PERFORMING AND INFORMING: EVIDENCE OF THE EXPENDITURE PATTERNS
OF AUSTRALIAN INTERNATIONAL AID ORGANISATIONS
ACCOUNTABILITY BEYOND THE HEADLINES: WHY NOT-FOR-PROFIT
ORGANISATIONS NEED TO COMMUNICATE THEIR OWN EXPENDITURE STORIES
Chris Ryan*
Helen Irvine*1
*School of Accountancy, Queensland University of Technology
ABSTRACT
This paper analyses the expenditure patterns of 97 Australian
international aid and development organisations, and examines the
extent to which they disclose information about their expenditure
in order to discharge their accountability. NFP expenditure
attracts media attention, with perceptions of excessive costs
potentially damaging stakeholder trust in not-for-profit
organisations. This makes it important for organisations to be
proactive in communicating their expenditure stories to
stakeholders, rather than being judged on their performance by
standardised expenditure metrics. By highlighting what it costs to
ensure longer-term operational capability, not-for-profit
organisations will contribute to the discharge of their financial
accountability and play a part in educating all stakeholders about
the dangers of relying on a single metric.
KEY WORDS: not-for-profit; financial ratios; accountability;
international aid organisations; expenditure information.
Type of paper: research paper
Acknowledgment.
We thank Matthew O'Connor for the preliminary literature review
work he undertook on this project. It has provided a useful
backdrop to the construction of this paper.
JEL CODE: M41
1 Corresponding Author: Helen Irvine, Address: School of
Accountancy – Queensland University of Technology, GPO Box 2434,
Brisbane QLD 4001, Phone: 07 3138 2856, Fax: 07 3138 1812, E-mail:
[email protected]
ACCOUNTABILITY BEYOND THE HEADLINES: WHY NOT-FOR-PROFIT
ORGANISATIONS NEED TO COMMUNICATE THEIR OWN EXPENDITURE STORIES
INTRODUCTION
In recent years, not-for-profit (NFP) organisations have been
criticised for a lack of transparency and accountability in their
finances, and some argue this has translated into a waning trust in
the honesty and efficiency of the sector (Ebrahim 2003; Chetkovich
and Frumkin 2003; Szper and Prakash 2011). In particular,
perceptions of excessive spending on particular items such as
fundraising and general administration, have attracted headline
attention (see for example Urban Institute, 2004; Gettler, 2007;
Gonzalez, 2010). Donors to NFP organisations seek assurance that
their contributions are being used efficiently and effectively
(Choice 2008; Australian Government Productivity Commission 2010),
so negative perceptions can be damaging to trust in the sector
(Rowley 2011; Charities Aid Foundation 2011). We contend that
organisations can enhance this trust by communicating explanatory
expenditure information transparently to stakeholders.
The purpose of this paper is twofold. First, in the context of
accountability, we examine the expenditure patterns of Australian
international aid and development organisations with the aim of
understanding any diversity in their expenditure patterns.
Secondly, we analyse the disclosures made about these expenditures
in the narrative of the entities’ annual reports and financial
statements. This enables us to determine the extent to which
organisations have communicated with stakeholders about their
expenditure patterns and communicated their unique expenditure
stories.
Espeland and Sauder (2007) argue that the response to increasing
demands for accountability and transparency has led to a
proliferation of metrics designed to evaluate organisations and
individuals, with these measures often having unintended
consequences. While proponents argue that these measures provide
information to the public and consumers, critics argue that such
measures are reactive and become the focus of attention rather than
the organisational practices and activities that lie behind the
metric (Krishnan et al 2006; Tinkelman and Mankaney 2007; Yetman
and Yetman 2012). Because metrics and ranking tables alter the
behaviour of individuals and organisations, this, in turn, shapes
the redistribution of resources (Espeland and Sauder 2007).
Specifically, Palotta (2008) alerts us to the dilemmas inherent
in evaluating or comparing the expenditures of NFP organisations.
On the one hand, donors want the maximum amount of money to go
towards the provision of programs, and the least amount of money
towards administration and fundraising costs. On the other hand, a
certain level of overhead expenditure is necessary to ensure the
long-term financial resilience of NFP organisations (Tinkelman and
Mankaney 2007). These organisations therefore need to be vigilant
in not perpetuating the use of short term single metrics about
their expenditure (Palotta, 2008). Transparent disclosures of
financial and narrative information about costs can inform
stakeholders of the reasons behind expenditure, and assist
organisations to discharge a more meaningful accountability, rather
than a watered-down formulaic accountability.
The majority of prior research into NFP financial expenditure
patterns is based on US data and takes the form of expenditure
efficiency ratios (see for example Tinkelman 1999; Okten and
Weisbrod 2000; Hager 2001; Bhattacharya and Tinkelman 2009; Marudas
2004). Calculation of such metrics is possible because of the US’s
sophisticated philanthropic environment (Hammack 1995; Gordon and
Khumawala 1999) and the Internal Revenue Service’s requirement that
tax-exempt NFP organisations must lodge a Form 990 (IRS, 2009).
This provides a vast amount of data for research into, and
evaluation of, NFP organisations’ performance, which arguably has
instituted a disadvantageous and restrictive reporting regime
(Pallotta, 2008). The calculation of these single metrics is
controversial since they encourage the development of rankings or
ratings tables (see, for example Tinkelman and Donabedian 2007;
Sargeant et al 2009).
There are four common metrics (ratios) that are used to assess
NFP expenditure performance: program expense ratio[endnoteRef:1],
fundraising expense ratio[endnoteRef:2], administration expense
ratio[endnoteRef:3] and cost of fundraising[endnoteRef:4] (Flack
2004; Greenlee and Tuckman 2007; Tinkelman and Donabedian 2007).
These expenditure ratios have been used extensively to determine
which NFP organisations most deserve the contributions of donors
and volunteers, since contributors are believed to prefer
expenditure to go towards program rather than administration or
fundraising (see for example Weisbrod and Dominguez 1986; Posnett
and Sandler 1989; Gordon and Khumawala 1999; Okten and Weisbrod
2000; Tinkelman 2006; Tinkelman and Donabedian 2009). [1: This is
calculated as Program expense/Total expenses, and reveals how much
of the total expenditure is devoted to delivering programs
(Greenlee and Bukovinsky 1998; Flack 2004; Greenlee and Tuckman
2007; Yetman and Yetman 2012). ] [2: Calculated as Fundraising
expense/Total expenses, this ratio indicates how much of the total
expenditure is allocated towards raising funds (Greenlee and
Bukovinsky 1998; Greenlee and Tuckman 2007).] [3: The ratio shows
how much of the total expenditure goes towards administering the
organisation. It is calculated as Administration expense/Total
expenses (Greenlee and Bukovinsky 1998; Greenlee and Tuckman
2007).] [4: The ratio is calculated by Fundraising expense/Total
funds raised, and indicates the cost of raising each $ of
fundraising revenues (Flack 2004; Wing et al. 2004; Sargeant et al.
2009).]
However, this research is not without problems (Tinkelman and
Mankaney 2007; Pallotta 2008; Tinkelman and Donabedian 2009).
