Understandability and Transparency of the Financial Statements of ...

„understandability‟ is at the very root of GAAP. The New Zealand Controller and
Auditor-General in paragraph 5.11 states:
The overall objective for the standard setter in setting New Zealand standards
should be to set high-quality standards designed to produce general purpose
financial statements that are understandable and meet the needs of the people
using them (Controller and Auditor-General, 2009, p. 54).
This view is supported by numerous standard setters including that of the USA where
the objective of their Statement of Financial Accounting Standards No. 117: Financial
Statements of Not-for-Profit Organizations is to:
Enhance the relevance, understandability, and comparability of financial
statements issued by those organizations (Financial Accounting Standards
Board, 2008b, p. 1).
The English Accounting Standards Board (2007a, p. 27) consider that understandability
is dependent on the way in which transactions are “characterised, aggregated and
classified” and information is shown. However, they acknowledge that it is not always
possible to present information in a way that can be understood by all users (Accounting
Standards Board, 2007a). In fact, the IFAC highlight that while the reliability of
financial statements may have increased, the understandability of financial statements
has not improved much (International Federation of Accountants, 2009a). This may be
because accounting standards are written in accounting language that may not be easily
understood by non-accountants (Palmer & Randall, 2002).
In New Zealand this lack of understandability in financial statements was highlighted in
the media by Rick Shera, a charity chairman, who said “it is difficult to look at accounts
and understand what they say” (Television New Zealand, 12 August 2009). He further
reiterated that there was a need to make financial statements “intelligible to an
accountant, never mind the average punter” (Editorial, 2009, 16 August, p. 45).
Jetty and Bettie‟s (2009) study found that there are still inconsistencies in the reporting
practices of charities, which supports the findings of earlier studies (Connolly &
Dhanani, 2009; Connolly & Hyndman, 2004; Hyndman, 1990, 1991). Reporting by
charities is characterised by a diversity of accounting practices and a lack of
standardisation which has resulted in difficulties for users in understanding charities‟
financial statements (Connolly & Hyndman, 2003). The impact these diverse
accounting practices have made on charities‟ financial statements and the resultant
complexities in charities‟ financial statements will be considered in the next section.
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