Andrew Hind warns that the the charity sector is not immune from the pressures that have led to disreputable practices in the commercial world.
It’s been another month when financial manipulation in the commercial sector has again dominated the economic news.
Six banks paid $4.3bn to regulators to settle allegations that they attempted to rig the foreign exchange markets.
Then there was the shocking case of Tesco, which announced at the end of October that it had overstated profits by £263m. Eight senior executives were suspended and the Serious Fraud Office opened a criminal investigation into the company’s accounting practices.
Following a review by Deloitte, it appears that as profits came under increasing pressure – with Tesco’s market share being eroded by stiff competition from other retailers – some managers charged with delivering demanding profit targets succumbed to the temptation of massaging the figures. Income was booked before it was earned, and costs were recognised later than incurred.
Although Tesco says that there was no personal gain for the executives involved, it seems that the growing pressure they were under to deliver results drove them to falsify the numbers they were reporting to stakeholders.
Lack of integrity among bankers; financial misreporting by FTSE 100 companies – what’s that got to do with us in the charity sector you might ask.
Our default reaction to these disreputable practices in the commercial world is to claim that it could never happen in civil society organisations. We assure ourselves that we have clear accounting rules laid out in the new Sorps; that charities’ reports and accounts are rigorously audited and, anyway, the strong values system in our sector would never allow such financial irregularities to occur.
If that’s your view of the matter, I would strongly advise you to think again.
Many charities are under more pressure than ever to demonstrate tangible impact to funders, or to show that they have delivered the necessary outcomes under a payment-by-results contract to trigger payment from their commissioner.
Just like managers in hard-pressed companies, senior executives in service-delivery charities have to continually hit targets to survive. Inevitably, this pressure to continually prove performance means that some charities are going to be tempted to tamper with data, just like those Tesco executives did.
If that sounds like a cynical view of the ethics and professionalism of charity leaders, I refer you to some alarming research published in the US last year.
Motives to misreport
In the Journal of Accounting Literature, academics at Appalachian State University found that “non-profits, just like for-profit firms, have both motives and opportunities to misreport financial information in order to mislead stakeholders or influence contractual outcomes”, and that “there is a large stream of research” indicating this actually happens in practice.
It’s almost ten years since former Conservative Party leader Iain Duncan Smith warned about the ‘Tescoisation’ of the charity sector. Back in 2005 he expressed concern about large national charities becoming ever-more dominant, driving smaller and more innovative charities to the wall; in the same way as Tesco was accused of eliminating the competition from local shops in the retail sector.
Now the spectre of the ‘Tescoisation’ of the sector has taken on a different meaning. Everyone charged with responsibility for financial reporting in UK charities should be on their guard.
In an era of unprecedented competition in the sector, fair and honest financial reporting is essential if public trust in the sector is to be maintained.