Ratios need careful interpretation (Weisbrod and Dominguez 1986;
Posnett and Sandler 1989) as they can be subject to
misrepresentation (Hager 2003; Jones and Roberts 2006; Krishnan et
al. 2006; Yetman 2009). One pertinent example is the propensity of
NFP organisations to report zero fundraising costs, despite
reporting significant levels of fundraising revenue (Hager 2003;
McCambridge 2012)[endnoteRef:5]. It is thus apparent that if
explanations about NFP organisations’ expenditure were to accompany
their financial data, stakeholders’ understanding of organisational
performance would likely be enhanced. This is especially crucial
where there is a culture of single metrics that attracts headlines
in the media and and consequently shapes the public discourse
surrounding NFP organisations’ performance. [5: Expenditure on
fundraising should be assessed in conjunction with the cost of
fundraising ratio (Greenlee and Bukovinsky 1998), since an
organisation could still be considered efficient if its fundraising
expense ratio is elevated, provided its cost of fundraising ratio
is relatively low (Urban Institute 2004).]
This need for contextualisation is recognised by the Charity
Commission for England and Wales, which does not set an acceptable
level of fundraising expenditure. Instead, it recognises that there
are many factors involved, encourages charities to achieve the best
fundraising outcomes they can, and urges charities to be “open and
transparent about these costs” (Charity Commission 2012: 5).
Recognising that respondents view information about program
expenditures of most interest (Charity Commission 2004), the
Commission adopts a “story approach” whereby entities are urged to
contextualise their operations, providing “narrative explanations
to complement and interpret the financial statements” (Charity
Commission 2009: 20). Further, the Commission’s Statement of
Recommended Practice (SORP) eschews misleading metrics by not
requiring expenditure to be disclosed line by line in the Statement
of Financial Activities, and by not requiring administration costs
to be reported on the face of the Statement (Charity Commission
2005, p. 15). Instead, it requires that the Notes include details
of support costs and methods of cost allocation (Charity
Commission, 2005, paras 166 – 167).
In spite of the controversy surrounding these expenditures, and
the sector’s obvious sensitivity to the issue, there is a dearth of
Australian research on the topic, primarily because of a lack of
standardised data[endnoteRef:6]. In a bid to overcome this lack of
data, we established a Memorandum of Understanding with the
Australian Council for International Development
(ACFID)[endnoteRef:7], the peak council of Australian NFP aid and
development organisations (ACFID 2011a). This provided us with
access to annual reports and financial statements for the 2008-09
financial year[endnoteRef:8]. From these we extracted data to
calculate and analyse the four most commonly used expenditure
ratios, and to analyse the narrative sections of organisations’
reports to determine the extent to which they disclosed additional
information about their expenditure. [6: One reason for this is
that to date, there has been no overall Australian NFP regulator to
systematically collect data (Choice 2008). ] [7: The Memorandum of
Understanding with ACFID permitted the compilation of a substantial
database of annual reports (including financial statements) from a
range of Australia’s leading international aid and development
organisations. These reports were sourced with the approval of the
organisations. ] [8: Most ACFID organisations are constituted as
Public Companies Limited by Guarantee or Incorporated associations.
Companies Limited by Guarantee come under the authority of
Australian Corporations Law as administered by the Australian
Securities and Investments Commission, and are required to prepare
general purpose financial statements based on the accounting
standards prepared by the Australian Accounting Standards Board
(AASB). Incorporated Associations are governed by legislation
unique to each state, with varying requirements ranging from
audited financial statements according to Australian accounting
standards, through to an appropriately classified income statement
and balance sheet. In addition to complying with these
requirements, all ACFID-affiliated organisations must present
financial reports according to the requirements of the Code of
Conduct. ACFID’s Code of Conduct Committee scrutinises all reports
prepared by signatory organisations, ensuring compliance.]
Consequently, the findings presented in this paper provide
valuable and unprecedented insights for researchers, practitioners
and regulators. This is timely as the Australian NFP sector moves
into a new era with the inauguration of a national regulatory body,
the Australian Charities and Not-for-Profits Commission (ACNC),
planned to commence its operations on 1 October 2012 (ATO
2011)[endnoteRef:9]. For the first time, Australian charities will
be regulated at a national level. The ACNC, through its regulation
encompassing registration, and the requirement that information
should be presented in a prescribed type and form, has the
potential to increase the amount of data available for analysis, to
guide the resultant conversations that will ensue, and ultimately
to shape the sector. [9: Australia’s 2011-2012 Federal Budget
included the provision of $53.6 million over four years to
establish this new regulatory body. ]
The next section of the paper presents the accountability
framework on which the study is based. Following this, the method
by which the study was conducted is outlined. Results and analysis
are then presented, with the concluding section outlining the
paper’s contribution and opportunities for further research.
THE ACCOUNTABILITY PUZZLE
It is generally agreed that accountability is an elusive term
(Sinclair 1995), one that is not straightforward (Ebrahim and
Weisband 2007; Alexander et al. 2010), and that has fundamental
ethical roots (Lawry 1995) and professional connotations (Crofts
2009). Hoskin (1996) argued that with the “audit explosion” (Power
1994), there is a growing use of quantitative indicators in
discharging accountability, and this has transformed the meaning of
accountability.
Accountability is especially important in the light of NFP
scandals (Gibelman and Gelman 2001; Ebrahim 2003) and increased
rivalry within the sector for scarce resources (Chetkovich and
Frumkin 2003; Greenlee and Tuckman 2007). For the NFP sector, the
link between accountability, trust and funding makes this a serious
issue. Strong “bonds” of accountability (Stewart,
1984)[endnoteRef:10] function to preserve public trust in an
organisation and guard its reputation, and, in the case of NFP
organisations, ensure continued funding (Lawry 1995; Tinkelman and
Donabedian 2009; Alexander et al 2010). [10: Stewart (1984) defined
the “bond” of accountability as consisting of two dimensions, the
presentation of an account and the holding to account.
Accountability “links” involved only one of these dimensions, and
were therefore a weaker form of accountability.]
Kreander et al. (2009) maintained that accountability has not
been adequately theorised in the case of NFP organisations. The
need for NFP organisations to understand how they can achieve
accountability “in a cost-effective, yet appropriate, manner” has
been acknowledged as “vitally important”, so these organisations
are able to devote their energy to the achievement of their mission
(Geer et al, 2008, p. 70). While the manner of discharging this
accountability may be debated, it is generally agreed that it
centres on issues of who is accountable, to whom, for what, and how
that accountability is discharged (Flack and Ryan 2005). In
relation to the ‘who’ and ‘to whom’ questions, we argue that one of
the keys to the unpacking of an understanding of NFP accountability
is the acknowledgment that organisations are accountable to a
variety of stakeholders both internal and external (Ebrahim 2003;
Ryan and Irvine, 2012). As Roberts (1991) suggested, accountability
is a social construct involving all aspects of organisational life.
So, while accountability may be discharged to external
stakeholders, it is the internal learnings in the organisation from
that discharge that lead to a full understanding of the role
accountability plays in developing a financially resilient
organisation that is delivering on its mission (Ryan and Irvine
2012). In this context transformational NFP leadership has been
identified as a strong indicator of accountability (Geer et al
2008).
It is in considering the inextricably linked ‘how’ and ‘what’
aspects of accountability that this paper provides strong insights.
