UK charity accounting: An exercise in widening stakeholder engagement

Given the economic and social impact of the charity sector in the United Kingdom (UK), the importance of good governance has been recognised as a basis for underpinning effective and efficient performance, and for ensuring that charities meet the legitimate aspirations of key stakeholders. A major aspect of this is high-quality accounting and reporting. Over the past 25 years attempts have been made to improve this through the medium of successive, evolving versions of a Statement of Recommended Practice (SORP) for charities. As a foundation for the future review of the SORP (expected to be published in 2015), the SORP Committee undertook its largest ever consultation on an accounting pronouncement. This paper presents the findings of that consultation and, analysing them using stakeholder theory, concludes that this ambitious exercise facilitated much wider stakeholder engagement than had been experienced before and has the potential to legitimise further the SORP.     

Charity performance reporting,regulatory approaches and standard-setting

Internationally, there are strong calls for charities’ formal annual reporting to include non-financial performance information. Without the international standards common in other sectors, national accounting standard-setters often regulate charities’ reporting. Lacking evidence on approaches to encouraging/mandating charity performance reporting, and the effectiveness of these approaches, we ask: “How have different jurisdictions responded to calls for increasing performance reporting?”We conduct a benchmarking study that indicates differences in current reporting practices between Australia, New Zealand, the United Kingdom and the United States. By discussing both current regimes and proposed projects, we develop and illustrate a typology of regulatory approaches to performance reporting. These range from command and control, where standard-setters mandate specific performance reporting standards, through to market regulation, where charities and/or sector bodies acting as regulatory entrepreneurs determine what is to be reported. Between these extremes, the typology describes new governance approaches, with standard-setters partnering and collaborating with other actors. These approaches lead to different requirements with potentially significant implications for performance accountability in the respective jurisdictions. We argue that our regulatory typology contributes useful insights for the many jurisdictions grappling with how to regulate their charity sector and encourage performance reporting.     

Trust and accountability in UK charities: Exploring the virtuous circle

Public trust and confidence in charities is essential for the achievement of their missions. However, recent evidence suggests that trust in UK charities has been damaged, potentially affecting charities' and the charity sector's sustainability and effectiveness. This paper constructs accountability as an important means of developing, maintaining and restoring trust in charities. Through a series of interviews with charity managers, it investigates the public and private mechanisms used in discharging accountability to, and building trust with, charities' main stakeholder groups. The paper identifies the use of a wide range of mechanisms, often highly tailored to particular stakeholders' perceived information needs, which are seen as critical in this process. It is argued that the use and interplay of these can create a ‘virtuous circle’ of accountability and trust, where each reinforces the other. It is argued that where this is achieved, trust in individual charities, and the sector as a whole, can be enhanced.     

The determinants of audit fees—evidence from the voluntary sector

Given the growing demand for accountability in the public sector, there is a need to begin to investigate audit pricing issues in this sector. This study makes three contributions. First, it develops and estimates, for the first time, a model of audit fee determinants for the charity sector. As in previous private sector company studies, size, organisational complexity and audit firm location are the major determinants. A positive association between audit fees and fees for non-audit services is also observed. Charity sector factors of empirical significance include the nature of the charity (i.e., grant-making or fund-raising), its area of activity and the importance of trading income. Separate models for grant-making and fund-raising charities reflect the relative complexity of the audit of fund-raising charities. Second, the lower auditor concentration in the charity sector market, compared to the private sector market, permits a more powerful test of whether large firms and/or auditor expertise are rewarded with a fee premium. In the more complex audit environment of fund-raising charities, the results show that Big Six audit firms receive higher audit fees (18.5%, on average) than non-Big Six firms. Also, non-Big Six audit firms with charity expertise are rewarded with a fee premium over other non-Big Six firms. Finally, the study demonstrates that the charity audit fee rate is significantly lower than that of private sector companies; in fact it is approximately half. A change in the reporting of charity audit fees is proposed to reflect any element of ‘charitable giving’ by the audit firm.     

Exploring attitudes to financial reporting in the Australian not‐for‐profit sector

The current level of satisfaction among different stakeholders about the current approaches and practises of financial reporting of not‐for‐profit (NFP) entities is underexplored ( Christensen and Mohr, 2003 ; Lee, 2004 ; Gray et al., 2006 ; Parker, 2007 ). This paper uses content analysis to examine submissions to the 2008 Australian Senate Economics Standing Committee for its inquiry into the disclosure regimes of charities and NFP organisations, which aimed to explore attitudes about financial reporting in the NFP sector. Financial reporting is viewed as an important part of accountability, but the sector identifies deficiencies in the current regime in terms of consistency, efficiency and transparency. Respondents to this inquiry believed that a sector‐specific accounting standard was important. Financial reporting standards, regulations and legal structures should be uniform across the entire sector, but with some variation allowed for smaller NFPs. The cost of complying with standards was a significant issue for smaller NFPs.     

