ACCOUNTING: Narrative Approach

Patrick McCurry

- Help readers relate the numbers in the accounts to the activities and organisational structure of the charity

- State the charity's policy on reserves - State the charity's investment policy, where applicable

- Describe the major risks to which the charity is exposed and what systems are in place by trustees to tackle these.

CASE STUDY SAVE THE CHILDREN WORKS TO IMPROVE TRUSTEES' REPORT

Save the Children has been working for several years to improve its trustees' report and be clearer about the charity's work and its impact.

"The revised Sorp dovetailed with what we were already doing," says finance director Nick Kavanagh.

In its trustees' report, the charity sets out what it has been trying to achieve during the year in areas such as health, education and social protection.

"We give an idea of what we think we've achieved during the year, as well as looking ahead to plans for the following year," says Kavanagh.

In the past, the finance department would handle most elements of the report, he says, but with the growing emphasis on a narrative, it is now produced in partnership with the communications department and involves input from across the organisation.

"Finance is a key player on issues such as the statement on financial controls but the overall review of what the charity is doing is a corporate issue," he says.

As well as the trustees' report, Save the Children produces a glossy annual review, with case studies of children it has helped and a summary of its finances.

But Kavanagh acknowledges that there are difficulties in how to measure the charity's impact. "We can say we dug a certain number of wells or educated a certain number of children but that kind of information is about inputs rather than impact," he says.

Annual reports used to be all about numbers. Now they must include just as much information about activities and aims. Patrick McCurry finds out how to get the narrative right

Once upon a time, little was asked of charities' annual reports apart from financial information. But in today's environment of accountability and transparency, organisations are expected to include a "narrative" in their trustees' report describing the charity's aims, activities and plans for the future.

The narrative requirement was part of the revised Statement of Recommended Practice (Sorp), an accounting and reporting framework published by the Charity Commission in October 2000. But it seems that compliance with this guidance is still patchy and some in the sector argue that it is unclear and that many charities are confused.

In response to this, the Commission is expected to publish more guidance on the narrative element in reports. The issue has also gained a higher profile thanks to the Government's Strategy Unit report released last year, which recommended that larger charities should complete a "standard information return" containing general information about the charity and what it is doing to meet its objectives.

In broad terms the revised Sorp called on charities to explain their objectives, describe the organisation of the charity and review their activities over the previous year. The narrative should also include statements on issues such as reserves policy and risk assessment. The guidance is less prescriptive than the previous Sorp, giving charities more flexibility and freedom to explain what they do and what the story is behind the numbers.

"This may sound like heresy, coming from an accountant, but there is more to reporting than just producing the numbers," says Pesh Framjee, head of the charity unit at Deloitte & Touche. Charities tend to measure their effectiveness in pounds and pence but this may only be part of the picture, he says. "Very rarely is qualitative information seen and yet this is the feedback that is needed," and the trustees' report in a charity's annual return is the place to do this.

Luke FitzHerbert, senior researcher at Directory of Social Change (DSC), agrees that too few charities are taking the narrative element seriously in their reporting. Not only that, he says, but many charities are failing to even send out copies of their report and accounts on request.

The DSC recently asked 150 large fundraising charities to send in their annual report and accounts and enclosed a stamped addressed envelope.

But six weeks later nearly a quarter had sent nothing. Of those that did reply the quality of reporting was extremely variable, says FitzHerbert.

"We blame this on the fact that the Commission has not issued its normal 'guidance' to trustees on this subject but has addressed it to their accountants through the Sorp, a purely technical document", he says. "We see the report as coming from the trustees and covering the work of the charity as a whole and not from the finance department and just dealing with the money."

Heather Hunter, internal audit consultant at Charity Business, agrees that compliance with the Sorp is variable, with perhaps only a third of charities attempting to fulfil requirements. "The quality of reporting ranges from those that are attempting to comply to the full extent to those that are hardly doing anything," she says. There needs to be more guidance on the practical aspects of how to put together a narrative, adds Hunter.

The Commission seems to be acknowledging that there is some confusion in the sector on how to communicate a charity's impact and measure its work. Later this month, it is expected to publish on its web site a summary of current thinking on issues such as the use of inputs, outputs and outcomes.

"The Sorp sets a broad framework for annual reporting and does not seek to impose any specific approach on how a particular charity manages, assesses or measures how well it is performing," says a Commission spokeswoman.

The Commission is working with the NCVO, Charity Finance Directors' Group and chief executives' group ACEVO to produce extra guidance that clarifies the importance of good annual reporting.