There are a number of ways in which organisations themselves can
discharge accountability to their stakeholders. One method common
to both for-profit and NFP organisations is through the production
of annual reports and financial statements that give stakeholders
the opportunity to evaluate, monitor and even control an
organisation’s operations and efficiency (Buckmaster et al 1994;
Buckmaster 1995; Gordon and Khumawala 1999; Flack and Ryan 2005;
Greenlee and Tuckman 2007). What is important is the way NFP
organisations communicate with their stakeholders about their
performance in these reports, i.e. the ‘how’ and ‘what’ dimensions
of accountability (Connolly and Hyndman 2004; Beattie et al 2004;
Connolly and Dhanani 2009; Jetty and Beattie 2009; Agyemang et al.
2009; Charities Commission 2010; Cordery 2011; IIRC 2011).
The FASB (Financial Accounting Standards Board), responsible for
setting accounting standards in the US, emphasised the importance
of financial reports that demonstrate accountability not only for
the ‘custody and safekeeping’ of organisational resources, but also
for their ‘efficient and effective use’ (FASB 1980: para 40).
Hyndman (1990, 1991) asserted that while most UK charity reports
are dominated by financial information, users consider this to be
less important than non-financial information that allows them to
assess the performance of an organisation.
Despite a reported dearth of information on their organisations’
expenditure performance (Connolly and Hyndman 2003, 2004), annual
reports nevertheless have the potential to be an important
accountability and communication medium if they include sufficient
narrative information, in addition to the financial statements, for
users to fully understand the financial results presented. Hyndman
and Anderson (1995) argued that, historically, accountability has
suffered from an overemphasis on the presentation of financial
statements. If the information in these reports is not accessible
or able to be understood, the effective discharge of accountability
is jeopardised.
Currently, stakeholders “should be primed to expect good quality
narrative and numerical data on outputs and outcomes” (Cordery
2011: 32). The encouragement of this practice is evident globally,
with the need for management commentary on financial statements
well recognised (Charity Commission 2004, 2009; IIRC 2011). In
relation to UK NFP organisations, the Charity SORP (Charity
Commission 2005) has placed greater emphasis on the provision of
narrative information. Similarly, in New Zealand, charities are
encouraged to tell their story in ways other than the provision of
financial reports (Charities Commission 2010).
This is especially important in the light of a UK survey that
revealed a “huge disparity” between what the public believe
charities spend on fundraising and what they actually do spend,
with actual fundraising expenditure much less than perceptions
about it (Charities Aid Foundation, 2011). This misperception
points to a need for organisations that raise funds to communicate
meaningfully with their stakeholders. Information about expenditure
is an important indicator of the unique approach and priorities of
an organisation.
The provision of such information can contribute to the
discharge of a broader accountability, and to the alleviation of
some of the accountability problems caused by a reliance on
simplified financial metrics. These include the misapplication of
costs, either deliberate or accidental, different cost allocation
systems between organisations, ambiguous or subjective
classification systems, or even an over-reliance on financial
ratios (Hager 2003; Jones and Roberts 2006; Tinkelman and Mankaney
2007). In this vein, the manipulation of ratios to enhance
organisations’ perceived efficiency has been documented (Jones and
Roberts 2006; Krishnan et al 2006; Yetman 2009). Such practices
undermine the notion of accountability and the implicit trust that
stakeholders place in the NFP sector (Tinkelman and Donabedian
2009). Arguably, this is less likely to occur if organisations are
released from expectations that the figures in their financial
reports should comply with narrowly focused expenditure metrics,
and instead, are encouraged to relate their own expenditure
stories.
Aside from these obvious deficiencies and inconsistencies,
metrics in the form of expenditure ratios or other financial
indicators provide an incomplete picture of organisations’
performance, since they exclude a consideration of the quantity and
quality of services provided (Tinkelman and Donabedian 2009). Thus
financial ratios should be used with caution (Tinkelman and
Mankaney 2007; Tinkelman and Donabedian 2009). It is important that
stakeholders understand the activities behind the metrics, and in
this regard there is a growing appreciation of the importance of
narrative reporting to inform stakeholders about activities, and
thereby to broaden the parameters of accountability (Beattie et al.
2004; Charity Commission 2008; Connolly and Dhanani 2009; Jetty and
Beattie 2009).
With NFP organisations increasingly experiencing pressure to
provide evidence of their accountability (Tinkelman and Donabedian
2009), and expenditure patterns subjected to public scrutiny, this
study of the expenditure patterns of Australian international aid
and development organisations is timely.
THE STUDY
The Australian Bureau of Statistics, using the Australian and
New Zealand Standard Industrial Classification, divides NFP
organisations into nine subcategories, one of which groups together
environment, development, housing, employment, law, philanthropic
and international organisations (ABS 2009). We reduce problems of
heterogeneity by restricting the target population to just one of
the elements of one of those subcategories, namely international
organisations that deliver aid and development[endnoteRef:11]. [11:
This is in contrast with a previous Australian study that compared
NFP ratios across nine different subcategories (Buckmaster
1995).]
The international aid and development subsector is a
particularly sensitive and topical area to research, with global
awareness of poverty in developing countries given visibility in
the United Nations’ Millennium Development Goals, through campaigns
like Make Poverty History, the impact of natural disasters, and the
Australian government’s commitment to providing international aid
(Australian Government Productivity Commission 2010; ACFID 2011b).
Government funding and consequent public scrutiny further emphasise
the significance and relevance of accountability in the NFP sector
and stakeholders’ demands for organisations to demonstrate
efficiency and transparency in their operations (Ebrahim 2003,
Gettler 2007, Australian Government Productivity Commission
2010).
ACFID’s Code of Conduct outlines requirements in the areas of
organisational integrity, governance, communication, finance,
personnel and management (ACFID 2009a)[endnoteRef:12]. Signatories
to this Code represent a significant proportion of the NFPs
operating in the international aid and development subsector, and
certainly all of those eligible for AusAID NGO Cooperation Program
grants[endnoteRef:13]. The ACFID Code encourages transparency in
its signatory organisations, aiming for accountability and
integrity in financial reporting. It specifies guidelines for
financial practice, and requires the presentation of financial
statements in a prescribed format (see Appendices 1 and 2) (ACFID
2009a, 2009b). [12: The ACFID Code of Conduct has been revised,
with the new Code taking effect from January 2012 (ACFID 2010).
Organisations’ 2008-2009 Annual Reports were prepared under the
earlier version of the Code.] [13: Australian NGOs that have been
accredited with AusAID and therefore comply with ACFID’s Code of
Conduct, are eligible to receive funding through the AusAID NGO
Cooperation Program (AusAID 2010). ]
The total population of ACFID signatories is around 110 in any
single year. We have selected the annual reports of 97
organisations as the sample for this study, based on the
availability and completeness of data included in their audited
financial statements. In order to gain an understanding of these 97
organisations, we divided them into six income groups and analysed
their income sources[endnoteRef:14]. Organisations in the study
reported total income ranging from under $15,000 to over $1b, with
varying degrees of reliance on funding sources. Figure 1 portrays
the relative importance of the various income streams of all 97
organisations in the six income groups. It reveals that these
income sources were most evenly balanced, on average, for
organisations in the $5m-$10m income range. Organisations in the
lowest income groups generally displayed the highest reliance on
fundraising income. [14: Income was selected as it has been
identified in prior literature as a suitable proxy for
organisational size (see for example, Ahmed and Courtis 1999).]
