The Truth about Charity Accounts

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The Truth about Charity Accounts

 

 

Published in The Guardian (financial page), London,  Friday December 24 1982, p. 23. This article was summarised from my MBA dissertation, The Financial Management and Polices of Major Aid Agencies, University of Edinburgh, 1981.

 

LIKE IT or not, finance is the sharp, sensitive end of a charity. It is the one thing which can be measured, audited, reported and people can get their teeth into.

 

If most of your relief work is carried out away from the public eye, who is to know if you fail to give people their meals? Who will complain’ If you give the wrong treatment or do not turn up? But if your overheads look on the high side, oh dear!

 

Just one bout of bad publicity over some item of expenditure can seriously damage a charity’s image for years. Not only that, but others suffer too when one receives criticism. Various studies such as the Govern­ment’s            1978 Schlackman Report have revealed that one of the main justifications used by non-donors for not giving is the belief, rightly or wrongly, that too much goes on administration.

 

Surprisingly, as the law stands, adequate control over charities hardly exists. There is no universal requirement for charities to file their annual accounts with the Charity commission unless the commission specifically requests to inspect them.

 

As Lord Goodman pointed out In 1976, the chances of this happening are slim owing to the commission’s paucity of resources: out of the 130,000 or so registered charities, just 6.5 per cent have their accounts scrutinized in any one year.

 

Furthermore, there is no legal obligation for charity accounts to be professionally audited unless the charity happens to be registered under the Companies Acts.

 

It is important to empha­sise that most of the better-known charities do prepare properly audited accounts which affirm that a “true and fair” picture has been shown. But this alone Is no guarantee that each organisa­tion has followed identical procedures for recording in­come and expenditure.

 

Such an absence of agreed standards can make nonsense of attempts to compare one charity with another on the basis of how they spend their money. As the financial director of a well-known relief agency candidly admitted, “Our accounts are as much exercises in public relations as financial statements. I would be failing in my job if I did not show things in as favourable a light as pos­sible.”

 

If you take most charity accounts at face value, the proportion of money appar­ently being spent on charitable objectives usually works out at between 70 and 85 per cent. But care should be taken when judging such figures. Much depends on the kind of charity in question.

 

Seventy per cent may be a very good showing If the charity has had to raise every penny from the public, while 85 per cent might suggest inefficiency if most of the income had come in block gants from statutory bodies or from other charities.

 

It is equally important to make allowance for the kind of work an organisation does. An operational charity, run­ning its own relief pro­grammes with its own field staff to ensure that money is well spent, might reasonably have higher administrative costs than an agency which hands out grants for others to apply.

 

This wide diversity of circumstances makes some experts suspicious of current proposals from the Institute of Chartered Accountants to streamline accounting procedures.

 

As Mr Timothy Phipps, deputy director general of the Save the Children Fund put it, “Nobody every sug­gested that BP should have the same standard form of accounts as the local garage because they were both dispensing petrol and oil. It is just as illogical to think you could have, a blueprint for charities which have such totally disparate aims and also run their fund-raising in such different ways.”

 

Nevertheless, there remain several areas where even the most avid critic could hardly deny that standardisation would diminish the scope for window-dressing accounts. There is the perennial problem of deciding what to count as an overhead and what as “charitable expenditure”.

 

There is the difficulty of deciding whether to reveal the fund-raising expenditure incurred by autonomous local committees. And what should be done in cases where a charity receives the net pro­ceeds from a subsidiary organization?

 

Charity shops are a good example of how serious the problem can be with subsidiaries. Take Oxfam as a typical case. Its accounts show that the charity re­ceived £5.5 million in net in­come from its shops during the financial year ending 1981.

 

Asked about gross pro­ceeds, a spokesman said these amounted to £7.7 mil­lion: 71 per cent of takings from its 590 shops is there­fore net income to Oxfam, which suggests very efficient management. However, by showing only net income on the charity’s accounts, it could be argued that £2.2 million of fund-raising expen­diture is hidden.

 

Oxfam justifies this on the grounds that it would un­fairly distort its overhead fig­ures if the cost of quasi-commercial activities were to be included. After all, most supporters would surely ac­cept that running shops is different from paying for newspaper advertisements or mailed appeals.

 

One way in which to overcome a situation like this would be to state gross in­come and expenses as a footnote to the accounts. Oxfam agrees this would be satisfactory, but points out it would be reluctant to comply unless other charities did like­wise, thereby giving a fair basis for comparison.

 

The more such questions are probed, the stronger becomes the case for standardisation. This could be either a statutory require­ment or a voluntary code of practice. With backing from the Charity Commission, a voluntary code would prob­ably prove quite adequate. One would hope that once the larger charities were per­suaded to follow it, others too might fall into line, fearing bad publicity if they per­sisted with cryptic accounting.

 

The chief obstacle lies in getting everybody to agree on the extent of what is re­quired. So far, dialogue be­tween the accountancy profession and the big charities have made little headway.

 

Christian Aid’s associate director, Mr Martin Bax, has rather neatly characterised one of the biggest stumbling blocks. “Standardisation?” he asked. Yes please! I would like standardisation. Please persuade them all to standardize - on the same basis as us.”

 

Any other suggestions?

 

 

 

Alastair McIntosh is the Scottish Organiser of a national overseas aid agency.

 

 

 

 

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9-12-01

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