Alan Sharpe, finance director at the RSPB, hopes the Commission will allow charities more latitude over where exactly they publish their narrative.

Like many of the bigger charities, the RSPB publishes a glossy annual review, as well as the official report and accounts. The annual review is aimed at supporters and donors and gives a readable account of the charity's objectives and activities, says Sharpe. "I would argue that we are complying with the spirit of Sorp, even though the information is not all contained in one document," he says.

Sharpe is concerned that there is an attempt to make Sorp "all things to all people". It does not make sense, he believes, to insist that charities distil all the information contained in their annual review into a few paragraphs of the trustees' report.

"You'll get a good idea of what we are doing as a charity if you look at the combined contents of our annual review, formal accounts and web site," he says.

However, Sally Kirby, head of charities at accountant Chantrey Vellacott, believes that charities with a glossy annual review could include some of their trustees' report or at least send the review along with the accounts to the Commission.

One of the sector's pioneers in impact assessment has been the RNID, which produced an impact report in 2001 looking at a range of the charity's services and assessing what had been achieved and what it hoped to achieve the next year.

"The report moved on from the simple presentation of accounts to break new ground in terms of talking about what the charity is achieving," says marketing and membership director Carol Monoyios.

But while many in the sector welcomed the report, some believed it ran the risk of appearing too one-sided. In response to this and to make the document more reflective of different views, the second impact report last year included input from stakeholders, says Monoyios.

There is a danger that a charity's narrative commentaries or annual reviews can become marketing exercises and that organisations play down any failures, says Nick Kavanagh, finance director at Save the Children. One antidote to this suspicion is social accounting in which an organisation surveys and publishes the views of a range of stakeholders and has the final report "audited" by an external company.

"What you get is a 'warts and all' picture of the organisation," says Kavanagh. The difficulty is that a social audit is a huge undertaking, particularly for a charity like Save the Children that acts globally and in many service areas. "It's something many organisations can only do in a piecemeal way," he says. Despite the patchy compliance with the guidance, Kirby believes the charity sector is well ahead of the commercial world when it comes to publishing objectives and activity.

The Accounting Standards Board has recently issued guidance calling on companies to set out their objectives and activities in their annual reports.

"It asks for companies to flesh out the bones of what they're doing, state the major risks facing them and so on, so in that regard the Sorp is ahead of the game," says Kirby.

One of the reasons some charities are not fully embracing the narrative requirement is fear of criticism, she says. For example, the requirement that charities state their reserves policy can make some chief executives nervous that they will be criticised for having reserves that are either too high or too low. In Kirby's opinion such nervousness is usually misplaced.

"It's good to be open and frank about reserves and to give reasons why reserves may appear high or low."

Without explaining the wider perspective behind the numbers, donors can jump to wrong conclusions, she says. Charities that do not fully adopt the narrative element of the Sorp would not be refused approval of the accounts by their auditors, says Kirby, although the auditor would warn the organisation that it could be subject to the Commission's enquiries.

So what should a charity do to produce an effective narrative? According to Hunter, too many charities are looking at the wrong information or not making sure that different departments communicate properly. "Good communication between departments is crucial in compiling the right information but often that communication is lacking," she says. For some charities, she says, bringing in an independent assessor to help decide what information to monitor can be helpful.

Sharpe argues that the finance department should not be responsible for the narrative but instead should work as part of a team, possibly headed by the communications department.

"Sometimes people think that because it's part of the annual report, it's the responsibility of finance, but the narrative is supposed to give a broad picture of the charity and so needs to be 'owned' by all the directors."

Despite differences of opinion on exactly how and where a charity should present its narrative, it is still probably the best way of increasing transparency and accountability, says Sharpe.

"It's a much more effective way of describing a charity than league tables comparing administration costs and so on." He argues that the key thing donors want to know is what a charity has done with its money, what its objectives are and how it's achieving them. "They want to know how their donations are making a difference," he says.

WHAT TO INCLUDE IN THE NARRATIVE SECTION

The quality of reporting is a concern, according to the Charity Commission, and it is looking at issuing further guidance on the narrative element.

The Sorp expects charities to provide an account of their performance against their objectives and this should form a core part of the report.

The narrative should:

- Explain the charity's objectives by reference to the governing document but may also include the charity's mission statement - Explain the strategies and activities for meeting these objectives - this should include significant changes and developments in the past year. Comments could include the contribution of volunteers and how effective fundraising activities have been

- Show whether the charity has achieved its objectives during the year - the narrative should enable the reader to assess how effective the charity has been in its work

- Explain plans for the future

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