IPSAS or IFRS as the Framework for Public Sector Financial Reporting? New Zealand Preparers’ Perspectives

The last 30 years have seen public sector accounting in many countries undergo considerable change. More recently, some governments adopted accrual accounting and International Public Sector Accounting Standards (IPSAS), some adopted modified International Financial Reporting Standards (IFRS) while others continued with cash‐based accounting. New Zealand (NZ) has, for more than two decades, followed a sector neutral approach to financial reporting and standard setting where the same accounting standards were applied to all entities in all sectors: for‐profit, not‐for‐profit and the public sector. This period included the adoption of IFRS by for‐profit entities with minor modifications for the public sector. The suitability of IFRS for the public sector has been questioned and, recently, standard setters in NZ decided to adopt a sector‐specific standard‐setting approach with multiple tiers for each sector. The for‐profit sector will continue to follow IFRS but reporting standards for the public sector will be based on IPSAS. In this period of change we sought the views of preparers of public sector financial reports regarding the users of such reports and their preferences for the public sector reporting framework. We also sought the views of the preparers regarding the usefulness of each financial statement for users, and whether the benefits of reporting by their organisations exceeds the costs. The findings indicate support for maintaining IFRS as a basis for reporting in the NZ public sector. However, IPSAS modified to NZ conditions is also perceived as an acceptable option by respondents in this study. The income statement is, in the opinion of the respondents in this study, the most useful statement while cash flows appear to hold little value. A high proportion of respondents believe that the benefits of reporting exceed the costs, which contradicts the view that such reports are mainly compliance documents that provide little value. This finding contributes to the continuing debate on costs versus benefits on the recent introduction of IPSAS as the reporting framework for the public sector and the perceived appropriateness of IPSAS in public sector reporting.     

Negotiating for survival: Balancing mission and money

The impetus for prioritising money over mission in charities is increasingly pertinent as public sector austerity progresses in the UK. Mid size charities – who are heavily reliant on grant funding - have experienced proportionately greater challenges to austerity than larger entities. A substantial part of accountability efforts in mid size charities are directed towards funders, where funder imposed frameworks and measures may direct charity attention away from social mission towards funder needs, causing mission drift. Four charity case studies and grant funder interviews were conducted to investigate how charities can pursue social mission in a challenging funding environment. This paper shows that charities can protect social mission despite high dependence on grant funding, but also provides evidence of susceptibility to mission drift in cases where the balance between money and mission changes. Charity accounting systems display notable funder influence. A resource dependence perspective is utilised to highlight the complexity in assessing dependence of charities in a challenging environment and demonstrates the extent of funder influence in accounting and performance systems in these charities. However, charities employ strategies to cope with external requirements, enabling them to retain mission focus.     

How can the public trust charities? The role of performance accountability reporting

Charities rely on public trust to exist. However, that trust has diminished, with a perceived lack of accountability seen as a key reason. This study draws on case studies of two New Zealand charities to examine their performance accountability reporting practices and potential implications for public trust. The findings surface the day‐to‐day agency of charity actors in shifting performance accountability practices towards modes of disclosure that are relevant and accessible to the public. This paper contributes to the literature by extending understandings of how charities produce accountability information that can enhance public trust and, thus, support their mission achievement.     

PERFORMANCE REPORTING BY MALAYSIAN LOCAL AUTHORITIES: IDENTIFYING STAKEHOLDER NEEDS

The concept of public accountability promotes the need for a comprehensive set of performance‐related information to satisfy the information needs of a diverse stakeholder interest group. However, literature concerned with the scope of information to be disclosed, and in particular within the context of a developing country, is limited. This paper identifies the information set which stakeholders of Malaysian local authorities consider relevant in the monitoring and assessment of local authority performance. Stakeholders indicated strong interest in performance information that is not traditionally disclosed in the financial statements: non‐financial information particularly performance measurement of outputs, outcomes, efficiency and effectiveness. Disclosures in the Statement of Revenue and Expenditure and forward‐looking information are generally regarded as the most important disclosures. The results of the study also indicate differences amongst stakeholders as to the level of importance that they place on certain items especially items related to internal policies and governance and financial position of the local authorities. The findings will be of significance to policy makers interested in improving the performance reporting of Malaysian public sector entities, particularly local authorities.     

