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Conversion Ratios, Efficiency and Obfuscation: A Study of the Impact of Changed UK Charity Accounting Requirements on External Stakeholders

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Abstract

Key stakeholders in the UK charity sector have, in recent years, advocated greater accountability for charity performance. Part of that debate has focussed on the use of conversion ratios as indicators of efficiency, with importance to stakeholders being contrasted with charities’ apparent reluctance to report such measures. Whilst, before 2005, conversion ratios could have been computed from financial statements, changes in the UK charity SORP have radically altered the ability of users to do this. This article explores the impact on the visibility of such information through an analysis of the financial statements of large UK charities before and after the 2005 changes. Overall, the findings suggest that, despite the stated intention of increasing transparency in respect of charity costs, the application of the changes has resulted in charities ‘managing’ the numbers and limiting their disclosures, possibly to the detriment of external stakeholders.

Résumé

Au cours des dernières années, les acteurs clés du secteur caritatif au Royaume-Uni ont appelé de leurs vœux à une plus grande responsabilité en matière d’efficacité caritative. Une partie du débat s’est concentrée sur l’utilisation des taux de conversion comme indicateurs de l’efficacité caritative, en insistant sur les divergences entre les intérêts des donateurs et bénéficiaires d’une part et la réluctance des organisations caritatives à communiquer leurs chiffres d’autre part. Alors que, avant 2005, les taux de conversion pouvaient être calculés sur la base des comptes financiers, les changements apportés aux directives d’encadrement de l’action caritative au Royaume-Uni ont rendu ces calculs beaucoup plus difficiles à réaliser. Cet article explore l’impact de la visibilité de ce type d’information en s’appuyant sur une analyse des rapports financiers de grandes organisations caritatives britanniques avant et après les changements de 2005. Dans l’ensemble, les résultats suggèrent que, en dépit de l’intention déclarée d’accroître la transparence des coûts caritatifs, les changements implémentés ont eu pour résultat d’inciter les organisations caritatives à « arranger » leurs chiffres et limiter la publicité de leur gestion, peut-être au détriment des donateurs et des bénéficiaires d’aide.

Zusammenfassung

Wichtige Stakeholder im gemeinnützigen Sektor in Großbritannien haben sich in den vergangenen Jahren für eine erhöhte Rechenschaftspflicht seitens der Wohltätigkeitsorganisationen hinsichtlich ihrer Leistungen ausgesprochen. Ein Teil dieser Debatte hat sich auf die Anwendung von Konversionsquoten als Effizienzindikatoren konzentriert und darauf, wie die Stakeholder scheinbar widerwilligen Wohltätigkeitsorganisationen gegenüberstehen, wenn es um die Offenlegung dieser Maßgrößen geht. Während die Konversionsquoten vor 2005 noch anhand von Finanzaufstellungen kalkuliert werden konnten, wirkten sich Änderungen des Statement of Recommended Practice (SORP; zu deutsch: Ausführungen zur empfohlenen Praktik) für britische Wohltätigkeitsorganisationen grundlegend darauf aus, wie dies bewerkstelligt werden kann. Der vorliegende Beitrag untersucht mittels einer Analyse der vor und nach den Änderungen im Jahr 2005 erstellten Finanzaufstellungen großer britischer Wohltätigkeitsorganisationen die Auswirkungen auf die Visibilität dieser Informationen. Insgesamt weisen die Ergebnisse darauf hin, dass trotz der beabsichtigten erhöhten Transparenz mit Hinblick auf die Kosten der Wohltätigkeitsorganisationen, die Änderungen in der Praxis dazu geführt haben, dass die Wohltätigkeitsorganisationen die Zahlen unter Umständen zum Nachteil externer Stakeholder „handhaben“ und ihre Offenlegungen einschränken.

Resumen

Las partes interesadas claves en el sector de las organizaciones benéficas del Reino Unido han defendido, en años recientes, una mayor obligación de rendir cuentas del rendimiento de las organizaciones benéficas. Parte de ese debate se ha centrado en el uso de ratios de conversión como indicadores de eficiencia, contrastando la importancia de esto para las partes interesadas con la aparente renuencia de las organizaciones benéficas a informar de dichas medidas. Mientras que, con anterioridad a 2005, los ratios de conversión podrían haber sido computados a partir de los estados financieros, los cambios en la Declaración de Práctica Recomendada (SORP, del inglés Statement of Recommended Practice) para organizaciones benéficas del Reino Unido han alterado radicalmente la capacidad de los usuarios para hacer esto. El presente documento explora el impacto sobre la visibilidad de dicha información mediante un análisis de los estados financieros de grandes organizaciones benéficas del Reino Unido antes y después de los cambios de 2005. En general, los hallazgos sugieren que, a pesar de la intención manifestada de aumentar la transparencia con respecto a los costes de la organización benéfica, la aplicación de los cambios ha dado lugar a que las organizaciones benéficas “manejen” los números y limiten sus divulgaciones, posiblemente en detrimento de las partes interesadas externas.

