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.     

Not‐For‐Profit Ratios for Financial Resilience and Internal Accountability: A Study of Australian International Aid Organisations

Not‐for‐profit (NFP) financial ratio research has focused primarily on organisational efficiency measurements for external stakeholders. Ratios that also capture information about stability, capacity (liquidity), gearing and sustainability enable an assessment of financial resilience. They are thus valuable tools that can provide a framework of internal accountability between boards and management. The establishment of an Australian NFP regulator highlights the importance of NFP sustainability, and affirms the timeliness of this paper. We propose a suite of key financial ratios for use by NFP boards and management, and demonstrate its practical usefulness by applying the ratios to financial data from the 2009 reports of ACFID (Australian Council for International Development) affiliated international aid organisations.     

Australian not‐for‐profit sector views on the conceptual framework,accounting standards and accounting information

In this paper, we examine the conceptual framework, accounting standards and accounting information relevant to the not‐for‐profit (NFP) sector. Based on the responses of 242 Australian NFP managers, we find support for the inclusion of accountability in the conceptual framework, and for a common set of accounting standards across NFP and for‐profit sectors with additional standards or paragraphs to recognise NFP specific issues. Respondents also rated information within general‐purpose financial reports to be useful for decision making within their organisations. We offer suggestions as to what our findings mean for the development of accounting standards for the NFP sector.     

Accountability and not‐for‐profit organisations: Implications for developing international financial reporting standards

This paper provides empirical evidence which informs contemporary debates on developing international financial reporting standards for not‐for‐profit organisations (NPOs). Drawing on a global survey with respondents showing experience of NPO reporting in 179 countries, we explore: practice and beliefs about NPO financial reporting internationally; perceptions of accountability between NPOs and stakeholders; and implications for developing international financial reporting standards. Interpreting our research in the context of accountability, we find considerable support for developing international financial reporting standards for NPOs, recognising broad stewardship accountability to all stakeholders as important, but prioritising accountability upwards to external funders and regulators.     

Spenders or Savers? An Examination of the Reserves of Australian NGOs

Not‐for‐profit (NFP) organisations experience a tension between societal perceptions about maximising mission expenditure on one hand, and their need to accumulate reserves to ensure longer term financial sustainability on the other. While studies have examined the level of reserves in UK and US contexts, there is little Australian research or guidance about what constitutes an appropriate level of NFP reserves. This paper examines the levels and implications of the reserves of 52 Australian NFP non‐governmental organisations (NGOs) over eight years, identifying two groups. Spenders, with less than three months of expenditure in reserve, were more financially vulnerable, had higher levels of debt, yet spent a relatively greater proportion of their revenue on mission‐related activities than savers. Savers, with more than three months’ reserves, demonstrated a greater proportion of revenue from fundraising, proportionately greater equity levels, and higher returns on assets. Providing unique insights into the financial reserves of Australian NGOs, this empirical study contributes to existing NFP literature on reserves, which to date has focused primarily on US and UK contexts. Further, we propose that by developing, monitoring and communicating their reserves’ strategies, NFP boards and managers will be able to improve their organisations’ financial sustainability and manage societal perceptions about reserves.     

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.     

Communicating the Impact of the Global Financial Crisis in Annual Reports: A Study of Australian NGOs

This paper analyses the extent and nature of communication by Australian non‐governmental organisations (NGOs) about the impact of the global financial crisis (GFC). NGOs need to balance their communications about financial need against news that could potentially reflect negatively on stakeholders’ impressions of their worthiness to receive funding. Recognising this, we content analyse the annual report narratives of 10 Australian NGOs for information about the impact of the GFC and their use of impression management (IM) techniques. All NGOs in the study experienced some financial impact from the GFC, with nine referring to it in their annual report narratives. However, the information was very limited, indicating a missed opportunity to communicate meaningfully with stakeholders. Further, of the nine NGOs providing disclosures about the GFC's impact, eight used at least one IM technique, indicating a lack of transparency that has potentially negative implications for trust‐building with their stakeholders. This study focuses on a limited number of NGOs, but further research could broaden this approach to examine organisations in the broader not‐for‐profit (NFP) sector, other modes of communication or communication patterns at other times of crisis, and currently, in an era of austerity.     

