There has been an increased amount of talk about the ‘trust deficit’ within relation to charities over the last few months. Surveys and discussions often clearly reveal that members of the public are quickly losing trust in charities and they are now beginning to demand an understanding of how their donations are being spent. The default response seems to be that the public wants to know how much of its pound is spent on “overheads” and how much is left for “the cause”.
This is muddled thinking and leads to spurious conclusions based on financial inputs. While this might sound like heresy from an accountant, the pounds and pence do not really tell the story. There is so much more to reporting than accounts and their historical focus on what has been raised and what has been spent. A big question facing charities is: how do they effectively identify, record and report on what matters?
So what does matter? Information about what the charity has achieved and what impact it is having on the issues it is trying to address is a good place to start.
The charity SORP is trying to raise the bar on better reporting of achievements and performance and explains that, “good reporting provides a context within which to interpret the accounts and links the activities and achievements reported with the sources of income used to finance them and the expenditure incurred on those activities.
“A charity’s accounts focus on its financial position and financial performance. In isolation, this information does not give the user a rounded overview of what has been achieved from the charity’s activities and the resources used in their delivery. The report and accounts taken together should provide a picture of what the charity has done (its outputs) or achieved (its outcomes), or what difference it has made (its impact).”
There are no stereotyped solutions or yardsticks that would work for all charities. All circumstances and the task of explaining the spending priorities and activities will remain as difficult as ever as operations try to match the demands to satisfy short-term needs against pressure for the resources required to achieve long-term solutions.
It is in this context that charity trustees and management have to make difficult decisions and explain their thinking. For too long these decisions, biased by concerns about cost ratios, have been suboptimal and trustees have shied away from making good choices, simply because they believe it would impact on how their cost ratios are perceived.
It is easy to default to using cost ratios as a measure of effectiveness, although it is well recognised that these ratios invariably lead to the wrong conclusions. Too many charities are giving unwarranted prominence to these spending ratios. Last year, I chaired an ICAEW working group of charity auditors that produced the report Positive impacts in challenging times. In it we said: “Charities need to be more proactive in explaining the outputs, outcomes and impact of their work. The failure to provide this information is creating a deficit gap, which is being filled with flawed commentary about cost and expenditure ratios, reinforcing confusion over performance.
“One way to address this is for charities to improve their engagement with stakeholders by being more open and discursive in their reporting. They should provide information about their governance and risk environment, and be honest about activities that are successful and are having a positive impact, as well as activities that are not working, or new endeavours that have not been as successful as anticipated and the lessons learnt. More dialogue and explanations would reassure stakeholders that stewardship obligations are being properly observed and that charities are being managed well.
“Trustees and management need to show effective leadership by making sure charities are transparent about what they do, how they do it, what it costs and what is being achieved. Financial statements mainly show inputs, income raised, funds expended and staff costs. There is a. need for more useful information on activities and achievements. Figures in financial statements are often a poor measure of the effectiveness of charities and, because charities often fail to provide other vital information and key performance indicators on a consistent basis, these figures are often used as a spurious measure of effectiveness.”
Charities can make real strides to good reporting by showing the links between what is spent, the activities undertaken and the outputs and outcomes. Case studies are often a simple way of demonstrating this and also showing the impact of the work. To properly report on activities and achievements, and also to take account of the need to how funds are applied, needs clarity about linkages.
The charity must be able to explain the link between its inputs (funds raised, volunteer time etc.) and the activities, outputs and outcomes that are part of the performance chain. Do all the inputs deliver the right activities, outputs and outcomes effectively?
I have intentionally stopped before the last bit in the traditional performance chain, which is about reporting on impact. My experience is that charities think they cannot report on performance without having measured information on impact.
Real impact reporting can be very difficult and purists often argue for a clear causal relationship, which can be quantified between the work of the organisation and the impact – in effect identifying the difference in the indicator of interest with and without the intervention.
This leads to the challenges of attribution and contribution, and many shy away from such reporting because they believe it leads to false claims. For example, has the incidence of polio in a particular country reduced because of the immunisation work of one charity, or because of the clean water and improved sanitation work of others?
Charities might like to claim and attribute achievements as a result of their interventions but claiming to contribute to the achievement is more credible. The debate on whether what is being measured is truly an impact or is auditable should not detract from the benefits of identifying, recording and reporting on what matters, even if it does not report on the whole performance chain.
This article first appeared in Charity Times in August 2019.