Transparency & Accountability

Overview and Some Important Points about Charity Roles and Regulations

 Understanding of accountability and transparency in charitable institutions

Accountability is about being responsible to someone for actions taken; about being able to explain, clarify and justify actions. It implies that someone has a right to know and hold an organization to account; and that the organization has a duty to explain and account for its actions. Charities have this duty as they have a privileged status because their purposes must be for the benefit of the public.

Transparency is about being easy to understand, and being open, frank and honest in all communications, transactions and operations. It is possible to be accountable by providing a lengthy and technical explanation of every detail, but if this information is not easily understood by the audience, and if key facts are hidden by the sheer volume of information then the information is not presented in a transparent form. Accountability and transparency go hand-in-hand, and involve being aware of who charities are accountable to, what the important pieces of information are, and how they can be communicated most effectively.

Key Principles

-Charities must be honest and truthful, and comply with the law.

-It is best practice for charities to respect the reasonable requests of donors and other stakeholders, and operate in order to give donors, beneficiaries and other stakeholders a better understanding of how the charity works, its clients, and it’s fundraising.

Understandability and transparency of the financial statements of charities

Abstract: Important points for policy makers

Access to charities’ financial statements has recently become possible in many countries due to the development of a Charities Register. However, the ability to discharge accountability through financial statements depends on the financial statements being transparent and understandable. Recent research has focused on four complexities that impact  the transparency and understandability of charities’ financial statements: the accounting basis; valuation of property, plant and equipment; fund accounting; and how charities report to stakeholders, in particular, the expenditure overheads ratio.

The focus of these studies was primarily on gaining an understanding of what accounting treatments charities have adopted to deal with each of these complexities, but more importantly why charities chose these particular accounting treatments. This was achieved by conducting interviews with multiple participants in the charity sector, in order to understand why charities act as they do.

This study determined there were three key reasons behind choices that charities make in accounting treatment that were not adequate. The first reason relates to the poor knowledge of appropriate professional standards by accountants working in the charity sector. This lack of professionalism must be addressed by accounting professional bodies to ensure the integrity of the accounting profession is maintained. The second reason is the low level of financial literacy among those who prepare and use the charities’ financial statements. There is a need for charities and their stakeholders to understand the charities’ financial statements to ensure charities produce meaningful financial statements that can be utilized for decision making. The third reason for choosing a certain accounting treatment stems from many charities’ aim to ‘look under-resourced’ as they seek to gain more funding. This impacts the accounting method charities use and so goes against the requirement for neutrality and freedom from bias when preparing financial statements.

Accountability is seen to be important for the charity sector in maintaining the confidence and financial support of the public by giving an account of charities’ activities. For accountability to be successful it needs to be discharged. This study developed a charitable accountability model for charities to utilize in ensuring that accountability is appropriately discharged. This included the need for performance accountability where charities assess and report on their performance to ensure that they are making a positive difference in their beneficiaries’ lives. Charities need to be proactive in communicating the success of their outcomes and outputs to attract funding and to differentiate themselves from other charitable organizations. Donors and funders also need to ensure that they are supporting financially viable charities who are prudently managing their future and achieving great success in their activities. Above all, it is important that donors and funders donate to a good charity, not just to a great cause.

 

Best Practice Example in the United States

The Best Charities are Transparent and Accountable

In order to continue to be one of the best charities in America, the Arthritis National Research Foundation undergoes a thorough and extensive audit annually by an independent accounting firm. The audit examines every transaction in detail resulting in an audited financial statement to show transparency and accountability. This is a best practice for one America’s best charities.

The independent auditors review income, expenses, grant making, endowment, investments, board decisions and board meeting minutes. It is thanks to the data seen during the audit that the Arthritis National Research Foundation has been ranked amongst the top 1% of charities in America, and has been awarded a 4-star rating for nine consecutive years.

The Arthritis National Research Foundation publishes such financial statements on its website, along with their tax returns and annual reports provided to donors, supporters and potential supporters.