[Figure 1 here]
The purpose of the paper is both to examine the expenditure
patterns and the disclosures of organisations. For the purposes of
calculating the expenditure patterns, expense data from financial
reports was recorded in keeping with the categorisation required by
the ACFID Code, as outlined in Appendix 2. One of the limitations
of the study centres around the allocation of costs, since
organisations did not provide details of how they allocated costs
to the various categories[endnoteRef:15]. However, this limitation
reinforces our contention that organisations need to communicate
additional information about their expenditures. In order to
satisfy the second objective of the study, we analysed the nature
and extent of disclosures relating to expenditure on program,
fundraising and administration, and the cost of fundraising. The
location of disclosures in either the narrative section of the
annual report and the notes to the financial statements was
determined, together with their page length. [15: This issue is not
unique to our study, as it has been acknowledged that possible
misallocation of costs reinforces the danger of using single
metrics to compare individual organisations (Hager 2003; Jones and
Roberts 2006; Krishnan et al. 2006).]
This research is exploratory, and as such the findings of this
study are not intended to be generalisable outside this target
population of ACFID organisations. However, in presenting the data,
we provide valuable insights into the expenditure and disclosure
patterns of a previously unexplored group of NFP organisations, and
highlight the potential of additional disclosures to enhance
organisational accountability and stakeholder understanding.
EMPIRICAL EVIDENCE OF EXPENDITURE PATTERNS
Sample-wide descriptive statistics for the four expenditure
efficiency ratios are presented in Table 1. Discussion on program,
fundraising and administration expenses is combined, as these three
expenditures comprise 100% of all organisational expenditure. The
mean program expense ratio across all organisations was 76.6%, with
a considerable range, from
0%-100%. A median of 81.5% confirmed the generally high degree
of program expenditure across all organisations. The mean
fundraising and administration expense ratios across the sample
were 6.1% and 15.1% respectively, again with quite wide ranges, and
medians that indicated fundraising and administration spending
remained low in the majority of cases.
[Table 1 here]
These findings may reinforce the notion that NFP managers want
to keep overhead costs (fundraising and administration) as low as
possible, presumably as a means of attracting substantially larger
contributions from donors. This pattern of expenditure is
consistent with the findings of prior studies in other
jurisdictions, that organisations report greater expenditure
devoted to program and consequently less on overheads
(administration and fundraising expenditure) (see for example,
Harvey and McCrohan (1988); Yetman and Yetman (2012) in the US; and
Hyndman and McKillop (1999) in the UK).
However, in line with Steinberg (1986), Tinkelman (1999, 2006,
2009), Tinkelman and Mankaney (2007) and Palotta (2008), we argue
against the use of simplistic metrics. Instances of high program
expenditure and consequently low overhead expenditure, as in this
case, may indicate that longer-term infrastructure needs are not
being met (Hyndman and McKillop 1999; Tinkelman and Mankaney 2007;
Australian Government Productivity Commission 2010). The prior
literature thus advises caution when interpreting ratios as
benchmarks, and suggests that moderate fundraising and
administration spending is not always detrimental to NFP
performance, as media headlines might suggest. In fact such
spending is vital for the long-term survival and capacity-building
of organisations, and hence should be given appropriate
consideration in the NFP budgeting process. In this case, given
that it is costly to run programs, and administration and
fundraising expense ratios were relatively low, each individual
organisation needs to ensure that it is not using up its reserves
and that it remains financially sustainable beyond the
short-term.
Table 1 displays a mean cost of fundraising ratio of 12.8%
across all 97 organisations. As with the previous expenditure
ratios examined, the range of this ratio was also wide, with a low
median of 5.2%. Cost of fundraising is a metric that also has the
potential to attract headlines, with public dissatisfaction evident
if it is regarded as high (Harvey and McCrohan 1988; Tinkelman
2006, 2009; Gonzalez 2010). It ought to be interpreted with care,
however. Rowley (2011), in a UK study which examined the
perceptions of more than 1000 residents, maintained that there is
no “magic number” for an appropriate level of fundraising costs,
and noted that charities actually spend less on fundraising than
the public thinks. Similarly, Tinkleman and Mankaney (2007: 80)
argued that the cost of fundraising ratio is limited in its
usefulness to gauge the efficiency of fundraising efforts, since in
some instances expenditure is “an investment in donor
relationships”, which had longer-term benefits. In fact, a high
cost of fundraising ratio in one particular period could point to
future growth in fundraising revenue (Hyndman and McKillop,
1999).
On a more general level, what is noteworthy in Table 1 is that
each of the ratios had a range that commenced at 0.0%, with the
Program and Administration ratios extending to 100% and Cost of
Fundraising ratio to a surprising 111%. To develop an enhanced
understanding of the unique characteristics of organisations whose
expenditure patterns were outside conventional expenditure
parameters, we identified 7 “outlier” organisations[endnoteRef:16]
and 20 organisations that reported zero fundraising costs even
though they reported fundraising revenue[endnoteRef:17]. Our
rationale for this was that because of their unusual metrics, they
might be expected to provide some additional explanatory narrative
about their expenditure patterns. They are examined in more detail
in the next section of the paper (see Table 3), as are the 20
organisations that displayed zero fundraising costs (see Table 4).
[16: For the purposes of this study, in order to identify some
organisations whose ratios were hugely numerically distant from the
mean, we determined outlier organisations to be those with any of
the four ratios being three standard deviations from the mean. This
resulted in the identification of seven organisations whose reports
we examined in closer detail for any evidence of additional
disclosures that might account for the ratios of unusual
dimensions. Because of the related nature of PER, FER and AER, this
approach also highlighted organisations which had a 0.0% in any of
these three expenditure ratios. Because of the high PER mean, it
did not pick up the two organisations that reported 100% PER, but
since these also reported 0.0% in the other two categories of
expenditure, they are included in the list of 20 organisations that
reported zero fundraising expenditure (see Organisations H and T in
Table 4). ] [17: These organisations prepared their accounts in
line with the ACFID Code of Conduct that was current for the
2008-09 year. ACFID’s revised Code of Conduct, to apply from 1
January 2012 highlights the inappropriateness of reporting zero
fundraising costs (ACFID 2010).]
The reporting of zero fundraising costs may appear
counter-intuitive, given the increased competition for donations
faced by organisations in today’s charitable environment (Ebrahim
2003; Chetkovich and Frumkin 2003), but it likely reflects
perceptions that fundraising expenditure ought to be low in order
to attract donors (Harvey and McCrohan 1988; Tinkelman 2009). It is
a phenomenon that has been identified in both the US (Krishnan et
al 2006; Yetman and Yetman 2012; McCambridge 2012) and the UK
(Hyndman and McKillop 1999; Sargeant et al 2009).
Krishnan et al (2006) and Yetman and Yetman (2012) reported that
organisations with zero fundraising costs often have fundraising
revenue, leading to speculation that they may be misreporting or
miscategorising fundraising costs, allied with program ratio
inflation. Even if there was no misreporting in this case, the fact
that an organisation reports zero fundraising costs would seem to
indicate that there would be a case for some additional
communication with stakeholders over this phenomenon. However, it
is possible that these organisations may either legitimately not
have incurred any fundraising expenses in generating their
fundraising income, or they may have miscategorised their
expenditure.
In an attempt to identify trends among organisations of similar
size, the sample was refined based on the six income groups
identified earlier. Table 2 presents the means of all four
expenditure ratios of the 97 organisations in the study, according
to their income group classification. In addition, it displays the
number of organisations in each of the income groups that we
identified either as outliers or which reported zero fundraising
costs.
