Understandability and Transparency of the Financial Statements of ...

2.3.2 Incorporated Society
Another type of structure is that of an incorporated society. Societies can be either
unincorporated or incorporated. Incorporated societies must meet the definition of
section 4 of the Incorporated Societies Act 1908, which states that incorporated
societies must consist of more than fifteen persons and not be for pecuniary gain. The
act of incorporation creates a separate legal entity. Tennant et al. (2006) consider this
structure more suitable for member-run charities.
A search for the term „incorporated‟ in the Charities Register on 25 February 2010
found 6,454 results of charities that identified themselves through their title as an
incorporated society (27%). This is a small portion (30%) of the 21,500 which were
registered on the incorporated societies register in October 2005 (Tennant et al., 2006).
It is unclear why so many incorporated societies have chosen not to register but, this
could be for a variety of reasons including the lack of incentive to register, with its extra
reporting requirements given that they will still maintain their tax exemption through
the Inland Revenue Department. However, for those incorporated societies that have
registered, section 23(4)(b) of the Incorporated Societies Act 1908 says that they do not
have to file an annual financial statement with the Registrar of Incorporated Societies.
As their financial statements attached to the Charities Register are sufficient.
2.3.3 Charitable Trust
Registering under the Charitable Trusts Act 1957 ensures that the charitable trust is a
separate legal entity (Charities Commission, 2006g; Ministry of Economic
Development, 2005). The Income Tax Act 2007 section HC13 defines charitable trust
as a trust in which all income is held for charitable purposes. Therefore, charitable trusts
are a subset of charities.
Fishman (2007) considers charitable trusts to be the primary mechanism for the transfer
and holding of charitable assets. This was reflected in a search of the term „trust‟ in the
Charities Register, which identified 10,872 registered charities (45%) with „trust‟ in
their name. As at October 2005 there were 15,000 charitable trusts on the Charitable
Trust Register and of those 73% have registered as charities (Tennant et al., 2006). This
means that not all charitable trusts have registered as charities, perhaps for similar
reasons as incorporated societies discussed in the previous section. Next the problems
related to these legal structures will be considered.
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