Charity begins with transparency

Charity finance directors already face a great deal of public scrutiny, as donors and other stakeholders look for reassurance that costs are kept to a reasonable level and funds spent wisely.

Now the Charity Finance Directors Group has published recommendations aimed at defining more precisely the ways in which those costs are allocated within accounts.

The CFDG’s chief executive Shirley Scott believes that firming up cost definitions and procedures for allocating costs will help donors and stakeholders appreciate the realities behind those costs. ‘We are very much convinced that if charities are going to perform their function, they have to develop more considered ways of disclosing what they are doing,’ she says.

The main context for the reform, she adds, was a new statement of recommended practice (SORP) for charity reporting. But the group also wants to use the report to try and draw out people’s expectations of charity spending and reporting.

A CFDG report Inputs Measurement Project Report is part of the group’s mission to improve the standing of charities in the public eye. Deputy CFDG chairman Les Jones says: ‘An essential ingredient of transparent reporting is better definition of inputs. For too long, the sector has suffered from a lack of real comparison as far as such things as fundraising costs, management and administration and the “financial” impact of volunteers are concerned. This has caused us to be defensive and others to be suspicious when we really have nothing to hide.

‘I believe if we can achieve consistency in measuring and reporting inputs and we can openly explain the reasons for differences, we can improve public confidence in our work.’

The review should go some way to addressing concerns that the existing SORP is not very precise.

Scott explains that confusion can arise when allocating the costs of producing a report for a donor organisation, for instance.

‘What we want to get recognition for is the fact that charities do have to have head office costs. But we need to reach some kind of best practice on where different costs should be allocated. If you need to produce a report to a funder – something that can be quite costly – where do you allocate the cost: fundraising, governance, administration? Where does it properly belong? That’s the reason we need to look at it more closely,’ Scott says.

The group also wants to consult on how to account for volunteer time.

Scott says that a charity shop will typically employ a full-time manager, but may have any number of individual volunteers making up a second 35-hour week – which should be accounted for even though it doesn’t have a financial cost.

The report recommends that a value for volunteer time should be included in the statement of financial activities. This would be shown as an incoming resource with an equivalent amount included as resources expended.

Fiona Shaw, finance director at Friends of the Earth, welcomes the report and says: ‘I think this is a complex area that merits further discussion. I can see where they are coming from in terms of wanting to value the cost of inputs in a way that ought to enable more direct comparisons.’

But she says the group has set itself no mean task. ‘The value of a volunteer depends very much on the level of experience and expertise they bring,’ she points out.

What is more, small charities might struggle with a new layer of disclosure requirements. Compliance always brings added costs and time burdens.

Ian Mathieson, charity partner at mid-tier firm PKF, agrees that the issues were complex and says that the consultation period was crucial.

In such a diverse sector, a wide range of responses will be needed before best practice is arrived at, he says.

The CFDG hopes that a period of consultation will mean that new definitions will be included in the next full revision of the SORP.

CFDG QUESTIONNAIRE

The CFDG is asking its members to comment on a range of disclosure issues and underlying arguments.

In respect of volunteers it asks:

• What are your views on the principle that a value for volunteer time should be included in the financial statements of charities? If you disagree with the principle, what are your main reasons?

• If you agree in principle that volunteer time should be included in the financial statements, but have doubts about the practicality, what are your reservations?

• What do you think are the particular considerations relating to smaller charities that arise from the recommendations and how might these be addressed?

• Do you agree that the national minimum wage would be an appropriate rate to apply to volunteers’ hours, or do you think that some other rate would be appropriate?

On inputs it asks:

• Do you agree that SORP requirements should continue to be based on a framework approach, or should there be more detailed prescription as to the capture, allocation/apportionment and disclosure of inputs?

On fundraising it asks:

– Do you agree that there is a need for clearer definitions of fundraising costs (related to a definition of what constitutes ‘fundraised’ income) and support, management and administration costs?

– Do you agree that allocation and apportionment policies should be determined in advance of the year-end and approved by the trustees before they are applied?

The group is asking its members to respond by 16 January 2004.

– Go to www.cfdg.org.uk.