As Third Sector recently reported, an international standard for charity finances could be with us within the next five years. Our sector is in a fragile place. As we tentatively emerge from crisis mode, robust financial reporting and analysis are vital tools for philanthropists and other funders in deciding who to fund, for how long, and how much to give.
Funders of all sizes are increasingly looking beyond their borders as they seek to direct their giving to the charities best placed to achieve the biggest social impact. The absence of an accepted international standard for financial reporting has forced both funders and charities to come up with imperfect workarounds.
For example, many funders have developed their own templates for gathering financial information from prospective and existing grantees. You can imagine what a burden it is for charities to have to maintain financial records in multiple formats.
A single international standard should remove these barriers. Greater consistency in financial reporting internationally should make it easier for funders to make informed decisions based on financial statements alone, which should free up charities to streamline their reporting.
But it’s not just the financials
Financial sustainability is vital for any organisation to succeed, including charities. But unlike businesses, the primary purpose of charities is to make an impact on the lives of the people they serve, not to make money for investors.
A single international reporting standard provides a perfect opportunity to set a clear expectation around impact reporting.
The international consultation paper acknowledges that “the importance of such other, narrative, information is as relevant, if not more so, for NPOs, in particular for demonstrating accountability and stewardship to stakeholders and civil society”.
And yet impact reporting warrants just one passing reference in the sub-text, which hardly seems right when you consider how central it should be for deciding where to give.
Some argue that a financial reporting standard is not the place for talking about impact. I disagree. We could achieve a significant cultural change by setting a clear expectation that all charities show the impact of their activities as part of their narrative report. At NPC we’re making it easier for charities of all sizes to do this by providing free resources on how to evaluate impact .
There could be bumps in the road
Introducing a new standard is not easy; success will require widespread adoption. We can learn from the private sector here. The first international Framework for the Preparation and Presentation of Financial Statements was published in 1973, but it wasn’t until the 2000s that adoption became mainstream, often following a legal or regulatory mandate from the relevant national body.
For example, most European countries adopted international standards only after a law mandated their use by listed companies on regulated securities markets.
Success will also require compromise and, possibly, setting aside national initiatives. The consultation paper expresses an intention to build on existing national guidance, seeking to carefully balance the needs of all stakeholders without burdening smaller charities. Compared to many other countries, the UK has relatively mature financial reporting guidance for charities, with a comprehensive review by the SORP Committee already under way.
So far, we haven’t seen much evidence that these two initiatives will inform one another. In a worst-case scenario, UK charities could be faced with two new financial reporting standards being developed at the same time, which may create rather than remove barriers.
Where do we go from here?
An international financial reporting standard could be a great opportunity to encourage a more impact-focused culture in the sector, so long as it’s about more than just the numbers.
The narrative guidance should set a clear expectation that all charities, proportionate to size, will clearly explain the impact of their activities. And once in place, national regulatory bodies will need to get behind it – in lieu of national guidance in some jurisdictions – to avoid creating parallel systems.
Sarah Broad is chief operating officer for the charity think tank and consultancy NPC (New Philanthropy Capital)