Charity accounts have a role in supporting financial decision-making but don't contain all the information needed, says Ray Jones of the Charity Commission
Benjamin Franklin once said that there were many occasions in his life when better information caused him to change his opinions on important subjects. Few would dispute that good decision-making is dependent on access to relevant and reliable information or that information has the potential to change the way we think, feel and behave.
Accountancy as a discipline exists to provide financial information that is useful in decision-making. Charity accounts certainly have a role in supporting financial decision-making and most funders use information from accounts when making funding decisions. But accounts also have a broader role in providing assurance as to the stewardship of charity funds and so provide a primary mechanism for the sector's accountability.
We know from surveys that people also want assurance that the money they give to charity is well spent and that the charities they support can be trusted. Accounts can certainly tell you about the funds a charity manages, how its assets are deployed, how much it spends on fundraising and how much is spent on charitable activities. But what do we mean by 'well spent'? My view is that the test of well spent is best gauged by looking at what a charity achieves through its spending. And I do not think the numbers in a set of accounts alone can tell us what a charity has achieved.
That's where a good trustees annual report comes in. An annual report, sitting alongside the accounts, can provide an explanation of the outputs, outcomes and even sometimes the impact of a charity's work. I believe that we must judge charities primarily by their effectiveness, and the best yardstick of this is a relevant and reliable explanation of what has been achieved with the money spent.
That said, it's clear people also want some assurance that charities are efficient - and this can lead us into difficult territory. Efficiency is about the economy with which a particular result is achieved, and putting a measure on efficiency is by no means easy. For example, administrative costs are often perceived as diverting money from charitable use and are therefore sometimes put forward as an indicator of inefficiency.
But anyone who followed the development of the Statement of Recommended Practice will know that what is classed as an administrative cost in accounts was often simply the product of the accounting system, the creativity of the charity's accountants and the flexibility of their auditors rather than some inherent measure of a charity's efficiency.
As highlighted by NfpSynergy's Charity Awareness Monitor, the public also has expectations about how a charity should operate. Issues such as expenses, remuneration packages and the role of volunteers all potentially affect confidence in a charity.
Working out exactly what information is relevant is never an easy task and the answer depends on the audience and what decisions we are trying to inform. The Charity Commission is currently reviewing the information it collects from charities on registration and subsequently each year through annual returns.
Asking for and getting the right information is central to any regulatory process and putting relevant information into the public domain through the online register is a vital ingredient of both public assurance and informed decision-making. So if you have a view on what information an online register should provide, do take a look at the current consultation on the commission's website. You have until 20 July to share your views.
Ray Jones is policy accountant at the Charity Commission