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.     

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.     

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.     

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.     

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.     

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.     

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.     

New development: The conceptual underpinnings of international public sector accounting

The conceptual underpinnings of accounting standards are potentially very important for the future of public sector accounting internationally. The authors explain why and comment on the implications for public sector accounting.     

Accountability Beyond the Headlines: Why Not‐for‐profit Organisations Need to Communicate Their Own Expenditure Stories

This paper analyses the expenditure patterns of 97 Australian international aid and development organisations, and examines the extent to which they disclose information about their expenditure in order to discharge their accountability. Not‐for‐profit (NFP) expenditure attracts media attention, with perceptions of excessive costs potentially damaging stakeholder trust in NFP organisations. This makes it important for organisations to be proactive in communicating their expenditure stories to stakeholders, rather than being judged on their performance by standardised expenditure metrics. By highlighting what it costs to ensure longer‐term operational capability, NFP organisations will contribute to the discharge of their financial accountability and play a part in educating all stakeholders about the dangers of relying on a single metric.     

Finding diamonds in the rough: Analysts’ selective following of loss‐reporting firms

Investors face greater difficulty valuing loss‐reporting than profit‐reporting firms: losses may be due to very different reasons (e.g., poor operating performance or investments in intangibles, and financial accounting information is of more limited use for valuing loss‐making firms than profit‐making firms. Because of increased uncertainty about loss firms’ future financial and business viability, we hypothesize that financial analysts will be more selective when choosing to follow loss firms than profit firms, with the result that “abnormal” analyst following will be more informative to investors regarding the future performance of loss firms than profit firms. Consistent with this prediction, we find that abnormal analyst coverage is useful for predicting firms’ future prospects, and is more strongly associated with future performance (stock returns and ROA) for loss firms than for profit firms. The market, however, does not seem to use this useful information when pricing loss firms: for loss firms a portfolio investment strategy based upon abnormal analyst following can generate positive excess returns over 1‐ to 3‐year holding periods. These results are stronger for persistent‐loss firms than for occasional‐loss firms. We conclude that abnormal analyst following contains useful information about firms’ future prospects, and even more so for loss firms than for profit firms.     

Towards a dialectical interpretation of the contemporary mode of capitalist accounting

This paper seeks to apply the Hegelian and Marxian dialectic to the interpretation of the present mode of capitalist financial accounting in its totality; as a unified mode of its particularities and universalities. The paper considers that whereas the recent changes in the conceptual framework and standards of accounting seem to be an entire transformation of capitalist accounting from traditional cost based accounting to advanced value based accounting, the general concept of accountability, the essence of the archetype of capitalist double-entry system, and the determination of accounting from the circulation of capital have been underlying the present mode of capitalist accounting. This paper also argues that the contradiction of accounting recognition or profit calculation inherent in the present mode of capitalist accounting corresponds to the contradiction in the contemporary mode of capitalist economy: the split of the investment of the enterprise’s capital into productive and non-productive assets, and the split of investors into those who solely deal with securities or fictitious capital and those who invest in productive capital by way of shareholding.     

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.     

An Analysis of Concepts and Evidence on the Question of Whether IFRS Should be Conservative

Do international accounting standards require conservative accounting? The IASB's conceptual framework suggests that they should not, while the research literature is largely silent on the matter, typically presuming conservatism to be an outcome of private contracting rather than standardized, public, general purpose financial reporting. In this paper, we analyze the actual requirements of IFRS. We find multiple examples of recognition requirements that lead to unconditional conservatism, measurement requirements that lead to conditional conservatism, and also presentation/disclosure requirements that further support a conservative reporting environment. These findings complement, support and deepen existing evidence in the empirical literature that accounting is in practice conservative. We show, however, that the requirements for conservatism in IFRS conflict with, first, the IASB's stated position in its conceptual framework that accounting should not be conservative and, second, the private contracting explanation for conservatism that is generally accepted in the literature. What is missing, and lies behind both conflicts, is an acknowledgement and understanding of the role of an agency/contracting perspective in enhancing the decision‐usefulness of general purpose accounting standards, given the information/incentive asymmetry and uncertainty that characterizes the real‐world context in which those standards operate. From a policy perspective, such an understanding would reconcile the IASB's conceptual framework with the actual requirements of IFRS. From a research literature perspective, such an understanding would re‐position accounting standards as central to the practice of accounting conservatism, which would in turn require revision to the generally accepted theory of a private contracting explanation for the empirical evidence of conservative accounting practice.     