Research horizons for public and private not‐for‐profit sector reporting: moving the bar in the right direction

The examination of public and private not‐for‐profit sector financial reporting has been a topic of interest on a cyclical basis in Australia over the last 30 years. Traditional topics have included examinations of the intended and unintended consequences of specific standards, the accountability value of financial reports, transaction neutrality, compliance with the accounting standards, and more recently, the prospective implications of new, differently focused reporting standards considering such issues as income measurement and outcomes reporting. With increased recent attention from standard setters and regulators, and greater data availability, the opportunities for undertaking impactful research in these and related areas are increasing. In this paper, we focus on research that has examined the following questions: (i) Which private and public NFPOs lodge financial reports and what is reported; (ii) Who are the users and what are their information needs? (iii) Which private and public NFPs should lodge financial reports and what should be included in them; and (iv) How should the accounting frameworks for NFP sector reporting be set? For each of these issues, we identify the research gaps and opportunities for further research.     

Accounting for carbon and reframing disclosure: A business model approach

This paper contributes to the research in accounting and the debate about the nature of carbon footprint reporting for society. This paper utilises numbers and narratives to explore changes in carbon footprint using UK national carbon emissions data for the period 1990–2009 and six years (2006–2011) of carbon emissions data for the FTSE 100 group of companies and a case study that focuses on the UK mixed grocery sector. Our argument is that existing approaches to framing carbon disclosure generate malleable, inconsistent and irreconcilable numbers and narratives. In this paper we argue for an alternative framing of carbon disclosure informed by a reporting entities business model. Specifically, we suggest, that a reporting entity disclose its carbon–material stakeholder relations. This alternative, we argue, would increase the visibility of carbon generating stakeholder relations and avoid some of the difficulties and arbitrariness associated with framing carbon disclosure around a reporting entity boundary where judgements have to be made about responsibility and operational control.     

The Public Accountability Value of a Triple Bottom Line Approach to Performance Reporting in the Water Sector

Global water resources are subject to increasing supply constraints. We respond by exploring how novel public sector performance reporting can service public accountability. Here our focus is an exploration of the drivers and utility of a unique ‘sustainability’‐focused, publicly disclosed, performance reporting initiative undertaken by a water agency in Australia. Semi‐structured interviews were conducted with a range of individuals from 2013 to 2014. A disclosure index was also constructed to assess the quality of the disclosures. While the key purpose of the reports was to provide managerial accountability with intra‐governmental stakeholders, they were also drawn on to serve a secondary public accountability purpose with external stakeholders. We argue that the prioritisation of internal stakeholders could threaten utility for public accountability purposes. However, in this case, the reports were also found to be largely relevant to the general public. The study demonstrates that reporting developed for managerial accountability purposes can be designed and targeted also to contribute usefully to ancillary public accountability objectives. Our engagement with the public sector to explore the role and effectiveness of novel reporting strategies in support of sustainability and accountability objectives is topical, and contributes to understanding potential solutions in other contexts.     

Do Not‐For‐Profits Need Their Own Conceptual Framework?

This paper raises the issue of whether not‐for‐profit (NFP) oganisations require a conceptual framework that acknowledges their mission imperative and enables them to discharge their broader accountability. Relying on publicly available documentation and literature, it suggests the current Conceptual Frameworks for the for‐profit and public sectors are inadequate in meeting the accountability needs of NFPs. A NFP‐specific conceptual framework would allow the demonstration of broader NFP‐specific accountability and the formulation of NFP‐appropriate reporting practice, including the provision of financial and non‐financial reporting. The paper thus theoretically challenges existing financial reporting arrangements and invites debate on their future direction.     

A stakeholder analysis of employee disclosures in annual reports

Little empirical research has identified what drives companies to voluntarily report employee‐related information. Ullmann's three‐dimensional stakeholder theory model is applied as a framework to analyse associations with corporate employee‐related disclosures. Measures are developed to estimate stakeholder power, strategic posture and economic performance associated with employee‐related disclosures. Results indicate that employee‐related disclosures increase with more employee share ownership, employee concentration, the quality of corporate governance, employee recognition in corporate mission statements, adverse publicity about employees and economic performance measured by profit per employee.     

