Understandability and Transparency of the Financial Statements of ...

The negative side of transparency comes through here, where donors are using
transparency so they can pick and choose who they should support. Donors want low
administration costs and low fundraising costs, which is one of the reasons for more
transparency. As the Australian Senate report highlights: “the paradox comes that they
[donors] are not willing to pay for the cost of transparency” (Senate Standing
Committee on Economics, 2008, p. 99). In other words donors use transparency to make
sure they are not paying for fundraising or administration costs. In fact donors object to
paying for these expenses because they believe that the costs have nothing to do with
the particular project they are donating towards. As Palmer and Randall correctly
highlight: “This is wrong. All organisations have overhead costs that are real
administration costs and must be paid for” (Palmer & Randall, 2002, p. 176).
Administration costs are supporting the disbursement of funds received and provision of
service (Hyndman & McKillop, 1999; Senate Standing Committee on Economics,
2008). Bradach, Tierney & Stone (2008, p. 97) go further and consider charities
response to this is to:
Both underinvest in infrastructure and underreport what they‟ve spent – thereby
reinforcing external expectations about what is (and isn‟t) appropriate. In the
short run, staff members may be able to „do more with less‟, but ultimately the
organisation‟s beneficiaries suffer.
Therefore, unless there are donors who are willing to provide the funds that every
charitable organisation needs to finance its administration and fund-raising (Bird, 1985),
all donors will need to help fund the „running costs‟ of the charities. Some innovative
charities have addressed this problem by clearly advertising the cost of the product they
are selling and what precisely goes to the charity, for example tea towels which cost $4
and retailed for $10 meaning that 60% of the funds received went to the charity
(Anonymous, 2009, 10 September). Also in New Zealand, DineAid had their overheads
covered by Mercedes Benz and Kensington Swan meaning that 100% of donations went
to charity (Anonymous, 2009, 18 December).
The relationship between funds raised and fund-raising expenditure is regarded as an
important indication of the efficiency of a charitable organisation‟s fund-raising efforts
(Accounting Standards Committee, 1984). An important management problem in any
charitable organisation, which relies largely on donations and grants, is to ensure that
money is used efficiently, and in particular that overhead costs are not too high. One
way of lessening the reluctance of donors to fund overheads is the need to report clearly
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