[Table 2 here]
A number of observations can be made from this data. First,
consistent with the overall results displayed in Table 1, these
figures reveal that the average level of program spending in each
revenue bracket was high, and that the corresponding levels of
fundraising and administration spending were low. Second, with the
exception of the two highest income groups, the cost of fundraising
appears to increase as the organisation gets larger. This is
surprising given research that identifies economies of scale in the
cost of some fundraising activities (Harvey and McCrohan 1988; Wise
1997; Hyndman and McKillop 1999; Kahler and Sargeant 2002; Sargeant
et al 2009).
Third, the seven outlier organisations and the twenty that
reported zero fundraising costs appear to be randomly distributed
across income groups, with the highest number reporting zero
fundraising costs in the lowest income bracket. However, closer
examination revealed that the percentage of the organisations in
the relevant income groups that were outliers rose from 6.7% for
the fifteen entities in the $0-$250K category to 10% of the twenty
entities in the >$10m category, i.e. the proportion of
organisations that were outliers was higher in the higher income
groups. This may indicate that as organisations increased in size,
their characteristics became more unique in some way.
In a similar vein, the percentage of organisations that reported
zero fundraising costs was highest (60%) in the lowest income
group, and lowest in the top two income groups (0% of the eleven
entities in the $5-$10m group and 5% of the twenty entities in the
>$10m group). One explanation of this may be that in
organisations of greater size, and presumably with more
sophisticated accounting systems, there were fewer instances of
misclassifications of fundraising expenses. There is thus some
ambiguity and uncertainty in these expenditure metrics.
The next section of the paper addresses our second aim, which is
to examine the extent to which organisations have disclosed
information about their expenditures in their annual reports and
financial statements. The extent of such communication is an
important issue, as illustrated in the US study of Szper and
Prakash (2011). They found that changes in ratings did not affect
donor support, but that donors assessed the worthiness of
organisations via other means. Our contention is that organisations
face the challenge of providing information that is relevant to
stakeholders, i.e. that they communicate their own expenditure
stories.
EMPIRICAL EVIDENCE OF ADDITIONAL DISCLOSURES ABOUT
EXPENDITURE
We examine the narrative sections of organisations’ annual
reports and the notes to their financial statements for
explanations or disclosures that elaborate on expenditure,
analysing these communications in three ways. First, we examine the
entire sample of 97 organisations to assess whether additional
disclosures were made about expenditure, and if so, where those
disclosures were made. Second, we examine the seven outlier
organisations more closely to determine whether they have
communicated their expenditure stories. Since they are
organisations that have the potential to attract headlines because
of their expenditure patterns, they might be more highly motivated,
in discharging their broader accountability obligations, to inform
stakeholders of the context of their expenditure. Third, we examine
the 20 organisations that reported zero fundraising costs, and yet
also reported fundraising income, to ascertain the extent to which
they provide additional disclosures about their fundraising
activities and the absence of any reported fundraising costs.
Figure 2 displays, for the 97 organisations, the number that
disclosed information about their expenditures and where those
disclosures were made.
[Figure 2 here]
Since expenditure on program attracts headline attention (Yetman
and Yetman 2012), it is not surprising that this item comprised the
highest number of disclosures (65 instances in the Annual Report
and 53 in the Financial Statements, with 38 entities disclosing
additional information about program expenditure in both
documents). Only 17 entities did not provide any additional program
expenditure information to their stakeholders. Equally
unsurprisingly, given the controversy surrounding the cost of
fundraising (Tinkelman 2006, 2009), there were fewer additional
disclosures about this item than about any other expenditure item,
with 79 entities providing no disclosure in either the annual
report or the financial statements.
Studies examining NFP organisations’ additional disclosures have
highlighted their inadequacy in meeting the needs of users
(Connolly and Hyndman 2003) and their failure to demonstrate
accountability to external stakeholders (Connolly and Dhanani
2009). While there will be many dimensions to this, one would be
the amount of disclosures. Consequently, we examine the extent of
disclosures, which, while they do not capture quality, nevertheless
represent a significant indicator of the emphasis the organisations
place on such communication. Figure 3 displays the very limited
extent of disclosures across the population.
[Figure 3 here]
Of the 97 entities, 64 (66% of the 97 organisations) provided
either no disclosures or less than a half a page of disclosures on
their expenditure patterns in their annual reports, with 18 (19%)
providing up to one page and a mere 8 (8%) providing over two pages
of additional information. The extent of additional disclosures in
the financial statements was similar, with 62 entities (64%)
providing either no disclosure or less than a half a page, and only
six (6%) providing over two pages.
Research has proposed that financial and quantitative
information may not be understood by stakeholders, or perhaps not
well received (Jetty and Beattie 2009), so the failure of so many
organisations to provide explanatory narrative about their
expenditure patterns represents a communication opportunity lost.
Recognising the dearth of needed expanatory information and the
inappropriate nature of many traditional metrics, Pallotta (2008:
173) proposed a national US agency that would provide “in-depth
program, organizational, and financial information in numeric and
narrative formats, updated annually, for every active charity in
America”.
Since our focus is on understanding disclosure patterns rather
than conducting statistical analysis, instead of excluding outlier
organisations, we further examine their reporting practices. Based
on the information in Table 3, which displays the characteristics
of the seven identified outliers, we make a number of
observations.
[Table 3 here]
· All organisations produced quite lengthy reports, yet their
expenditure disclosures were quite minimal. The total length of the
seven organisations’ reports ranged from nineteen pages to 69
pages, which only highlights the relatively small attention given
to expenditure information. Connolly and Hyndman (2004: 147)
observed that in the UK, larger charities generally disclosed more
than smaller charities, perhaps in response to “greater scrutiny”
from outside agencies. Seven organisations is too small a number on
which to generalise about this, but with the exception of
Organisation F, this Australian data was not supportive of the UK
situation. The level of reporting indicates that organisations are
providing some level of accountability to their stakeholders,
although Connolly and Dhanani (2009) noted in a study of the top
104 UK charities, that accountability (particularly fiduciary,
financial and operational management) weakened over a five-year
period even though reports were longer and narratives had
increased.
· There is no identifiable disclosure pattern based on
organisational size or reliance on fundraising income, except that
the largest amount of disclosure was produced by Organisation F,
which reported total income > $10m. Organisation E reported only
0.1% of its income from fundraising and produced no disclosures,
but two other organisations (A and D) that also produced no
disclosures demonstrated a relatively high reliance on donations
and memberships.
· No organisations were identified as outliers based on their
Program Expenditure Ratios, which reinforces the perceived
importance of expenditure on program, and confirms literature that
indicates program costs may be inflated by “understating
fundraising and overstating program expenses” (Yetman and Yetman
2012: 2). Surprisingly, however, Organisation A reported zero
program expenditure, and yet provided no additional disclosures
that may explain this.
· Organisations F and G, which are identified as outliers
because of their high Fundraising Expense Ratios, are both in the
largest income group. Prior literature has demonstrated that there
are economies of scale for larger organisations (Harvey and
McCrohan 1988; Wise 1997). However, it has also been reported,
based on a study of the 500 largest charities in England and Wales,
that the fundraising expense ratio increases with the size of the
organisation (Hyndman and McKillop 1999). This can indicate that
cost savings from the Program and Administration ratios are
diverted to fundraising activities, which promise future growth.
