July 2015 Newsletter

Funding – A guessing game.

Accounting Standards and Privacy – CCA checked with the Privacy Commission.

The Road to 2016 – What outputs and outcomes are you required to report in future?

Accountants at War – NZICA is being taken to Court over defamation.

The Funding Crystal Ball

It’s ‘funding season’ at the moment, and I get asked quite regularly on the impact of particular aspects of an organisation’s Financial Statements on funders’ perception of that organisation. People are worried about the naming of some items of expenditure, too much or too little excess income, having term deposits and other things.

The individuals making funding decisions (or advising those who do) are not (usually) accountants. Even if they are, they may judge an organisation on business indicators, in the absence of any generally accepted not-for-profit financial performance or stability indicators. Funders also vary widely in how much they even take financial information into consideration, and what particular causes they want to support. Some have a very professional process, of which financial information is a part, while others are rather informal about it. Sometimes a funder contacts us at CCA to clarify something in the Financial Statements of an applicant, but that is quite rare.

 

In purely financial terms, funders will get the most bang for their buck when giving money to organisations that are highly grant dependent with low cash reserves. Organisations that are able to generate more of their own income, and have a bit of cash stacked away, are more able to implement their projects under their own steam, and a grant may merely fund something that would happen anyway, while allowing the organisation to divert their own cash to something else altogether (which the funder may not be so keen on).

High grant dependence and low reserves also mean poor financial stability, however. Grant funders can and do ‘lose’ money to organisations that react too late to funding shortfalls and have to wind up. The grant money is then spent on holiday pay and paying other bills, without delivering much of what the funding was for.

In general, funders want to see their money do good – some want to achieve ‘systemic’ or ‘lasting’ change especially with social issues, while others are happy to simply support community initiatives in all areas to help them continue and sometimes grow. In my experience all funders want to see their money get used. Having continuous high surpluses, high investments or high cash assets point to an organisational policy of amassing funds, perhaps to increase investment income and become ‘independent’ from needing the approval of funders or the general public. A funder would have to ask themselves why they should support an organisation that is not prepared to use their own money towards the need or purpose they identified.

Good luck, everyone

Harald

Privacy Commission’s Hands Tied about New Financial Reporting Standards

CCA wrote to the Privacy Commission about our concerns regarding the implications of public reporting of people’s incomes, individual donations and other items required under the new Financial Reporting Standards becoming mandatory for Charities.

In their reply, the Commission acknowledged that privacy may be violated by the Standards for those involved with smaller organisations. “For smaller agencies, low staff numbers and fewer transactions mean that in some cases, supposedly non-personal financial information may be able to be extrapolated and associated with individuals”, writes senior policy adviser Sarah Adams-Linton, who also admitted that the Privacy Commission has not been consulted in the development of the Standards.

However, the Financial Reporting Act 2013 states that disclosure of personal information by entities required to comply with the Act is not a breach of privacy principles and that it overrules the Privacy Act – in effect, legislating privacy away, tying the Privacy Commission’s hands.

Adams-Linton recommends to use the full flexibility of the Standards to minimise privacy breaches, and to contact the director of Accounting Standards at XRB directly about any concerns (Todd Beardsworth: todd.beardsworth@xrb.govt.nz).

The Road to 2016

Monthly feature to prepare for the new Financial Reporting Standards for Charities.

Outputs and Outcomes

Organisations choosing to report under Tier 3 or 4 will in future have to prepare a ‘Statement of Service Performance’, listing ‘outcomes’ and ‘outputs’ (Tier 3 only). Note that this does not apply to Tier 1 or 2 reporting, which you are also entitled to use even if qualifying for a lower Tier.

What exactly is the difference? The Standards define ‘Outputs’ as ‘the goods and services delivered during the year’ while ‘Outcomes’ are ‘what the entity is seeking to achieve in terms of its impact on society’. An ‘output’ would be: ‘250 people attended our health awareness day on 25 June’, while an outcome could be: ‘we continued to hold awareness days to achieve our mission of educating the public about chronostatic dismosis’.

The Standards are quite vague and very brief on the subject. They require an organisation to quantify outputs ‘to the extent practicable’, meaning organisations should not go to extra expense to measure outputs for the sole purpose of this report, and they can be estimated as well. For outcomes, these should be a comment on your activities during the year in relation to your overall mission or purpose (as set out in your rules or Trust Deed).

The Standard does not prescribe any particular format, and even suggests to entities that they may consider delivering this ‘Service Performance’ report in pictorial format. Although the two components (outcomes and outputs) must be present in Tier 3, it is not mandatory to separate them out (and if there aren’t any practically quantifiable outputs, then none need be reported, either). ‘To further our mission of educating the public, we held an awareness day on 25 June attended by 250 people’ is a single sentence that would meet the requirements of a complete ‘Statement of Service Performance’ as defined in the Standard, as it contains both an output and an outcome.

One of the problems of mixing ‘hard’ verifiable financial figures with ‘soft’ estimates and quality statements in the same report is that it may well encourage some organisations to make wildly positive claims about its outcomes and outputs while their financial figures tell a very different story. Over time, this may become an exercise in marketing rather than reporting for accountability purposes.

CPAA Brings Defamation Case against Chartered Accountants

Certified Public Accountants Australia (CPAA) have sued the New Zealand Institute of Chartered Accountants (NZICA) over its response to CPAA entering the NZ accountants’ market a few years ago. NZICA’s ‘Project Ambush’ involved pamphlets, speeches and advertisements suggesting that CPAA accountants are second-rate. NZICA chief executive Kirstin Patterson had also made objectively false statements in her speeches, according to CPAA. In their defence, NZICA claimed that their campaign was not defamatory, merely ‘clumsy’ and should be interpreted as ‘puffering’.

CPAA is the largest of the three accounting bodies operating in Australia, and has a wide reach with members and offices throughout the Asian-Pacific region. The Financial Markets Authority (FMA) has granted it the same legal status in New Zealand as NZICA, which have since merged with their Australian counterparts to form CAANZ (Chartered Accountants Australia/New Zealand).

Justice Robert Dobson, who is hearing the case in the Wellington High Court, said that he saw this as a case of NZICA trying to ‘defend their patch’ with a ‘how dare they’ kind of style.