The rise of transparency in third sector accounting

- How can the finance function adapt?

This paper looks at the drive for greater transparency within the Third Sector and how this can be the catalyst for strengthened financial operations, and offers a shortlist of actions that can help work towards greater transparency. A recent survey commissioned by chief executives body Acevo (Association of Chief Executives of Voluntary Organisations) reported that a large sector of the general public do not understand charities. If polls are to be believed then there is growing scepticism over how voluntary sector organisations are run and naturally in turn there is a greater demand for transparency.

There appears to have been a number of catalysts behind this. The furore over MPs' expenses, for example, has highlighted awareness of the need to be more open. This was echoed in the third sector where an independent body was set up to consult with charities over how they should disclose their expenses. Meanwhile the economic climate has increased competition for donations and the need for individual charities to demonstrate that monies are being spent appropriately. So what implications does this have for charities and in particular those that are responsible for managing income and expenditure.

The value of trust

Reaching acceptable levels of transparency isn't often easy, but building trust is a good place to start. Not only do your supporters need to have faith in what the charity is doing, but other personnel such as the Chief Executive or other departments such as marketing need to be armed with clear figures and statements about how the charity is performing and how cash is being spent. As the official holder of the purse-strings, the Finance Director needs to be seen as a reliable source of information which can then be used to persuade supporters to give more or maintain existing donations.

Following recent research by the Chartered Institute of Public Finance & Accountancy, the body published suggestions to FDs wanting to gain trust. These included becoming a member of the leadership team in order to implement & develop strategy, becoming more involved in business decisions to ensure that long-term implications, opportunities and risks are considered and maintaining good financial management so public money was spent effectively. To achieve the latter, it was recommended that the finance function should have sufficient resources to process transactions on time or deliver accurate information. Overall though the Financial Director is expected to control and manage money well so they can inspire confidence and trust amongst colleagues, trustees, stakeholders and Joe Public.

Be Open

For any organisation, trust can only be achieved by being open and honest. This holds true for charities too and one of the most effective ways of building trust, whether it's from trustees, benefactors or supporters, is to be transparent. This means that everything you do has to be accountable with the ability to produce clear and accurate financial reporting that is understood by a range of different groups. A recent survey commissioned by Office of the Scottish Charity Regulator found that members of the Scottish public were particularly sceptical about charities' administrative costs and what proportion of donations were being spent on this, rather than going towards the actual cause itself. This is an example of how charities could offer greater transparency by calculating exactly what proportion of costs go on administration and allowing these type of figures to be publicly available. The quality of charity reporting has certainly improved over the years particularly with the introduction of concepts such as SORPs, but there are still calls for greater regulation and monitoring of the sector. The Charity Commission recently gave its support for concepts such as the PQASSO mark, saying that those organisations that reach level 2 or 3 will be given a charity commission seal of approval.

However, until greater regulation is introduced with perhaps a charity specific accounting standard along similar lines to the global IFRS rules, the onus of responsibility for providing clear and understandable financial data lies firmly with the Finance Director. So how can the finance department provide more transparency?

Better systems and processes

If you feel it is difficult to be transparent then the chances are your systems and processes are letting you down. It shouldn't be difficult to provide accurate and timely information on areas such as performance, division of costs, breakdown of expenditure, forecasts and so on. However what often holds backs finance teams are outdated or ill-fitting methods for producing such data.

One of the worst accusations that potential benefactors might make is that the charity does not provide sufficient evidence to show that monies are being directed and managed in the right way. Without clear and accurate reporting which is easily understood by these parties, then the claims could be perceived as justified.

Yet better reporting will only be achievable if you have the systems and processes in place to support it. One of the main challenges for finance departments is collecting the raw data in the first place. Often, the core accounting system stands alone from other applications or departments where the relevant information is held. This means that finance staff can spend days just moving information from one silo to another, usually with the aid of spreadsheets. Not only is this hugely time-consuming it is also open to errors and duplications that can give misleading results.

The way that these reports are distributed can also affect trust amongst colleagues, trustees and other parties. Many finance departments produce monthly reports which are sent out either electronically or by hard copy, but typically these are lengthy, hard to decipher and are out of date by the time they are collated.

If you identify with any of these problems then re-assessing your procedures could be the first step towards transparency. Firstly you need to evaluate which areas could be improved and then look for ways in which these can be addressed. Here's a quick shortlist of actions that could help work towards greater transparency:

• Real-time integration of core finance system with other information sources such as CRM means that information is always accurate and up to date.
• Introduction of Activity Based Costing can reveal what cost centres are spending the most money and which are giving the best return possible.
• Automated creation and scheduling of customised reports to be sent to different recipients electronically keeps everyone informed with the latest information.
• Give access to staff and trustees via on-line reporting. Personalised web-based Portals can be easily set up to provide headline information that is easy to access and understand.
• Devolved accounting could dramatically reduce administrative costs and make your charity more favourable in the eyes of potential supporters.
• Project Accounting tools can show which campaigns are most profitable and identify those that perform poorly. By embracing transparency, not only can you be confident in meeting any sector-specific requirements now and in the future, but it also gives the finance department the chance to lead the change towards a more effective and efficient operation.