Since the 1990s the Charities Statement of Recommended Practice (SORP) has shaped charity reporting and accounting. The SORP in turn is heavily influenced by for-profit company reporting and accounting standards which fundamentally are all about financial return to the investor through distributions of profit and the payment of interest.
Standard for-profit performance measures are earnings before interest, taxes, depreciation and amortisation, gross and net profit, dividend cover, and rate of return on capital. The reporting and accounting is framed by these imperatives. Since the SORP is a charity specific application of UK-Irish Generally Accepted Accounting Practice (GAAP), it follows that charity reporting is framed in this way too.
In for-profit reporting it follows that the needs of the investor or provider of capital are the focus and so the directors’ report and the accounts are framed with this in mind. The Accounting Standards Board in its Interpretation of the Statement of Principles for Public Benefit Entities (now withdrawn) advised that donors and funders should be considered the investor instead. This substitution implies that in principle the reporting developed for commercial investors is essentially the same as that needed by donors. However is this really the case?
It is true that public interest issues do shape the reporting of medium and large companies but this is not their main focus. For charities however public benefit issues should be at the centre of reporting and accounting and not an add-on – this is after all the reason they exist.
Research for the Charity Commission for England and Wales and OSCR has consistently found that the public are interested in how much money reaches the end cause and what difference charities have made with that money. The SORP research in 2008-09 identified that donors and funders are not the main audience and the group of stakeholders is far wider including beneficiaries, the public, volunteers and charity staff. All the research strands point to the cause, good use of the money, and making a difference to beneficiaries as the focal points. We believe if you follow this logic through, the sector is not best served by a for-profit focus on cash-flows and surpluses, important though these are in financial management.
How might reporting and accounting differ if public benefit and the difference charities make were the focus? We offer some thoughts on the major elements of the current statutory reporting framework:
- The trustees’ annual report - requiring a greater emphasis on the activities for public benefit, the evidence pointing to the difference the charity makes, transparency about decisions and priorities set by the trustees in the use of funds, how the needs of beneficiaries are identified and how the charity plans to meet those needs in the future.
- The statement of financial activities - a common format followed by all charities retaining the current information on how the charity raised and spent its funds with some simplification where technical elements e.g. revaluations are included within income or expenditure items
- The balance sheet - more of a financial sustainability focus with the emphasis instead on the ease of conversion into cash but retaining the separation of assets from liabilities and distinction between unrestricted and restricted funds
- The statement of cash-flows - reframed to distinguish between cash-flows associated with charitable activities and those related to raising funds / other activities
- The notes to the accounts - detailed information on expenditure, more consideration of financial sustainability and transparency over issues of public interest such as senior staff pay and related party transactions
The SORP is a partnership across the four charity law jurisdictions of the UK and Republic of Ireland and would not exist without the approval and assurance the Financial Reporting Council brings as the UK-Ireland accounting standards setter. Changes to the SORP come through debate and discussion and for an insight into our latest thinking and the work of the four SORP Committee working groups see the dedicated website: www.charitysorp.org
There is a wider debate to be had about whether statutory reporting needs rethinking for the digital age as primarily for smartphones and tablets with the traditional paper or PDF document as a secondary format for reporting.
Not everything falls within the scope of the SORP and so influencing some matters is not within our gift. In particular the external scrutiny report (independent examination or audit) inevitably has a focus on the accounts and the consistency of the report with the accounts. However, could audit be extended to consider the steps trustees take to identify the needs of beneficiaries, and how they obtain value for money and manage conflicts of interest?
Nigel Davies is head of accountancy services at the Charity Commission, and Laura Anderson is head of professional advice and intelligence at OSCR, the Scottish charity regulator