By Aedín Morkan
Here is a five-step plan to help charities tell their story through the annual report and financial statements.
The public has a right to know that charities are economical, efficient and effective in the work they do. High-quality financial reporting by charities plays a key role in meeting the public’s reasonable expectation of probity and impact by charities.
While it is often in the best interests of a commercial organisation to be somewhat minimalist in its reporting, the opposite is true for charities. I view the annual report and the financial statements as a valuable opportunity to tell your story, show the good work you are doing and demonstrate your impact. It is also an opportunity to highlight for stakeholders the challenges and the risks faced by your organisation. In being truly open and transparent, you will win stakeholder confidence and support and, in effect, secure your financial sustainability.
In the absence of specific legislation or regulation to guide financial reporting by charities in Ireland, Charities Statement of Recommended Practice (SORP) has long been recognised as the cornerstone of best practice for financial reporting by charities. While heretofore adoption of Charities SORP has been entirely voluntary for charitable organisations in Ireland, it is no secret that mandatory application of the standard is coming down the tracks for charities of a certain size operating in Ireland.
For some time, a small number of organisations in Ireland – less than 10% at the most recent count – have recognised the value of proactive early adoption of Charities SORP in the interest of openness and transparency. There are many, however, who are daunted by the prospect or who quite simply don’t know where to start. Words such as ‘onerous’ and ‘complex’ have often been associated with Charities SORP, but it need not be so.
Follow our five-step plan to assist you on the journey and remember, Rome wasn’t built in a day. Good governance and high-quality financial reporting do not happen overnight, but are a journey of continuous improvement.
Step 1: telling your story
Before you even put pen to paper, sit back and think about the story you want to tell and the message you want to convey through your annual report. What is your one overall theme and what are the three key messages you want the reader to take away?
You also need to think about your audience. Charities have wide and extensive stakeholder groups including service users and beneficiaries, employees, volunteers, funders, regulators, the general public and more. You are ultimately dependent on the goodwill and support of all of these groups. You need to meet the information needs of all of these groups through your annual report but you also need to connect with them in a positive and engaging way.
At the very highest level, you should aim to convey the message of the good work you are doing. This should link to your mission, goals and objectives on the one hand but it should also link to the financials so that the reader can see what you achieved with the income you received and how you expended that income in fulfilling your objectives.
Telling your story need not be done solely through hard facts and figures. Testimonials and case studies can portray a message in a very powerful, tangible and meaningful way. Equally, the use of graphics, images and lots of colour can bring your story to life and engage your audience more effectively.
Step 2: governance
The public has a right to know that charities are well-governed. While Module One of Charities SORP provides details of what should be included in the trustees’ report in respect of the governance of the organisation, it is worth going beyond these basic requirements in an effort to clearly demonstrate the commitment of the organisation to good governance.
Separate to the trustees’ or directors’ report, the chairperson’s statement (or equivalent) should specifically address governance and clearly demonstrate an ownership and a real desire to continuously enhance governance rather than viewing it as a box-ticking exercise. Compliance, or otherwise, with sectoral codes should be demonstrated and any initiatives on the board’s agenda to enhance governance structures and practices should be outlined and explained.
Equally, it is worth considering the disclosure of items not specifically required by SORP such as attendance at board/committee meetings by individual members and details of how conflicts of interest or loyalty are managed.
Step 3: financials
Too often, I read the financial review in a trustees’ or directors’ report and it doesn’t tell me anything more than what I read in the primary statements. To my mind, the financial review should provide insight into what is driving the key numbers in the primary statements and it should also place those numbers in the context of the plans, targets and budgets for the year.
So rather than just reiterating what is in the primary statements, think about the key headings or key performance indicators which you, as an organisation, focus on. Secondly, think about what might be interesting, informative or useful to the reader and to your stakeholder group.
Ultimately, you want to demonstrate to the reader where your money comes from, what form it is received in (e.g. grants, legacies, donations etc.) and how you use that money. Looking at that information for two years in isolation, however, has reasonably limited value and that is why you will see that many of the higher quality annual reports include five-year or even 10-year financial summaries. Good graphic design can capture this type of summary data in an appealing, easy-to-read manner.
