Creative accounting is rare, but let's not be complacent

The new Sorp should include a message that will put a firm brake on misleading accounting practices, writes Ray Jones

Accountants should not seek loopholes to exploit in the drafting of guidance and standards, writes Ray Jones
Accountants should not seek loopholes to exploit in the drafting of guidance and standards, writes Ray Jones

I often hear people talk about "creative accounting", so I decided to search for the term on the internet. I was surprised to see it so well defined in so many internet sources - including the Oxford dictionaries website, which describes the practice as "the exploitation of loopholes in financial regulation in order to gain advantage or present figures in a misleadingly favourable light". Quite simply, it's an approach completely at variance with the concept of "true and fair" accounting that has been central to good accounting and auditing practice for many decades in the UK.

Over the years, many developments in financial reporting standards - and indeed the development of the Statement of Recommended Practice - have been triggered by the need to put a stop to creative accounting practices.

Possible wheeze

Recently I was asked about a wheeze I thought we had seen the back of a decade or more ago. It's a practice initially exported from the US that seeks to turn a fundraising cost into a charitable activity, creating a lower cost of fundraising activities and boosting the disclosed charitable spend in accounts.

Searching some more, I notice that this particular practice seems to be resurfacing in the US. Quite simply, it involves adding what is sometimes referred to as an "action step" or a "call to action" to fundraising appeal literature, then allocating part of the costs of the fundraising campaign to charitable spend on the basis that it is in part an educational cost and therefore charitable. Sometimes there are genuine joint costs that are correctly apportioned between fundraising and charitable spend, but on other occasions a "strapline" is simply added for no other purpose than to facilitate creative accounting. In my view, there is nothing "creative" about practices that exist simply to mislead.

Firm brake

I'm therefore pleased that the Sorp Committee, of which I am a member, has reminded us in good time about the need to include a message in the exposure draft of the new Sorp, designed to put a firm brake on such practices. The message - which was in Sorp 2005 but was missing from early drafts of the new Sorp until the committee advised that it be reintroduced - is that unless literature is clearly targeted at groups that can use and act on the information given, and unless there is a clear link to a charity's wider education programme, then strapline information in a fundraising letter is hardly likely to be educational, so apportioning some of the costs to charitable spend is clearly wrong.

Accounting standards and the Sorp exist, at least in part, to limit creative accounting practices that seek to deliberately misrepresent a transaction. Sometimes this is not easy - particularly if some accountants look for loopholes to exploit in the drafting of guidance and standards.

Thankfully, creative accounting is rare in our sector - but I sometimes think that if all accountants were angels then accounting standards and the Sorp might well be shorter.

Ray Jones is policy accountant at the Charity Commission

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