Understandability and Transparency of the Financial Statements of ...

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3.1.2 Understandability Trevor Garrett, the Chief Executive Officer of the Charities Commission, considers that (Garrett, 2010, p. 1): It is vitally important that registered charities keep the information on their Register pages accurate and easily understandable. In relation to understandability it is important to comprehend its context within the conceptual framework especially with regards to the presentation of charities‟ financial statements (International Accounting Standards Board, 2008b; International Public Sector Accounting Standards Board, 2008a). The International Accounting Standards Board in their publication „Preliminary Views of Financial Statement Presentation‟ considers that the presentation of financial statements are important as they are the principal means of communicating financial information to those outside an organisation (International Accounting Standards Board, 2008e). Of particular importance in reporting are the six qualitative characteristics of information, i.e. relevance, comparability, understandability, timeliness, faithful representation and vulnerability that makes that information useful to users (Governmental Accounting Standards Board, 2009; International Public Sector Accounting Standards Board, 2008a). Of the six qualitative characteristics, a study of user needs focused on the first three characteristics, as the study identified that the important needs of users are the furnishing of “relevant, comparable and understandable financial statements” (Connolly & Hyndman, 2000, p. 97). These three qualitative characteristics will be focused on next. The first two characteristics, relevance and comparability, will be looked at to determine their meaning and their linkage to understandability, before focusing on the importance of understandability in producing quality financial statements. RELEVANCE The International Public Sector Accounting Standards Board (2008a) considers that information is relevant if it is capable of making a difference in the decisions made by the users. In this study relevance is used in the context of donors choosing which charity to donate to and deciding what is the relevant information that they need to support their decision. An important aspect of relevance in this context is ensuring that the relevant information is understandable to donors, as without understandable information 44
elevance is compromised. The link between „comparability‟ and „understandability‟ and „transparency‟ is looked at next. COMPARABILITY Comparability enables users to identify similarities and differences between charities‟ financial statements (International Accounting Standards Board, 2008b). It is based on the premise that information about a charity is more useful if it can be compared with similar charities (Accounting Standards Board, 2007a). Comparability implies consistency throughout the reporting process i.e. in both the recording of information such as property, and the reporting of that information in financial statements. New Zealand‟s Controller and Auditor-General emphasises the importance of comparability in the financial statements by saying: To be comparable, the reports should: be consistent in their format, layout, and in the way information is classified; be consistent in the selection, measurement, and disclosure of elements and related information (Controller and Auditor- General, 2008, p. 49). The importance of comparability in the charities sector was highlighted in a study of 1,000 people where “over 60% of participants said that the ability to compare important information between charities would affect their decision about which charity to support” (Framjee, 2004, p. 89). In Australia comparability was also considered one of the fundamental principles needed for effective transparency (Institute of Chartered Accountants in Australia, 2009a). Young (2006, p. 583) puts the lack of comparability at the feet of the accounting profession by considering that “the lack of comparability arose from the failure of accountants to specify a single accounting method for such basic areas as … depreciation.” This was supported in England by the Accounting Standards Board predecessor, the Accounting Standards Committee, who considered that the number of diverse practices in reporting adopted by charities is confusing and can be misleading to the readers of charities‟ financial statements (Accounting Standards Committee, 1984). Thus an important aspect of comparability is a prescribed conceptual framework which needs to ensure consistent GAAP is used by all charities. Next, the importance of understandability is reviewed. UNDERSTANDABILITY Understandability is the quality of information that enables donors to comprehend its meaning (International Accounting Standards Board, 2008b). The concept of 45
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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
Page 11 and 12: Abbreviations AASB Australian Accou
Page 13 and 14: Related Research Outputs The follow
Page 15 and 16: Acknowledgements My journey through
Page 17 and 18: Abstract Access to charities‟ fin
Page 19 and 20: CHAPTER 1: INTRODUCTION 1.1 Introdu
Page 21 and 22: More importantly the study will loo
Page 23 and 24: Unerman and O‟Dwyer (2008, p. 801
Page 25 and 26: adopted here is clarified, as the l
Page 27 and 28: March 1999. Further, a study by the
Page 29 and 30: those by: Vatter (1947); Anthony (1
Page 31 and 32: CHAPTER 2: REGULATORY & CONCEPTUAL
Page 33 and 34: (k) The erection, laying out, maint
Page 35 and 36: Before looking at the legal structu
Page 37 and 38: 2.3.4 Problems As with charity nome
Page 39 and 40: yet to be determined. This ensures
Page 41 and 42: per annum (Charities Commission, 20
Page 43 and 44: certain cases there will be concept
Page 45 and 46: The focus of the Charities Commissi
Page 47 and 48: Unlike incorporated societies, the
Page 49 and 50: 2.4.4.4 Future conceptual framework