Dominant stakeholders,activity and accountability discharge in the CSO sector

Civil society organisations (CSOs) comprise a diverse range of associations, including non‐governmental organisations (NGOs), community groups, political parties and social networks. Nevertheless, despite heterogeneity, regulators, funders and donors often treat CSOs as homogeneous when demanding accountability. This paper highlights differences in to whom CSOs across different categories (or types) perceive themselves to be accountable, what for and the different practices they undertake to discharge accountability. It calls for stakeholders to acknowledge diversity in accountability across different CSO types. This survey‐based research finds CSOs weight upwards and downwards stakeholders equally, and undertake voluminous reporting. They would benefit from negotiating multiple‐use mechanisms, especially with dominant stakeholders. In combining stakeholder and accountability theory, the research highlights specific CSO types needing further study.     

Defining the Reporting Entity in the Not‐for‐profit Public Sector: Implementation Issues Associated with the Control Test

This paper reports the main findings of a research project carried out on behalf of the Australian Accounting Standards Board (AASB) and the New Zealand Financial Reporting Standards Board. The purpose of the research is to inform standard setters about implementation issues that had been encountered in the not‐for‐profit (NFP) public sector when applying the control concept in AASB 127, Consolidated and Separate Financial Statements. The intention is to use the findings to inform proposed implementation guidance for AASB 10, Consolidated Financial Statements. Data were collected via a literature review and meetings with various NFP public sector constituents. Identified issues were either conceptual in nature (for example, who are the relevant users of NFP public sector general purpose financial statements and what are their needs?) or related to implementation concerns (for example, is the power exerted by one NFP public sector entity over another of an ‘ownership’ or a ‘regulatory’ form?). The findings give rise to several suggested actions that standard setters could take in providing useful guidance to NFP public sector constituents.     

Voluntary Disclosures as a Mechanism for Defining Entity Status in Australian Not‐for‐Profit Organisations

This study examines managerial efforts to portray an entity's not‐for‐profit (NFP) status based on voluntary disclosure practices. The annual report text of 61 NFPs are analysed in accordance with Salamon and Anheier's (1997) NFP definitional framework. Results indicate a predominant application of the structural‐operational definition. Furthermore, the ‘organised’ attribute of this definition prevails over the ‘non‐profit‐distributing’ criterion that has been advocated by various parties. Standard‐setting bodies may want to consider: (1) NFP management perspectives in any revised NFP definition; and (2) greater clarity in conceptual framework and standard‐setting arrangements to improve overall transparency in NFP reporting practices.     

Making charity effectiveness transparent: Building a stakeholder‐focussed framework of reporting

Effectiveness in achieving mission is fundamental to evaluating charity performance, and is of central concern to stakeholders who fund, regulate and otherwise engage with such organisations. Exploring the meaning of transparency in the context of stakeholder engagement, and utilising previous research and authoritative sector discussion, this paper develops a novel framework of transparent, stakeholder‐focussed effectiveness reporting. It is contended that such reporting can assist the charity sector in discharging accountability, gaining legitimacy and in sharpening mission‐centred managerial decision making. Then applying this to UK charities’ publicly available communications, it highlights significant challenges and weaknesses in current effectiveness reporting.     

The climate change‐related disclosures and accountability practices of NGOs: Evidence from Australia

This paper focusses on non‐governmental organisations’ (NGOs) broader social accountability, investigating their public disclosures on climate change commitment and performance. Using a synthesised disclosure index, we analyse the annual reports of 30 NGOs, all signatories to the Australian Council for International Development's Code of Conduct. Overall disclosure rates from 2008 to 2013 were higher for commitment than performance, but were very low overall. However, the number of NGOs disclosing information rose markedly over the period. Although it is not directly possible to attribute the change in disclosure levels to the implementation of the Code, the enactment of the new Code could be one of the motivating factors for NGOs’ disclosure practices and their demonstrations of greater social accountability.      

Who Will Pay for Long‐Term Care in the UK? Projections Linking Macro‐ and Micro‐Simulation Models

The long‐term care funding system continues to attract much debate in the UK. We produce projections of state and private long‐term care expenditure and analyse the distributional impact of state‐financed care, through innovative linking of macro‐ and micro‐simulation models. Variant assumptions about life expectancy, dependency and care costs are examined and the impact of universal state‐financed (‘free’) personal care, based on need but not ability to pay, is investigated. We find that future long‐term care expenditure is subject to considerable uncertainty and is particularly sensitive to assumed future trends in real input costs. On a central set of assumptions, free personal care would, by 2051, increase public spending on long‐term care from 1.1 per cent of GDP to 1.3 per cent, or more if it generated an increase in demand. Among the care‐home population aged 85 or over, the immediate beneficiaries of free personal care would be those with relatively high incomes.     