User Requirements for Not-For-Profit Entity Financial Reporting: An International Comparison

This study investigates the not-for-profit (NFP) external financial reporting regulatory environments of the US, the UK, Canada and New Zealand and compares them with that of Australia. It finds a lack of clarity in the definition of a NFP entity under Australian accounting standards. The study also identifies various types of information that earlier research and the guidance in other countries suggest are useful to the users of NFP entities' financial statements. This information is not currently required under Australian accounting standards.     

User Requirements for Not-For-Profit Entity Financial Reporting: An International Comparison

This study investigates the not-for-profit (NFP) external financial reporting regulatory environments of the US, the UK, Canada and New Zealand and compares them with that of Australia. It finds a lack of clarity in the definition of a NFP entity under Australian accounting standards. The study also identifies various types of information that earlier research and the guidance in other countries suggest are useful to the users of NFP entities' financial statements. This information is not currently required under Australian accounting standards.     

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.     

NOT REPORTING A PROFIT: CONSTRUCTING A NON‐PROFIT ORGANISATION

Public sector reformers advocate contracting‐out as a means of improving cost‐effectiveness. In the health sector, market‐based contracts with for‐profit organisations can reduce equity of access and divert public funds to private gain. Such issues have prompted policy makers to seek alternative contracting strategies. This paper examines a primary health care policy whereby government contracts with private non‐profit organisations to increase efficiency and meet World Health Organisation ideals. The study found that the policy's implementation has not achieved these aims when for‐profit providers masquerade as non‐profit organisations. The implication is that governments may find it more effective to manage for structural diversity than mandate homogenisation.     

The Conceptual Framework as a Coherent System for the Development of Accounting Standards

The Financial Accounting Standards Board (FASB) visualized a conceptual accounting framework as a 'coherent system of interrelated objectives and fundamentals that can lead to consistent standards that prescribes the nature, function, and limits of financial accounting and financial statements' (FASB, 1976). To Australian standard setters, the primary purpose of the conceptual framework (CF) was only to be used as a 'guide' in developing and reviewing accounting standards (AASB, 1995, para. 5). The International Accounting Standards Committee (IASC) diminished the role of a conceptual framework even further by openly acknowledging that some standards are inconsistent with the guidelines offered by the framework (IASC, 1989 para. 12). Even though the Australian Accounting Standards Board (AASB) supposedly pursues a policy of harmonization of conceptual frameworks and accounting standards, there are also acknowledged inconsistencies in the conceptual frameworks of the IASC.
The aim of this article is to assess the coherence of the Australian (and IASC) conceptual framework. This analysis identifies confusion in drafting or construction of the conceptual framework, internal inconsistencies, and inconsistency with the legal framework within which business entities operate. Accordingly it is suggested that the adoption of a conceptual framework will not lead to consistent accounting standards, and inevitably the conceptual framework will lack credibility so long as it is inconsistent with legislation.     

CAPITAL ACCOUNTING, USER NEEDS AND THE FOUNDATIONS OF A CONCEPTUAL FRAMEWORK FOR PUBLIC SECTOR FINANCIAL REPORTING

This paper analyses the need for an adequate conceptual framework for financial reporting, particularly in the public sector, and examines several factors which may have worked against progress in the UK in developing such a conceptual framework in the past. The paper then analyses in detail the needs of potential users for capital accounting information in public sector financial reports, and the relevance of accruals accounting and different measurement bases in this context. Given the large amount of existing work outside the UK on the development of conceptual frameworks for financial reporting, the paper argues the need not for a new framework, but rather for a more focused analysis of several key conceptual issues that are relevant to meeting user needs.     

Do principles‐based accounting standards lead to biased financial reporting? An Australian experiment

International accounting standards are deliberately designed to be principles‐based (i.e. ‘substance over form’). With Australia's recent adoption of international accounting standards, a relevant question is, do principles‐based accounting standards lead to biased financial reporting? The present paper describes a study that analysed the consolidation judgements of senior accounting officials from Australian listed companies. Participants made consolidation judgements based on AASB 1024 Consolidated Accounts. Although AASB 1024 is not identical to IAS 27 Consolidated and Separate Financial Statements, there are many similarities and both follow a principles‐based approach. In aggregate, the present study finds that principles‐based accounting standards do not necessarily lead to biased financial reporting.