Stakeholder Engagement in Sustainability Reporting: Evidence of Reputation Risk Management in Large Australian Companies

The objective of this research is to examine whether stakeholder engagement in sustainability reporting constitutes the process of managing reputational risk. This research utilises Shrives and Brennan's (2017) framework of rhetorical strategies of non‐compliance to obtain empirical evidence of reputation risk management (RRM) in the context of stakeholder engagement in sustainability reporting. Quantitative and qualitative content analysis was undertaken on 154 sustainability disclosures in both the annual and sustainability reports of large Australian companies. This research finds that large Australian companies engage with their stakeholders to manage reputational risk: to increase market share and pre‐empt social issues. It is evident that large Australian companies use several forms of rhetorical statements in their sustainability disclosures with respect to RRM. However, there is no evidence that they shirk their responsibilities.     

The public accountability index: crafting a parametric disclosure index for annual reports

The methodology used to craft a disclosure index with parametric statistical properties is described and explained. The index is developed from a public accountability perspective using stakeholder opinions captured via a delphi exercise. Named the Public Accountability Index (PAI), the index is applied to the annual reports of the New Zealand universities, 1985–2000. This was a period of radical change for the public sector, and the index scores reflect the wholesale changes in reporting over the period. PAI is offered as a generic stakeholder approach for the development of disclosure indices to measure annual reports of groups of organisations in any of the private, public or so-called third sectors.     

Churches and charity regulation: 1993–2009

This article explores the impact of charity law and regulation on churches in the period 1993–2009 in the jurisdictions of England and Wales, Scotland, and Northern Ireland. In the past, churches have often escaped the full requirements of charity regulation on issues such as registration, reporting, and accountability to regulators. Many of these exemptions have been removed as a result of modernization of charity law throughout the UK, and the implications of these changes are explored both normatively and qualitatively.     

A Comparative Study on the Impact of Revised SORP 2 on British and Irish Charities

Charities constitute an important sector in the economies of Britain and Ireland. However, despite their economic importance, charity external financial reporting has been characterised by a diversity of accounting practice and a lack of standardisation. Over the last 20 years an attempt has been made to improve this situation by the publication of a Statement of Recommended Practice (SORP) for charities in 1988 and its revision in 1995. It is argued that inconsistencies in the financial statements of charities and the adoption of dubious accounting practices make it difficult for users of charity accounts to understand (and therefore use) the information provided. Previous studies have mainly looked at the impact of the original SORP (1988) on large charities in Britain. Little is known with respect to the impact on Irish charities. This paper presents the results of a comparative analysis of over 200 financial statements of Irish and British charities with respect to the recommendations contained in the revised SORP (1995). The results provide evidence that the accounts of Irish charities are considerably less compliant with the recommendations made in the revised SORP than their British counterparts. Possible reasons for this are discussed.     

THE CHARITIES SECTOR IN VICTORIA -CHARACTERISTICS AND PUBLIC ACCOUNTABILITY*

The paper presents the results of a survey conducted to provide a background paper for the Victorian Government Interdepartmental Working Party on the Administration of Charities. The paper is the first attempt to provide an overview of the size and structure of the charity sector in Victoria. Extrapolated for Australia, the survey shows that charities in 1978 commanded receipts representing approximately 3.56 per cent of Australia's Gross Domestic Product. Difficulties in obtaining data for the study raise questions regarding whether the government presently adequately discharges its responsibilities with regard to controlling the reporting of charities and assessing their performance.     

Earnings Quality under Rules‐ versus Principles‐based Accounting Standards: A Test of the Skinner Hypothesis / LA QUALITÉ DES RÉSULTATS SELON QUE LES NORMES COMPTABLES SONT AXÉES SUR LES RÈGLES OU SUR LES PRINCIPES: VÉRIFICATION DE L'HYPOTHÈSE DE SKINNER*

We provide preliminary evidence, consistent with Skinner (1995), that Canada's relatively principles‐based GAAP yield higher accrual quality than the United States' relatively rules‐based GAAP. These results stem from a comparison of the Dechow‐Dichev (2002) measure of accrual quality for cross‐listed Canadian firms reporting under both Canadian and U.S. GAAP. However, we document lower accrual quality for Canadian firms reporting under U.S. GAAP than for U.S. firms, which are subject to stronger U.S. oversight, reporting under U.S. GAAP. The latter results suggest that stronger U.S. oversight compensates for inferior accrual quality associated with rules‐based GAAP. Consistent with the positive effect of Canada's principles‐based GAAP and the offsetting negative effect of Canada's weaker oversight, we find no overall difference in accrual quality between Canadian firms reporting under Canadian GAAP and U.S. firms reporting under U.S. GAAP. Our results imply that (1) policymakers who wish to compare the effectiveness of oversight across jurisdictions must control for the GAAP effect; and (2) accounting standard‐setters who wish to compare the effectiveness of principles‐ versus rules‐based GAAP must control for oversight strength.