Page 51 and 52: problems with New Zealand‟s regul
Page 53 and 54: This research seeks to identify if
Page 55 and 56: charities” (Charity Commission, 2
Page 57 and 58: statements in different documents t
Page 59 and 60: seek to identify whether a lack of
Page 61: In the international arena transpar
Page 65 and 66: 3.2 Complexities in Charities’ Fi
Page 67 and 68: 3.2.1 Accounting basis The „Accou
Page 69 and 70: application of the appropriate GAAP
Page 71 and 72: length transaction”. This definit
Page 73 and 74: There are four arguments against de
Page 75 and 76: Financial Accounting Standards Boar
Page 77 and 78: al., 2008; Newberry, 1992; Rees & D
Page 79 and 80: However, the notion of control is a
Page 81 and 82: Kilcullen et al., 2007b). Charities
Page 83 and 84: the amount of money spent on admini
Page 85 and 86: This research seeks to identify wha
Page 87 and 88: As a result of the literature revie
Page 89 and 90: the elements of the world, or rathe
Page 91 and 92: come about through the mutually sim
Page 93 and 94: Research reports from other organis
Page 95 and 96: clearer picture of the interviewee
Page 97 and 98: In England, Palmer and Randall (200
Page 99 and 100: APPROACHING PARTICIPANTS Within the
Page 101 and 102: availability of charities‟ financ
Page 103 and 104: As credibility was usually achieved
Page 105 and 106: clarifications. This approach was u
Page 107 and 108: to understand the meaning behind an
Page 109 and 110: analysis is both complete and impar
Page 111 and 112: 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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Because the [charity‟s] finances
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„selling a story‟ makes them fo
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that you can use it [the stove] for
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the organisation pay to have those
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contributors twice - first to fund
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There is a need to record restricte
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charity will have control of a seco
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of accountants involved in Charitie
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their decision making. One auditor
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Whilst the sample in this thesis is
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Another problem my study found was
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framework funders would not be able
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The lack of professionalism must be
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New Zealand‟s charitable purpose
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We have since February of last year
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analysis was done of the first comp
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Also the idea of members „taking
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The transparency of their organisat
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7.3 Monitoring As discussed in Chap
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Zealand] Statistics Department poin
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There was a sub-committee running [
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useful for smaller organisation and
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change and they‟re doing a good j
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problem that you‟ve [pause] we‟
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legislation and monitoring. Of part
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CHAPTER 8: PERFORMANCE ACCOUNTABILI
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In New Zealand both the Controller
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what proportion of their charitable
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None of the above reasons includes
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Charities Commission publication
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achieve an appropriate level of per
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more effectively in order to increa
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eneficiaries‟ needs are met is an
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As well as setting aside reserves,
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The important aspect of the propose
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Mostly they [the funders] are worki
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eyond financial health to include
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8.4.4 Prescribed performance report
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impact they have on their beneficia
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statements, but also other mechanis
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compare different charitable organi
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shock when their accounts are eithe
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9.4 Academic Contribution This rese
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Outcomes (Effectiveness) Figure 9-1
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Charities Register, of which thirty
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success in their activities. For as
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Ahrens, T., & Chapman, C. S. (2006)
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Australian Accounting Standards Boa
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Bradbury, M. E., & Baskerville, R.
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Charities Commission. (2009f). A sn
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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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