 

Best Practice Examples in the United Kingdom

Key legal requirements and information to be included on fundraising materials:

England and Wales

All notices, advertisements and documents issued by or on behalf of any registered charity with an income over £10,000 that contain a request for money or other property for the benefit of the charity must include a statement that the organization is a registered charity. It is best practice to include the organization’s registered charity number on such documents.

Scotland

Only organizations that are registered with the Office of the Scottish Charity Regulator are recognized as “charities” in Scotland. Registered charities in Scotland must comply with the References in Documents Regulations, 2007, and make certain statements about their status in their documents (see Section 9.0 in the link below).

https://www.fundraisingregulator.org.uk/code-of-fundraising-practice/legal-appendices/

Commercial participators

Under the Charities Act, 1992, “Commercial participators” are considered to be organizations (other than professional fundraisers) that, in the course of their business, engage in a promotional venture in which it is represented that contributions will be made to charity. For example, a manufacturer that advertises washing powder with the promise that a contribution will be made to charity for each packet sold would be a commercial participator.

A statement that a commercial participator will make a contribution to charity must be accompanied by a statement setting out:

-the name of the charity or charities that will benefit

-the proportions in which each charity will benefit in cases where the money is to be divided between more than one charity

-what proportion of the price of the goods or services will be given to the charity or what sums will be donated by the commercial participator in connection with the sale or supply of the goods or services

Reporting requirements:

Charities must prepare an annual report and accounts, and must submit these to the Charity Commission and/or OSCR. Charities whose gross income or expenditure does not exceed £10,000 and are registered with the Charity Commission, only have to submit an annual report and accounts to the Charity Commission if requested to do so. For instance, OSCR requires all charities to complete an Annual Return, whilst charities with an income of over £25,000 must complete a supplementary Annual Return. The amount of detail and the information to be included varies according to the size of the charity.

In some cases, the information contained in the accounts must be independently audited. Charities should consult the guidance on preparing annual reports and accounts provided on the Charity Commission website and/or OSCR’s website.

Information to be given in the report and accounts includes, for example:

-the charity’s name and charity registration number

-details of all who have served as trustees during the year

-details of the aims and objectives of the charity, and the strategies and activities undertaken to achieve them

-an assessment of the challenges and achievements of the charity during the year

-a review of the financial position of the charity including its policy on reserves

-an outline of the charity’s plans for the future

-financial statements, which must comply with SORP 2005

Charities must also complete and submit the annual return form that they receive annually from the Charity Commission with details including:

-the charity’s name and charity registration number

-a statement of the charity’s annual income and expenditure and the date of the financial year end

-any changes to trustees’ details

Any charity with an annual income over £1m must also complete a Summary Information Return (SIR), which forms part C of the annual return. This outlines the aims, strategy and financial position of the charity. Further guidelines and examples of charities’ SIRs that have been submitted to date may be found on the Charity Commission website. The information contained in the annual report and SIR will help fundraisers and other charity employees and volunteers who have contact with the public to answer questions such as:

-how much money does you raise in a year?

-what sources does your income come from?

-how much of your income do you spend on fundraising/ administration?

-how much of your income do you spend on CEO/directors’ salaries?

-how many paid staff do you have?

-why do you pay staff when people are willing to volunteer for you?

-why do you have (such large) reserves?

-what is the appropriate level of reserves for the charity?

-how is your charity governed?

Charities that are companies must also comply with company law reporting requirements, details of which may be found on the Companies House website. These include filing an annual return and accounts and informing Companies House of changes to certain governance aspects of the charity, such as directors (or the equivalent term within the charity’s governing document), company secretaries, registered office address, name or governing documents.

 

 

REFERENCES

https://www.institute-of-fundraising.org.uk/code-of-fundraising-practice/guidance/accountability-and-transparency-guidance/defining-accountability-and-transparency-and-key-principles/ (1)

haut.researchgateway.ac.nz/handle/10292/1303 (2)

institute-of-fundraising.org.uk/code-of-fundraising-practice/guidance/accountability-and-transparency-guidance/key-legal-requirements/ (3)

councilofnonprofits.org/tools-resources/financial-transparency (4)

www.sos.state.co.us/pubs/charities/reports/2014/8-Standards.html (5)

www.curearthritis.org/transparency-accountability-best-charities/ (6)

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