Going global with charity reporting

August 3, 2012 at 15:40

 

Last month a CFG symposium, hosted by MHA MacIntyre Hudson, brought leading figures together to discuss whether there should be an international reporting standard for not-for-profit (NFP) organisations. Representatives from the international charity sector, including Oxfam and the British Red Cross, joined accounting bodies and standard setters hoping to pin down some of the growing number of ideas for greater commonality in not-for-profit reporting at an international level.  Acronyms aside (and there were many!), it proved to be a highly thought-provoking and constructive discussion.

Currently, international accounting standards exist for both business and public sector and apply in most developed countries, allowing for greater accountability and comparability.

The transparency provided by these standards for business contributes to effective functioning of capital markets and sound growth; as companies become increasingly international and markets are more inter-related, standardised financial statements (accounts) and reports allow shareholders to assess management performance and subsequently influence investment behaviour.  The case for common standards in the public sector reporting is similar. As the recent sovereign debt crisis has shown, poor quality financial reporting by governments can lead to risks to global and national financial stability.

Hence, we now have high-level shared standards for business (International Financial Reporting Standards – IFRS) that over 100 countries legally require companies to follow in order to provide a ‘true and fair view’ of their accounts.  And increasingly, public bodies including international organisations, national and local governments, their agencies and regulatory bodies from around the world are using International Public Sector Accounting Standards (IPSAS).

For charities and NGOs, with less emphasis on profit and more on social purpose and benefitting users and members, there is no common international framework. The need for accountability however, is still paramount, but differs in that it applies to donors, funders and beneficiaries that may have a range of different expectations and needs.

Many not-for-profits currently use existing business frameworks – which fall somewhat short of the mark in terms of allowing them to fully reflect their funding and activities. Some countries have adapted national accounting frameworks, providing sector specific guidance for the charity sector. The UK Charities SoRP (Statement of Recommended Practice) and US non-profit guidelines offer arguably the best examples, based on years of careful development of reporting practice which is appropriate for charities and the way they manage money. This allows for consistency at a national level on some of the unique accounting phenomena characteristic to charity or not-for-profit sector such as the treatment of gifts, grants and revenue, heritage fixed assets, grant offers and commitments and allowing for restricted funds and volunteers.

While the NGO sector doesn’t have the same strong drivers from financial markets pushing for greater global consistency, there are still strong and rational arguments in favour of moving towards greater uniformity on an international level.

Strong communities have always formed the bedrock of society, but recent decades have seen an explosion of more a formalised and organised NGO sector. Disparate definitions, differing regulatory regimes and the complex make-up of the sector make it notoriously difficult to put a finger on the number of NGOs globally.  However, looking at individual country examples can provide a proxy as to the sector’s scale: the US has over 1.8m NGOs registered with the Inland Revenue, the UK has over 170,000 registered with the Charity Commission and in emerging economies like India there are estimated to be between 1 and 2 million.

The financial crisis has highlighted a growth in recognition of a global and connected society. The growth in civil society activity is mirrored by an increase in the economic and social role NGOs play in this society and a greater internationalisation of the sector. Roughly 50,000 NGOs now operate across borders, and ever more, particularly in the developing world, receive funding from overseas sources to which they must be accountable.  Arguably, charities are financially accountable to a far greater number of stakeholders than other legal forms, because they are can be funded by a combination of the general public, government, charitable trusts and tax concessions. More uniform standards would allow for better quality information globally (and would reduce the burden of having to prepare separate accounts with different disclosures for different audiences). It would also reduce the need to reinvent the wheel in developing economies like Latin America, China and the Middle East as each country develops its own take on accounting standards and takes its not-for-profit sector with it.

It has been said in the commercial and public standard setting that transparency is a prerequisite for confidence, however this applies equally, if not more so, to not-for-profits.  The plethora of existing initiatives which aim to increase transparency across INGOs demontrates this, DfIDs UK Aid Transparency Guarantee, the Global Reporting Initiative, International Aid Transparency Initiative (IATI) and those of the International Body of Supreme Audit Institutions (INTERSAI) are all examples.

High quality narrative and financial reporting is also essential to securing sustained support from donors, funders and the wider public. Both UK and global surveys show high levels of trust and confidence in charities. However, the current lack of international consistency in reporting places limits on the overall transparency of international NGOs. A more consistent approach would improve the quality of information available, deliver on the wider agenda to improve NGO transparency and effectiveness, and ultimately strengthen confidence and trust in NGOs worldwide. For many charities, it is this trust that butters their bread and keeps them delivering their mission. When it comes to funding and financing, donors and the public are their markets. The key drivers of trust and confidence in charities include evidence of good management and that a reasonable proportion of donations make it to the end cause; reporting evidence of this is going to be increasingly important.  Agreed standards also support users of accounts to understand the information they are given.  This is especially important for not-for-profits where the form income and expenditure takes can appear odd to the commercial eye.

However, none of this is straightforward stuff. While undoubtedly few would argue with the objective, agreeing a mechanism for achieving it poses a greater challenge – and it was this question that exercised our delegates last month.

There are a number of obstacles to be overcome, however we have a good example to follow in the International Accounting Standards Board (IASB) initiative to provide guidance to SMEs.  The point of our initial discussion was to spark a debate, understand the need for guidance in areas not addressed by existing standards and level of interest in the issue and to start exploring further the options for creating more consistency, quality and understanding in global NFP reporting. After a highly valuable debate the delegates have proposed a number of next steps for consideration. We will keep you posted on developments!

 See papers for this meeting and a summary of our discussion here.