Understandability and Transparency of the Financial Statements of ...

In the international arena transparency is considered an important tool to prevent
charitable organisations being used to fund terrorists, as detailed in Chapter Two section
2.5.2 (European Commission, 2005b). The European Commission has recognised that
there is a need to protect the charities sector by imposing higher standards of
transparency (European Commission, 2005a).
The importance of transparency for the wider public is illustrated in a newspaper
editorial (Editorial, 2009, 16 August, p. 45) which states:
Making a charitable donation is about as discretionary as spending gets; the
least the charities owe their supporters is transparency.
As New Zealand‟s registered charities now provide public access to their financial
accounts through their Annual Return, Trevor Garrett, the CEO of the New Zealand
Charities Commission, says in his Annual Report that:
Comments we receive indicate that people value the increased transparency of
the charitable sector that the [Charities] register enables (Charities
Commission, 2008a, p. 5).
However, in an interview on Radio New Zealand (27 August 2009) he touches on the
negative side of transparency:
Many of those charities have never made information about themselves public,
which is a pity, because … there should be a relationship between the charity
and the people giving the money. But as people start to look at those accounts,
they‟re going to start to ask questions.
Brandeis (cited in Fishman, 2007, p. 123) said in 1914 that “sunlight is the best
disinfectant”, which implies that „opening the books‟ will provide more transparency
for contributors of charitable organisations. However, this assumes that these financial
accounts are transparent to all stakeholders. Unfortunately, previous studies in England
and Wales (Accounting Standards Committee, 1984; Ashford, 1986; Bird, 1985; Bird &
Morgan-Jones, 1981; Charity Commission, 2004; Connolly & Hyndman, 2000, 2001,
2004; Hines & Jones, 1992; Hyndman, 1990, 1991; Lee, 2003; Williams & Palmer,
1998) and New Zealand (Hooper et al., 2008; Narraway & Cordery, 2006; Newberry,
1992, 1995b; Rees & Dixon, 1983) have shown that this is not the case and that there
are some complexities that veil the transparency of the financial accounts of charities.
In particular, one aspect of transparency that has raised questions is the
understandability of charities‟ financial statements, considered next.
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