摘要

近年来,英国慈善领域的主要利益相关者提倡更大的慈善义演可说明性。该争论的一部分专注将兑换率作为效率指标,对利益相关者的重要性与慈善组织明显不愿公开这些形成对比。尽管2005年前可以通过财务报表计算兑换率,但是英国慈善会计制度的改变从根本上改变了用户的计算能力。通过分析大型英国慈善组织2005年之前和之后的财务报表变化,本论文探讨了此类信息的可见性影响。调查结果显示,尽管整体的慈善成本透明度不断增长,但是应用变化导致慈善组织“管理”数字并限制其公布,这可能损害外部利益相关者。

ملخص

دافع أصحاب المصلحة الرئيسيين في قطاع الأعمال الخيرية في المملكة المتحدة، في السنوات الأخيرة، عن قدر أكبر من المساءلة لأداء الأعمال الخيرية. قد ركز جزء من هذا النقاش على إستخدام نسب التحويل كمؤشرات للكفاءة، مع أهمية لأصحاب المصلحة على النقيض مع ممانعة واضحة للأعمال الخيرية للإبلاغ عن هذه القياسات. في حين، قبل عام 2005، كان من الممكن حساب نسب التحويل من البيانات المالية، التغيرات في دليل تقارير الأعمال الخيرية و حساب المستحقات(SORP) في المملكة المتحدة غير جذريا˝ القدرةعلى القيام بذلك. يفحص هذا البحث تأثير ذلك على وضوح هذه المعلومات من خلال تحليل البيانات المالية لأعمال خيرية كبيرة في المملكة المتحدة قبل وبعد تغيرات عام 2005. عموما˝، فإن النتائج تشير إلى أنه على الرغم من النية المعلنة لزيادة الشفافية فيما يتعلق بتكاليف الأعمال الخيرية، تطبيق التغيرات أدى إلى ‘إدارة’ الأعمال الخيرية لإستخدام الأرقام والحد من الكشف عنها، ربما على حساب أصحاب المصلحة الخارجيين.

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Fig. 1

Notes

  1. This estimate includes 162,000 charities in England and Wales, with estimated annual income of more than £53 billion (Charity Commission 2012), 23,000 charities in Scotland (Office of the Scottish Charity Regulator (OSCR) 2012) with income of £8 billion (OSCR 2008) and 4,800 such organisations in Northern Ireland (NI) with income of £864 million (NI Council for Voluntary Action 2012). In addition, in England and Wales, there are many exempt charities (mostly universities, educational institutions and national museums), which are not required to register and are not subjected to the Charity Commission’s supervisory powers, and excepted charities (including religious charities), which are not required to register but are subjected to the supervision of the Charity Commission. Therefore, the total number of charities, and their economic impact, is considerably higher.

  2. SORPs are recommendations on accounting practice for specialised industries or sectors, and they supplement other legal and regulatory requirements. The first charity SORP was issued in 1988, with subsequent revisions in 1995, 2000 and 2005.

  3. The Wise Giving Alliance, part of the BBB, is an American organisation which provides guidance for donors in a number of forms including in-depth evaluative studies of national charities based on the application of criteria (their Standards for Charity Accountability) to the publicly available reporting of those charities (Form 990) (BBB 2012).

  4. The SORP requires charities to report on their achievements for the year, including measures or indicators used by the charity to measure that achievement (paragraphs 53–54, Charity Commission 2005), but does not require the reporting of specific ratios.

  5. Annual reports and financial statements for all charities in England and Wales with income in excess of £10,000 are available on the website of the Charity Commission and a similar scheme is being developed in Scotland. In addition, many larger charities are constituted as limited liability companies and their financial statements are available to the public through Companies House, while charities may also make their reports available through their own websites.

  6. With SORP 2005 being applicable to all accounting periods beginning on or after 1 April 2005, financial statements before the adoption of the SORP were for either 2004 or 2005 year ends, and those first adoption statements dated for either 2005 or 2006 year ends (due to some early adoption).

  7. Given the issues of unobtainable/unusable reports, combined with changes in the sector over the 6 years under study, the number of charities which could be used as a matched sample across all three reporting periods was 56. The same analyses were performed on the matched sample and on the larger, unmatched groups, and the patterns identified were sufficiently similar that the results for the large, unmatched sample are presented throughout this report, with confidence that the patterns identified are the same as those in the matched sample.

  8. For 2004/2005, other costs include support, administration, investment and exceptional costs; for 2005/2006 and 2008/2009, other costs include governance, investment and exceptional costs.

  9. The Kruskal–Wallis and Mann–Whitney U tests are both nonparametric analysis of variance (Anova) tests which test whether samples are drawn from the same/identical or different/non-identical populations (for detailed explanation, see Siegel 1956).

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  1. Queen’s University Management School, Queen’s University, Riddel Hall, Belfast, BT9 5EE, UK

    Ciaran Connolly, Noel Hyndman & Danielle McConville

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  1. Ciaran Connolly
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  2. Noel Hyndman
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Correspondence to Danielle McConville.

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Connolly, C., Hyndman, N. & McConville, D. Conversion Ratios, Efficiency and Obfuscation: A Study of the Impact of Changed UK Charity Accounting Requirements on External Stakeholders. Voluntas 24, 785–804 (2013). https://doi.org/10.1007/s11266-013-9371-8

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