It's hard to construct meaningful financial comparisons from annual accounts.
If your only experience of the voluntary sector had been over the past two weeks, you might be forgiven for thinking that finance directors had something to hide. But take a closer look and you'll discover just why the sector reacted as vociferously as it did when an unknown publishing company ranked 104 of them in a league table last week.
Searchline Publishing, a small company based in Chislehurst, developed the list at the request of clients in the banking sector who wanted background on charities they donate to. The company's financial analysts usually research banks, and used similar financial models for the voluntary sector.
But stakeholders say the analysis is at best crude and at worst wrong, and illuminates the many reasons why meaningful comparisons between charities are hard to get at.
Robert Humphreys, the partner chairing PricewaterhouseCoopers' charity auditing section, says that difficulties arise from the diverse range of activities that charities carry out, from small grant-giving bodies in the UK to those carrying out complex infrastructure projects abroad.
"You have a huge range of activities that you are trying to squeeze in one reporting structure," he explains.
That diversity leads inevitably to difficulties in finding equivalent markers at each organisation. "What is comparability?" Humphreys asks.
"If you look at the parallels in the commercial world, stakeholders have a clear set of performance measures that they can use. There are a limited number of key performance indicators that can be applied to organisations working across the charities sector, but even those wouldn't have universal acceptance."
One of the greatest difficulties in ensuring a meaningful comparison across the sector comes in matching the costs of fundraising with the income. Pesh Framjee, head of the non-profit unit at Deloitte, says: "There are good reasons why different charities may have different cost ratios.With most forms of fundraising there is very little correlation between what is reported as fundraising costs in a year and the actual amount raised." He cites legacy fundraising, where money is spent in one year but the income stream may flow over 10 years.
New Sorp regulations due this year address that issue. Ray Jones, policy adviser with the Charity Commission, explains that Sorp 2005 should enable charities to explain better their fundraising activities and use existing accounting standards to their benefit. Sorp advises that an expensive legacy campaign can be accounted for separately from the main fundraising expenses, as an 'exceptional item', as occurs in the commercial sector.
Cost ratios are affected by other considerations that make comparisons tricky, says Framjee. "Some types of charities, such as medical charities, do better at raising legacies than others ... this has little to do with their fundraising skills or effectiveness."
It is also difficult to compare charities' expenses, when those with the more attractive causes can draw in volunteers and consequently limit their fundraising expenses. That immediately distorts the cost ratios, but auditors do not know how to value the nebulous concept of someone's time. For the moment, the Sorp committee has decided that volunteer time won't be valued, but the trustees' report - the charity's shop window - can make clear how much free time volunteers give.
Inconsistencies in the way that administration and management costs were accounted in the past also created an uneven base from which to compare charities. One of the key changes Sorp 2005 makes is the rebadging of the 'administration and management' category into a 'governance' section - essentially all costs related to statutory requirements - on the Statement of Financial Activities.
What charities want is a better way of valuing their outcomes. Framjee agrees: "It is time that donors and commentators shifted the emphasis from administrative and fundraising costs to the outputs and impact arising from the donations." That can't be valued by financial indicators, but will be defined by discursive analysis, he believes.
Guidestar is one possible answer. The website, partly government-funded, models itself on a US namesake that has already influenced the way grant makers spend their money. While all the financial information available on the UK site from April is already in the public domain, this is the first time it has been collated on one database. Charities wishing to inform the public better can explain their accounts online. A Guidestar spokeswoman described the site as "a charity Google", and as an "incredibly powerful tool", allowing users to manipulate a huge amount of financial information.
- See Finance, p16 and Opinion, p24.