which they operate” . The nuances of ratios are highlighted by the following interviewee: It‟s very interesting how different a lot of the ratios are because of some of the unique differences of how that [charitable] organisation operates. You know little things like whether they own their own building or not make a huge difference to overhead costings. (Interviewee 18) Joan Buchanan, a Charities Consultant, also highlighted the variability in ratios on Radio New Zealand by distinguishing between different fundraising motivations that could affect ratios, including: raising an awareness of the charity and its cause; or hiring someone to cultivate bequests when it could be more than ten years, depending on the circumstances of the donor, before that money comes in (Radio New Zealand, 27 August 2009). These differences were further highlighted by James Austin of the Fundraising Institute of New Zealand, who raised the example of the different expense incurred by charities needing to build their donor basis compared with charities with an existing donor base (Television New Zealand, 30 July 2009). Another reason for the variability in ratios could be that the monies given were related to purchasing a product or service. For example - tickets sold for a charity dinner must cover the costs of providing the dinner before any monies are distributed to charities. 181
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Understandability and Transparency
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CHAPTER 2: REGULATORY & CONCEPTUAL
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4.3.3 Axiom 3 - The possibility of
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6.6 Summary .......................
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Appendix One - Statement of Financi
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Abbreviations AASB Australian Accou
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Related Research Outputs The follow
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Acknowledgements My journey through
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Abstract Access to charities‟ fin
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CHAPTER 1: INTRODUCTION 1.1 Introdu
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More importantly the study will loo
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Unerman and O‟Dwyer (2008, p. 801
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adopted here is clarified, as the l
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March 1999. Further, a study by the
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those by: Vatter (1947); Anthony (1
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CHAPTER 2: REGULATORY & CONCEPTUAL
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(k) The erection, laying out, maint
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Before looking at the legal structu
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2.3.4 Problems As with charity nome
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yet to be determined. This ensures
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per annum (Charities Commission, 20
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certain cases there will be concept
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The focus of the Charities Commissi
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Unlike incorporated societies, the
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2.4.4.4 Future conceptual framework
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problems with New Zealand‟s regul
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This research seeks to identify if
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charities” (Charity Commission, 2
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statements in different documents t
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seek to identify whether a lack of
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In the international arena transpar
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elevance is compromised. The link b
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3.2 Complexities in Charities’ Fi
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3.2.1 Accounting basis The „Accou
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application of the appropriate GAAP
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length transaction”. This definit
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There are four arguments against de
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Financial Accounting Standards Boar
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al., 2008; Newberry, 1992; Rees & D
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However, the notion of control is a
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Kilcullen et al., 2007b). Charities
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the amount of money spent on admini
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This research seeks to identify wha
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As a result of the literature revie
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the elements of the world, or rathe
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come about through the mutually sim
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Research reports from other organis
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clearer picture of the interviewee
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In England, Palmer and Randall (200
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APPROACHING PARTICIPANTS Within the
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availability of charities‟ financ
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As credibility was usually achieved
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clarifications. This approach was u
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to understand the meaning behind an
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analysis is both complete and impar
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subjective realities (Chua, 1986).
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To assure the study was dependable
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CHAPTER 5: ACCOUNTABILITY 5.1 Intro
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emphasis on the definition of accou
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supposition was that a lack of resp
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general public (Charity Commission,
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assumes the other is monitoring the
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performance reporting rather than f
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appropriate performance information
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examiners and the Charities‟ Boar
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which was set up in 2003. Charity a
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Western Australia, all financial st
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The fourth level of independent exa
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What are the major areas of concern
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subset of good accountability pract
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Programme refers to a meeting of ob
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ecording property, plant and equipm
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Figure 6-2 Dimensions of Financial
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Page 159 and 160: charity will have control of a seco
Page 161 and 162: of accountants involved in Charitie
Page 163 and 164: their decision making. One auditor
Page 165 and 166: Whilst the sample in this thesis is
Page 167 and 168: Another problem my study found was
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Page 175 and 176: We have since February of last year
Page 177 and 178: analysis was done of the first comp
Page 179 and 180: Also the idea of members „taking
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Page 183 and 184: 7.3 Monitoring As discussed in Chap
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Page 189 and 190: useful for smaller organisation and
Page 191 and 192: change and they‟re doing a good j
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Page 207 and 208: achieve an appropriate level of per
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Page 221 and 222: 8.4.4 Prescribed performance report
Page 223 and 224: impact they have on their beneficia
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Page 227 and 228: compare different charitable organi
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Page 231 and 232: 9.4 Academic Contribution This rese
Page 233 and 234: Outcomes (Effectiveness) Figure 9-1
Page 235 and 236: Charities Register, of which thirty
Page 237 and 238: success in their activities. For as
Page 239 and 240: Ahrens, T., & Chapman, C. S. (2006)
Page 241 and 242: Australian Accounting Standards Boa
Page 243 and 244: Bradbury, M. E., & Baskerville, R.
Page 245 and 246: Charities Commission. (2009f). A sn
Page 247 and 248: commission.gov.uk/Our_regulatory_ac
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Cordery, C. J., & Baskerville, R. (
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Eisenberg, P. (Ed.). (2005). Challe
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Fremont-Smith, M. R. (2004). Pillag
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Hui, D. (2006). Financial Reporting
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http://www.ifac.org/Members/DownLoa
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Maxwell, J. A. (1992). Understandin
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http://www.nzica.com/AM/Template.cf
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O'Sullivan, N., & O'Dwyer, B. (2009
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Robson, C. (1993). Real World Resea
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Television New Zealand (Writer) (27
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Appendix One - Statement of Financi
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Appendix Three - Semi-structured in
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Appendix Five - Participant informa
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Appendix Six - Transcriber’s Conf
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Heading 1 Heading 2 Heading 3 Prope
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