Such a strategy, together with other factors that affect the level
of fundraising expenditure, for example the life cycle of the
organisation, its size and fundraising methods and the popularity
of the mission (Harvey and McCrohan 1988; Tinkelman 2006), indicate
the benefit to both stakeholders and NFP organisations, of
additional explanatory disclosures. Stakeholder reliance on the
output of monitoring agencies can have “unintended, unfortunate
consequences”, as in the case of a fundraising initiative in the US
that reported “high up-front” but low marginal fundraising costs
(Tinkelman 2009: 492). This indicates the necessity of effective
communication about an organisation’s unique fundraising
characteristics and costs. In fact, Organisation F provided the
highest level of disclosure of all the outliers, and of the entire
97 organisations, providing narratives about its fundraising
expenditure, and linking it to programs.
· There was evidence of extremely large cost of fundraising
ratios that were not accompanied by explanatory narrative. Three
organisations (B, C and E) reported outlier levels of Cost of
Fundraising, Organisation E with an amazing 111%, but none provided
additional disclosures about this.
· Organisations A and D, whose Administration Expense Ratios
were 100% and 71.5% respectively, also provided no explanation of
why these expenditures were so high. Tinkelman and Mankaney (2007)
indicated that NFP organisations should increase their
administration expenditure, for example to build necessary
infrastructure or to meet the costs of regulatory reporting.
However they also pointed out that managers would need to provide a
justification of this expenditure, particularly to reassure
stakeholders that program expenditure was not adversely
affected.
In summary, the paucity of additional disclosures in the reports
of these seven outliers reflects poorly on the level of
accountability they achieve with their reports and could indicate a
lack of awareness on the part of the organisations of the
significance of their expenditure patterns and the advisability of
communicating their own stories to stakeholders. Even where they
have shown large expenditures in certain categories, there is no
evidence that any of the organisations have communicated their
expenditure stories. In short, the organisations do not appear to
be responsive to the visibility they may attract from unusual
expenditure patterns.
The third way we obtained an understanding of the disclosure
patterns of organisations was to focus on the twenty organisations
that reported zero fundraising expenditure. The prevalence of
reporting of zero fundraising costs, while noteworthy (20.6% of the
population of organisations in the study), is not unusual, as
already outlined. Two of these organisations (A and D, as outlined
in Table 3) were also identified as outliers, because they reported
high Administration Expense Ratios. Because all twenty of these
organisations reported a 0.0% in this category, there were no
disclosures about either the fundraising expenditure or the Cost of
Fundraising in their reports. However, to ascertain any reasons why
there were no reported expenditures related to fundraising
activities, we examined both the annual reports and financial
statements of these twenty entities for possible explanations. The
results are outlined in Table 4.
[Table 4 here]
Fundraising income as a proportion of total income varied widely
across the twenty organisations, from 0.02% in the case of
Organisation W, to 99.9% for Organisation P, with no obvious link
to the level of total income. Zero fundraising expenses may be
expected due to materiality issues, where fundraising income
represents only a diminutive fraction of total income, such as with
organisations W and Y, and to a lesser extent, D, H and K. Further
investigation of the annual reports of R, S, D and W provided no
additional insights about why they might have reported zero
fundraising costs. A close examination of the reports of the
remaining organisations’ reports enabled us to discern information
that provided some insights about why no fundraising costs were
recorded, but this was not obvious. Reasons included a reliance on
single large donors, spontaneous donations, the contributions and
fundraising work of volunteers[endnoteRef:18], and generous media
coverage of the mission. [18: It is interesting to note that four
of the zero fundraising expenditure organisations mentioned
volunteer contributions to the fundraising activities in their
reports (Organisations L, M, O and P). L, M and O were in the
$0-$250K income range and P in the $250K-$500K income range. This
could indicate that smaller organisations placed more reliance on
volunteers for fundraising activities, where larger organisations
may have more sophisticated fundraising systems, or employ
professional fundraisers. ]
It is possible, but unlikely, that all of these organisations
legitimately did not incur any fundraising expenditure, however
further information would need to be provided to confirm this.
Prior studies have highlighted some reasons for the reporting of a
zero or low fundraising expenditure ratio. These include
misallocation or differences in cost allocations (Sargeant et al
2009), difficulties in relying on information from financial
statements to construct fundraising ratios (Tinkelman 2006),
“inappropriate reporting” (Krishnan et al 2006: 399), or a response
to awareness of public criticism of high fundraising costs (Harvey
and McCrohan 1988) and a deliberate understatement of fundraising
expenditure (Yetman and Yetman 2012). This is particularly salient,
given the requirement in ACFID’s revised Code of Conduct, that
“signatory organisations should not give the impression that
fundraising has no costs” (ACFID 2010: 15).
It is also possible that the preparers of reports were not aware
that additional information would prove useful for those trying to
interpret financial accounts, particularly in the absence of
guidance from regulators. The need for the communication of
performance-related information has been identified as important in
the UK (Hyndman and Anderson 1995; Connolly and Hyndman 2003, 2004;
Connolly and Dhanani 2009; Jetty and Beattie 2009), while in the US
some researchers are acknowledging the shortcomings and misleading
nature of charity ratings tables (Pallotta 2008; Tinkelman and
Donabedian 2009).
it would therefore appear from this analysis that at the very
least, the organisations in the sample significantly neglected the
potential to contextualise their financial performance and
communicate transparently with their stakeholders. Although they
provided financial statements as mandated, they may not have fully
or meaningfully discharged their broader accountability
responsibilities by communicating appropriate voluntary information
in either their financial statements or annual reports.
CONCLUSION
The expenditure patterns of NFP organisations attract media
attention and reflect the increasing accountability demands of
stakeholders. NFP organisations must be willing to be subject to
public scrutiny if they are to maintain public trust and thereby
ensure the continuation of their operations. This means that NFP
organisations must be able to communicate transparent information
about their performance, including their expenditure patterns.
Concerns about these accountability and communication issues in
relation to Australian NFP organisations motivated this study of
NFP expenditure patterns and disclosures, and was made possible by
the availability of ACFID data.
A detailed analysis of the annual reports and financial
statements of 97 organisations revealed a high commitment to
spending on program, with relatively low expenditure on
administration and fundraising activities, and a low cost of
fundraising. Further analysis revealed that additional explanatory
disclosures about these expenditures were very limited. Even those
organisations whose expenditure patterns could be interpreted as
unusual provided little disclosure of the reasons why this might be
the case. An explanation for this edearth of additional disclosures
on expenditure patterns could be that the preparers of reports,
particularly of the narrative sections of annual reports, focus
more on presenting a “good story” in a publicity mode, rather than
an “objective, transparent account” in an accountability mode
(Connolly and Dhanani 2009: 7). We identify the lack of
communication about these unusual expenditure patterns as missed
opportunities, when annual reports and financial statements could
have been used to communicate transparent information about the
real costs of running the organisation, thus building trust and
educating stakeholders about the real cost of running a NFP
organisation.
These findings have implications for NFP regulators and
managers. Within this relatively comparable population of
organisations reporting according to the ACFID Code of Conduct,
evidence of variations in expenditure patterns, coupled with
uncertainty about how expenditures were allocated, indicates that
there will likely be huge incomparability of data for Australia’s
broader NFP sector. Given this observation, any suggestion about
benchmarking the expenditure of Australian NFP organisations would
seem to be irrelevant, unjustified and misleading. A regulatory
regime that requires organisations to tell their own stories rather
than disclose or conform to standardised metrics, will encourage
transparent demonstrations of accountability and enhance the
public’s understanding of NFP costs (Connolly and Hyndman 2003;
Pallotta 2008; Connolly and Dhanani 2009).
