Understandability and Transparency of the Financial Statements of ...

prescriptive nature of the SORP (Charity Commission, 2005) came into effect further
English studies found that fund raising, publicity and administration expenses were
separately disclosed for large charities from 30% in 1992 (Hines & Jones, 1992) to 71%
(Connolly & Hyndman, 2000). Further research on medium-sized charities found 98%
of English charities complied with the SORP (Connolly & Hyndman, 2001). However,
New Zealand (New Zealand Institute of Chartered Accountants, 2007a) just requires
expenses to be disclosed either by nature, e.g. rent, or function, e.g. fundraising
(paragraph 5.23), so it can be impossible for a donor to determine what proportion of
expenses are fundraising or administration, if the expenses are shown by their nature,
rather than their function.
However, the acceptable maximum percentage of charitable income that should be spent
on raising further donations can depend on the nature and size of the charitable
organisation (Association of Fundraising Professionals, 2009b). For example, a
charitable organisation “may properly spend all of its income on administration if its
function is to organise the rendering of charitable services entirely by unpaid
volunteers; another organisation may operate by making grants to other agencies and
could reasonably be expected to restrict its administrative expenses to a very low
percentage of its total income” (Bird, 1985, p. 163). Also fundraising costs vary
according to the life cycle of the charity, e.g. a new charity will have considerably
greater expenses than a well established charity (Senate Standing Committee on
Economics, 2008).
As with New Zealand, England and Wales have seen an increasing amount of press
attention directed towards fundraising and administration costs and this has led to a
demand for suitable bases for comparison between competing charitable organisations
(Lee, 2003). From this discussion arose a project to develop a more appropriate
benchmarking methodology for fundraising performance (Lee, 2003). This project will
involve two steps: first, an annual study of fundraising cost ratios and second a study of
the specific forms of fundraising (Lee, 2003). Molloy (2006) had the contrary view that
emphasis should not be placed on expenditure but rather on the quality of services
delivered to the beneficiaries for each NZD1 donated, i.e. focusing on the benefit. For as
Lammers says in Breen (2009, p. 119):
choosing which charity to support based only on financial ratios is a little like
choosing a restaurant based on how much it spends on advertising and
marketing versus food (Lammers, 2003, p. 1).
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