In terms of the technical aspects of the financials, there are two areas which, in my experience, prove to be most challenging on first-time adoption.
Restricted and unrestricted funds: you need to think about the nature of your funding and whether restrictions apply to that funding. You need to think about this in the context of the current and prior year but also, in the context of earlier periods where there are unused funds remaining in opening reserves. Factors such as the nature of your funding, the level of detail of historic records and even the degree of change and staff turnover can have a strong bearing on how easy or difficult this task may be.
Deferred income: it is important to note that Charities SORP is different to FRS102 in the treatment of deferred income and there are quite limited and specific circumstances under which income, including capital grants, can be deferred. This has presented two challenges in particular for charities:
- In the year of transition, where there is a significant opening deferred income balance and the SORP criteria for deferral are not met, there can be a significant once-off credit to the income statement/statement of financial activity; and
- Many feel that recognising income upfront, which heretofore would have been amortised over the life or matched to related expenditure, “muddies” the income statement/statement of financial activity and they struggle with no longer presenting the “true operating results” for their organisation. The good news, however, is that while Charities SORP does prescribe a particular format for the statement of financial activity, there are ways to meet the requirements of Charities SORP while also presenting what finance professionals consider to be the true operating position.
The key to addressing these challenges is to start early and seek support from those who have experience working through such challenges.
Step 4: accounting policies
The importance and value of accounting policy is, in my view, significantly underestimated. Well-written, organisation-specific, meaningful and insightful accounting policies can make a significant difference and add real value to the financial statements. Boilerplate accounting policies that bear little relevance to the actual income, expenditure, assets and liabilities are of limited value and, in my experience, can in fact confuse the reader. It is worth investing time and effort in developing your accounting policies. By all means, use pro forma financial statements and the accounts of other similar organisations as a point of reference, but ensure you make them your own and ensure that they enhance rather than diminish the understandability of your financial statements.
Step 5: outputs, outcomes and impact
While some organisations are making an effort to report on outputs, outcomes and impact in the annual report and others are even publishing separate impact reports, it would be fair to say that this hasn’t gained much momentum in Ireland – at least not in any meaningful way. While I would acknowledge that there are many challenges to this type of reporting, not least the fact that not everyone has the same understanding of the terms, reporting on outputs, outcomes and impacts is one way of demonstrating to funders (whether institutional, governmental, corporate or individual) the value of their contribution.
Reporting on outputs, outcomes and impact centres on the change you as an organisation are effecting over time. While there are various models and tools available for measuring and monitoring that change, it is important to bear in mind that outputs, outcomes and impact are by and large specific to an individual organisation. It is therefore not possible to provide a template or a ‘one size fits all’ solution. In simplistic terms, before reporting on outputs, outcomes and impact, you really need to start with your strategic plan and, in designing that plan, identify what you want your outputs, outcomes and impact to be. In essence, what is the change that you are trying to bring about through your work? You then need a means of recording, measuring and monitoring that change over time. Easier said than done!
By way of conclusion, if I was to offer some key tips to assist you on your journey through our five-step plan, I would suggest the following:
- View the annual report as an opportunity to tell your story and as a very valuable communication tool to build your reputation;
- Promote a commitment to transparency and openness right across the organisation, but particularly from the board and senior management;
- Use clear, concise language, avoid boilerplate and repetition;
- Ensure there is a consistency, linkage and flow between the quantitative and qualitative information;
- While it is important to be optimistic and positive, be careful of painting too rosy a picture. Ensure that the story you tell is reflective of reality and gives a flavour of the challenges and constraints facing the organisation;
- Read winning annual reports and learn from them. Understand what works well from a reader’s perspective; and
- Don’t be afraid to seek help. While responsibility for the accounts and the annual report rests with the organisation’s directors or trustees, your external auditors are likely to have experience in advising a wide range of organisations. They can therefore provide insights into best practice.
Aedín Morkan is Director, Audit & Assurance, at Mazars Ireland.