A charity sector accountant has published a 17-page report identifying errors in the True and Fair Foundation’s analysis of charitable expenditure and called for an end to the use of cost ratios as a measure of effectiveness.
Pesh Framjee, head of the not-for-profit unit at Crowe Clarke Whitehill, published his report, Neither true nor fair: A critique of the True and Fair Foundation’s Review of Charitable Spending by UK Charities in December.
It responds to the True and Fair Foundation’s report, A Hornet's Nest, which called for charities to spend at least 65 per cent of their income on charitable expenditure and identified a number of high-profile instances where this was not the case.
A Hornet's Nest was widely criticised when it was published and the Charity Commission is assessing complaints about the Foundation. Gina Miller, co-founder and trustee of the foundation, has previously defended the report.
Framjee said: “My aim in writing this critique is twofold. First, to correct the completely superficial and downright wrong analysis provided by the True and Fair Report. Secondly, to show how the use of cost ratios just does not work and that continued focus on them is damaging charities.”
Examining the same charity accounts as those cited in the Foundation's research, Framjee said he identified five “rudimentary errors and flaws”. These were: comparing the income of a foundation with a large trading group; not understanding charity law in relation to large endowments; ignoring the impact of trading activities; not including expenditure on fixed assets (such as in the RNLI’s case lifeboats), and ignoring the impact of donations in kind.
‘Why cost ratios don’t work’
Framjee also criticised the Charity Commission’s beta site for including the cost ratio figure that the True and Fair report used.
“Regrettably, the Charity Commission’s beta site compounds the problem by displaying simple cost ratios. Fortunately, this is a beta site and the Commission has asked for views and the site is to be changed. The fact is that any endorsement from the regulator of a cost ratio-based approach will be a retrograde step.”
He argues that cost ratios do not work because income is unpredictable and different types of charities are more suited to different types of fundraising. Such ratios can also be influenced by the financial reporting date. He added that the focus on ‘overheads’ as a problem “has led to an underinvestment in vital infrastructure”.
Framjee also said that charities needed to take some of the blame for using their ratio as a measure of their own effectiveness.
“This is because it is thought to be what donors want to see and as a result the more difficult reporting on performance falls by the wayside.
“The narrative needs to move on and the vicious cycle needs to be broken. Charities need to be bolder in their messaging – explaining operating realities, costs and what they really are achieving. We need to stop talking about good and bad expenditure and focus instead on performance.”