NFP organisations have the opportunity in their annual reports
and the notes to their financial statements, to communicate with
stakeholders about their performance by voluntarily providing
additional explanatory information about their expenditure
patterns. These disclosures represent one aspect of confronting the
realities of what it costs to run a NFP organisation to ensure its
longer-term sustainability and of the necessity of meeting
stakeholders’ need for information about an organisations’
financial health. Transparent and informative disclosures about
expenditure have the potential to draw the focus away from narrow,
short-term focused expenditure metrics and instead, contributed to
the discharge of a broader accountability.
The study has some limitations, both theoretical and practical.
It has been suggested that the calculation of expenditure ratios
from financial statements is not an accurate or appropriate
strategy, since it ignores “current, marginal information” about
the use of donations (Tinkelman 2006: 461). Reliance on data from a
single year has been said to ignore potentially substantial
variations between years (Kahler and Sargeant 2002). In addition,
there is extensive criticism on the calculation of narrow financial
metrics because of their limited ability to portray organisational
performance, and because of allocation differences.
However, it is not our intention that the expenditure ratios we
have identified and calculated should be seen as an end in
themselves, but rather that they should be considered in the light
of organisations’ mission-related activities and achievements, and
their individual characteristics including their size and
fundraising methods. On the basis of this study, we advocate the
longitudinal, internal use of expenditure efficiency metrics by NFP
boards in order to highlight the issues unique to their
organisations (Ryan and Irvine 2012). Through the enhanced use of
the annual report and financial statements these issues can then be
communicated to stakeholders as the unique stories behind
expenditure patterns.
It is clear that further empirical research on the performance
and accountability of Australian NFP organisations is required,
particularly at this juncture in Australian NFP history, with the
inauguration of the new national regulator. It would be useful to
expand this study longitudinally to ascertain changes in both
expenditure patterns and communication about those patterns. The
diversity of the Australian NFP sector presents a further
opportunity for research that explores whether levels of program
spending are as high (and fundraising and administration spending
as low) in other Australian NFP subcategories as they are in that
of international aid and development.
This paper provides the first empirical insights into the
previously unexplored topic of Australian NFP expenditure
performance and disclosure. It is hoped that these insights will
enlighten the debate over NFP expenditure expectations and
disclosures, as regulators and policy-makers move the Australian
Government Productivity Commission’s (2010) agenda forward and the
new formed ACNC takes up the challenges of regulating the
sector.
APPENDIX 1: ACFID CODE OF CONDUCT – SELECTED EXCERPTS
4. Communication with the Public
4.1 An Annual Report is to be produced and made available to the
organisation’s own members, supporters and members of the public
upon request.
5. Finances
5.1 The Organisation will have internal control procedures which
minimise the risk of misuse of funds. Reporting mechanisms which
facilitate accountability to members, donors and the general public
will be used. The Organisation will have adequate procedures for
the review and monitoring of income and expenditure. Loans to and
transactions with Governing Body members or related parties shall
be publicly disclosed. Loans to staff shall be disclosed to the
Governing Body.
5.2 Notwithstanding any other legal requirements, the
Organisation must publish in their Annual Report, financial
statements prepared in accordance with the Code of Conduct Summary
Financial Report Format found in the Guidance Document to the ACFID
Code of Conduct. Additionally, organisations may choose to publish
their Full Financial Statements within their Annual Report.
5.3 Code of Conduct Summary Financial Reports and Full Financial
Reports must be audited by at least a qualified accountant who is a
member of CPA Australia, the Institute of Chartered Accountants in
Australia, the National Institute of Accountants or by a Registered
Company Auditor. The Auditor’s statement of the summary reports
presented must accompany the financial report in the Annual
Report.
5.4 Where an organisation chooses to publish only their Code of
Conduct Summary Financial Reports in their Annual Report and not
the organisation’s Full Financial Report, the Annual Report must
make reference to the fact that the Full Financial Report is
available on request. Any other organisational publications that
detail, summarise, or comment on financial performance must also
indicate that the Full Financial Report is available on
request.
5.5 Donations shall be used as promised or implied in
fundraising appeals or as requested by the donor. When funding is
invited from the general public for a specific purpose, the
Organisation shall have a plan for handling any excess and shall
make this known as part of the appeal. Organisations shall
substantiate, upon request, that their application of funds is in
accordance with donor intent or request.
5.6 The use of ratios in publications shall at all times be
accompanied by a note explaining how these have been
determined.
10. Definitions
Annual Report. The annual report is one of the principal windows
of Organisational performance, activity and accountability. It
should be both reflective of the pursuits, issues and achievements
for the period being reported and be predictive on future
directions and activity. It shall contain, as a minimum:
· a statement of the Organisation's goals or purposes;
· a summary of overall program activities by country or
region;
· the names, qualifications and experience of current members of
the Governing Body as well as those who served at any time during
the period being reported on;
· financial statements using the Code of Conduct Summary
Financial Report Format; and an audit opinion on the financial
statements, clearly identifying the auditor (name, company, address
and signature). (Reproduced from ACFID 2009a: 5-6, 14)
APPENDIX 2: FINANCIAL REPORT TEMPLATE FOR INCOME STATEMENT
ANALYSIS
ACFID Code of Conduct Categories (ACFID 2009b)
The Study’s Categories
Revenue
Income
Donations and Gifts
monetary & non-monetary
Fundraising Income
Legacies and bequests
Grants
AusAID, other Australian, other overseas
Grant Income
Investment Income
Investment Income
Other income
Other (Commercial) Income
Expenses
Expenses
Overseas projects
Funds to overseas projects, other project costs
Program Expenses
Domestic projects
Community education
Fundraising costs
Public, government, multilateral and private
Fundraising Expenses
Administration
Administration Expenses
Excess of revenue over expenses (shortfall) from continuing
operations
Surplus (Deficit)
APPENDIX 3: DISCLOSURES OF ADDITIONAL INFORMATION ABOUT
EXPENDITURE: NUMBER OF ORGANISATIONS, PLACE AND TOPIC OF
DISCLOSURES (see Figure 2 for bar graph representation)
Additional narrative information about …
Disclosures in Annual (Narrative) Report
Disclosures in Financial Statements
Disclosures in both Annual Report and Financial
Statements
No disclosures in either Annual Report or Financial
Statements
No. of entities
% of total
No. of entities
% of total
No. of entities
% of total
No. of entities
% of total
program expenditure
65
67.01%
53
54.64%
38
39.18%
17
17.53%
administration expenditure
41
42.27%
31
31.96%
17
17.53%
42
43.30%
fundraising expenditure
31
31.96%
25
25.77%
11
11.34%
52
53.61%
cost of fundraising
7
7.22%
14
14.43%
3
3.09%
79
81.44%
APPENDIX 4: LENGTH OF DISCLOSURES IN ANNUAL (NARRATIVE) REPORTS
AND FINANCIAL STATEMENTS (see Figure 3 for bar graph
representation)
Length of disclosure
Disclosures in annual (narrative) reports (n=97)
Disclosures in financial statements (n-97)
No. of entities
% of total entities
No. of entities
% of total entities
0
28
28.9%
40
41.2%
>0.5 page
36
37.1%
22
22.7%
0.6 – 1.0 page
18
18.6%
10
10.3%
1.1 – 1.5 pages
7
7.2%
9
9.3%
1.6 – 2.0 pages
0
0.0%
10
10.3%
>2.0 pages
8
8.3%
6
6.2%
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BIOGRAPHY OF AUTHORS
Christine Ryan
Chris Ryan is Professor and Head of the School of Accountancy,
Queensland University of Technology. She researches the
accountability implications for non profit organisations. She is on
the editorial advisory boards of Accounting, Auditing &
Accountability Journal, Pacific Accounting Review and Accounting
Research Journal. She a Fellow of CPA Australia and a member of the
Institute of Chartered Accountants in Australia. She currently
serves on the Queensland State Council of the ICAA.
