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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