Integrated Reporting: An Opportunity for Australia's Not‐for‐Profit Sector

Integrated Reporting is a new reporting paradigm that is holistic, strategic, responsive, material and relevant across multiple time frames. Emphasising enhanced disclosure of the value drivers for today's organisations, Integrated Reporting represents a journey to more meaningful reporting that can be instrumental for Australia's reporting organisations, including not‐for‐profits. With momentum behind the concept of Integrated Reporting building and contemporaneous local regulatory reform on the agenda, there are nascent opportunities for Integrated Reporting to guide the future of not‐for‐profit reporting in Australia.     

Estimating Risk‐Adjusted Costs of Financial Distress

The search for the optimal, or value‐maximizing, capital structure involves weighing the expected benefits of higher leverage against the expected “costs of financial distress.” These costs include not only the direct costs of reorganization, but less quantifiable effects of financial trouble such as damage to the firm's reputation, the loss of key employees and customers, and the loss of value from forgone investment opportunities. This article proposes a new method for valuing expected financial distress costs. While researchers have provided estimates of the costs associated with financial distress when it takes place, whether or when these costs will be incurred is, of course, unknown at the time the financing decision. As a result, the “correct” discount rate for valuing expected distress costs is difficult to derive. Instead of adjusting the discount rate to reflect historical default rate probabilities, the authors' method uses “risk‐neutral” probabilities of encountering distress that allow for discounting at the risk‐free rate. The risk‐neutral probabilities of default are derived by incorporating the systematic risk premia implicit in corporate bond yield spreads. This method results in a significant increase in estimates of financial distress costs. In a simple example presented by the authors, distress costs estimated at about 1.6% of firm value using the conventional method turn out to run about 5% after adjusting for the increased systematic risk associated with financial distress.     

Sustainability accounting—a brief history and conceptual framework

Research linking accounting to the emerging concept of sustainability surfaced in the early 1990s and has received continuing attention in academic and professional accounting literature. This paper tracks this brief history through to the release of the Sustainability Reporting Guidelines at the World Summit on Sustainable Development in August 2002, consolidating the various approaches into a sustainability accounting framework. The result is a comprehensive reporting model that presents an enormous challenge to business organisations, requiring a significant commitment of resources to achieve widespread implementation. Failure to meet this challenge enables business organisations to continue to avoid accountability for their continuing unsustainability. The paper concludes with a personal view as to how implementation of the sustainability accounting framework could proceed.     

Valuing Volunteers: Expanding the Relevance and Reliability Debate

Volunteers’ inputs to public and other not‐for‐profit organisations are significant. However, while statisticians gather data on volunteering, accountants do so less often due to a debate as to whether the relevance of recognising volunteer input in financial reports outweighs the reliability of that data and the costs of its derivation. This paper presents a survey of voluntary organisations that publish financial reports. It explores whether the promise of funding for volunteer effort has been matched with increasing financial reporting of volunteering. The results show there is little recognition of volunteer labour in financial reports, reflecting the unresolved relevance‐reliability debate in the accounting profession.     

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.     

Public‐private partnerships versus traditional procurement: Innovation incentives and information gathering

A government agency wants a facility to be built and managed to provide a public service. Two different modes of provision are considered. In a public‐private partnership, the tasks of building and managing are bundled, whereas under traditional procurement, these tasks are delegated to separate private contractors. The two provision modes differ in their incentives to innovate and to gather private information about future costs to adapt the service provision to changing circumstances. The government agency’s preferred mode of provision depends on the information‐gathering costs, the costs of innovation efforts, and the degree to which effort is contractible.     

Joined‐Up Government and the Challenges to Accounting and Accountability Researchers

Abstract: Collaborative working between public sector bodies in the UK, sometimes involving partnerships with private sector and not‐for‐profit organisations, was promoted heavily by the Labour Government (1997–2010) under what is sometimes labelled ‘Joined‐Up Government’. The Conservative – Liberal Democrat Coalition Government, elected in 2010, appears likely to continue to promote such policies. The objective of this paper is to raise awareness of what may be seen as an important and developing agenda in public services in which accounting and accountability researchers are barely visible. The paper reviews the meanings and motivations of joined‐up government and its development in the UK. A number of challenges are presented, including the need to refocus research from an entity to a network perspective; to assess whether joined‐up government delivers value‐for‐money services; to join the debate on the development of related accounting techniques; to seek precision in specifying accountability mechanisms and to adapt our research methods.