Helen Irvine
Helen is a Professor at the School of Accountancy, Queensland
University of Technology, and is a CPA. Her research interests
include financial reporting and not-for-profit accounting. She is
on the editorial advisory board of Accounting, Auditing &
Accountability Journal and Australasian Accounting Business &
Finance Journal, and conducts ad hoc reviews for numerous other
journals.
Figure 1. Funding streams of the 97 organisations in the
study
Table 1. Range and diversity of expenditure patterns of the
sample
Ratio
Mean
Median
Standard Deviation
Range%
Low
High
Program expense (PER)
76.6%
81.5%
17.4%
0.0%
100.0%
Fundraising expense (FER)
6.1%
2.4%
8.0%
0.0%
36.5%
Administration expense (AER)
15.1%
10.4%
15.7%
0.0%
100.0%
Cost of fundraising (CoF)
12.8%
5.2%
19.4%
0.0%
111.0%
Table 2. Calculated expenditure efficiency ratios by annual
revenue, “outliers”, and organisations reporting zero fundraising
costs
Income group
No. of entities
Expenditure ratio means (%)
No. of entities[endnoteRef:19] [19: Two organisations were
identified in both the outlier and zero fundraising cost
categories, although reporting zero fundraising costs alone was not
sufficient to satisfy the three deviations either side of the mean
test we applied to identify outliers (see Tables 3 and 4). The two
organisations were in the $0-$250K and $1m-$5m income groups.]
Outliers
Zero fund-raising costs
PER
FER
AER
CoF
0-250K
15
72.3
3.5
24.2
4.4
1
9
250K-500K
5
87.5
2.7
9.8
3.1
0
2
500K-1m
16
78.0
3.0
16.0
9.4
1
3
1m-5m
30
74.4
5.2
17.3
11.6
2
5
5m-10m
11
81.2
5.5
9.9
23.2
1
0
>10m
20
78.1
12.6
8.3
19.5
2
1
Total
97
7
20
Figure 2. Disclosures of additional information about
expenditure: number of organisations, place and topic of
disclosures (see Appendix 3 for detailed figures)
Figure 3. Length of additional expenditure disclosures in annual
(narrative) reports and financial statements (see Appendix 4 for
detailed figures)
1
Table 3. Information and disclosures by identified ‘outlier’
entities (Note: expenditure ratio that identified the organisation
as an outlier is shaded)
Entity
Mission
Income Group
($)
Expenditure ratios (%)
Additional information disclosed in Annual Report or Financial
Statements
Page length of reports
Length of Disclosures (pages)
PER
FER
AER
CoF [endnoteRef:20] [20: Organisations A and D both reported
zero Fundraising Expense Ratios and zero Cost of Fundraising, and
are also included in Table 4, in the list of twenty organisations
that reported zero fundraising costs. However, they were not
identified as outliers because of this, but rather because they
reported a 100% Administration Expense Ratio and a 71.5%
Administration Expense Ratio respectively (see Table 3).]
A
Account-ability
0-250K
0
0
100
0
This member-based entity received 72% of its income from
members, with only 3.3% from donations, and no grants. There were
no additional disclosures to explain the high administration
expenditure.
23
0
B
Medical R & D
500K-1m
49
7.9
43.1
84.5
Income was from investments (75%), donations (15.2%), and grants
(7.3%). Even though the cost of fundraising was high, the
organisation provided no disclosures about its fundraising
expenditure.
19
<0.5
C
Anti Traffick-ing
1m-5m
83.9
7.6
8.5
86.6
70% of income came from grants and 8% from donations. The
narrative disclosure (<0.5 page) was of a general nature, with
no explanation of why the cost of fundraising might be 86.6%.
43
<0.5
D
Medical
1m-5m
28.5
0
71.5
0
71% of the income was from grants and 23% from memberships.
There was no explanation of the high administration expenditure, or
any other additional expenditure disclosures.
69
0
E
Medical
5m-10m
88.8
0.1
11.1
111
Income was from grants (50.6%), commercial (48.3%), investments
(1%) and a minuscule reliance on fundraising (0.1%). Despite the
high cost of fundraising ratio, there was no explanation of any
expenditures.
50
0
F
Refugee Program
>10m
52.7
36.4
10.9
53.1
Donations (70%) and grants (30%) made up the income. There were
some narratives about fundraising expenditure, mainly to explain
which programs benefited from various fundraising activities.
36
>2
G
Environ-mental
>10m
49.9
35.5
14.6
44.3
68% of the income was from donations. There were scant narrative
disclosures about expenditure, despite a two-line note in the
financial statements about the organisation’s recruitment of “new
supporters”.
45
<.0.5
Table 4. Expenditure disclosures of organisations reporting zero
fundraising expenditure
Entity
Mission
Income group ($)
% Fund-raising revenue[endnoteRef:21] [21: This represents the
percentage of total revenue derived from fundraising sources. We
have included all organisations’ donations income as a category of
Fundraising income. However, we acknowledge that some organisations
may have unsolicited donations, which, under some State fundraising
legislation, may not constitute fundraising income. ]
Additional information disclosed in Annual Report or Financial
Statements that may explain zero fundraising costs
H
Environ-mental
0-250K
9.9
Financial statements and annual report included the statement
that there was no single fund raising activity for a designated
purpose that generated 10% or more of total income for the year.
Donated funds were from a single corporate donor to purchase
equipment. PER 100%.
I
Sustain-ability
0-250K
72.7
Annual report notes postponement of some fundraising activities
due to the global financial crisis and plans for future fundraising
programs. Financial statements note no fundraising activities
subject to charitable fundraising legislation.
J
Develop-ment
0-250K
72.8
A donation from a regular donor comprised 85% of total donations
received.
A
Account-ability
0-250K
75.5
Financial statements note the organisation’s funding is mainly
from subscription revenue. Annual report notes that no single
fundraising activity for a designated purpose generated 10% or more
of total income.
K
Medical
0-250K
17.9
Financial statements and annual report included the statement
that there was no single fund raising activity for a designated
purpose that generated 10% or more of total income for the year;
donations and gifts include monetary and non-monetary items.
L
Human-itarian aid
0-250K
73.6
A series of spontaneous donations were received from individuals
and local businesses. Volunteers distributed donations made during
the year.
M
Medical
0-250K
79.4
The organisation receives the support of regular volunteers at
head office and corporate sponsors who raise funds on their
behalf.
N
Develop-ment
0-250K
62.0
Financial report specifically stated there were no fundraising
costs. Chairman's reported plans to institute a