Mandatory performance reporting for charities

Out with annual financial reports and in with the more comprehensive performance reports.  Why this mandatory change for registered charities and what does it mean?

I was away tramping in the lovely South Island with a friend recently and amongst our 8 hour walking days through some demanding but fantastic country we got to talking about many things.  This included charities.  My tramping buddy, a very generous chap in many respects (except in the cracking walking pace he always sets), and knowing that I have a bit to do with charities posed the question; How can I tell if a charity is doing good and deserves my support?    As it often is, his contextualizing of the question was even more illuminating in that he explained:  “I’m a busy person.  I want to ensure my support goes to worthy, efficient, and effective organisations but how can I easily tell if they are really delivering on their purpose?  I sometimes worry that the charities I hear the most about may just be using my entire donation in marketing themselves rather than delivering good.”

Really good questions and I believe possibly common ones of many thoughtful donors and potential donors.

Pleasingly I was able to inform my fleet footed friend that New Zealand is on the cusp of a charity reporting revolution to help address exactly his concern.  (I briefly contemplated explaining that this revolution actually relates to Public Benefit Entities (PBEs) rather than just the subset that is registered charities, but I thought better of it knowing that he already thinks of accountants as something akin to train spotters without throwing any more acronyms into the mix!).   I was also able to report that we are leading the world in this innovative reporting being imposed.

So what is happening?

Hopefully by now most involved with registered charities in New Zealand will be aware that, thanks to legislative change and the initiatives of the External Reporting Board, for periods beginning 1 April 2015 registered charities will be required to follow new reporting standards.

However it is in the detail of these new reporting standards for Public Benefit Entities that the magic happens. (At least for tier 3 & 4 entities).  Changes are however also coming for tiers 1 & 2 PBEs)  Rather than just requiring entities to provide an annual financial report with details of their income and expenditure and assets and liabilities, they are instead also required to provide information about the entity, why it exists, what it set out to achieve, and what it actually achieved.

This makes great sense.  Unlike a profit seeking company, the success of a PBE is not easily measured by whether it made a surplus or a deficit.   While a statement of financial performance is important hygiene information that can be a measure of activity and sometimes financial efficiency, it doesn’t help assess whether a PBE organisation is actually delivering on its purpose.

Hence the changed requirement for PBEs to provide a more comprehensive Performance Report instead of just an annual financial report.

What is a performance report?

It is designed for those users who cannot require the entity to disclose the information needed for accountability and decision making.  Most users of a PBEs performance report will fall into two groups:

  1. providers of resources to the entity i.e. funders, donors etc
  2. recipients of services from the entity

While the performance report will still contain much of the accounting information that annual reports used to contain, it goes further in that it also requires some crucial entity information explaining what the entity is, and why it exists.  It will also require performance information which will generally be a mix of qualitative and quantitative reporting.

The fundamental aims of this new style of reporting is to enable stakeholders to better assess an entity’s performance and to improve the quality and consistency of reporting.

Benefits of performance reporting;

There is a saying that you get more of what you focus on.  Performance reporting is designed to help focus the entity on reporting on its raison d’etre, it’s reason for being. As anyone who has ever been to a meeting where financial reports are discussed and heard some minor amount like the telephone expenses queried will attest – giving people lots of financial detail often is counterproductive to focusing on the important matters.   Rather than focusing on a lot of the detail the performance report essentially requests PBEs to report on their KPIs (key performance indicators).  That is, those key measures that show whether the organisation is achieving its aims or not.

An organisation with a clear vision and mission that is then further expanded into a strategic plan with KPIs or other milestone targets should have little difficulty in providing a valuable performance report.   And hopefully by forcing entities to consider their outputs and outcomes we should see better focus on the things that really matter towards achieving their purpose.

What are the challenges likely to be?

  • This is new and it is a change and that is always challenging until it becomes the norm.
  • There is no “one size fits all template”. Organisations will need to think about what are the key performance measures they should report.  Good quality clear strategic plans will make this easier.
  • There may be the need for new reporting systems to be implemented to easily and accurately capture the performance information to be reported.
  • Presenting the information in a concise and easily understandable manner will be key.

Initially we expect much of the reporting to be output reporting but the quality will improve when organisations are able to able to accurately measure and report outcomes.

Finally, for the very small percentage of charities that, to be frank, are not delivering good outputs/outcomes for the cost of running their organisations (i.e. “not providing bang for their buck” argument), this may be very challenging indeed and this new reporting may highlight these inadequacies and need for strategic changes in that organisation.

And what about audit?

If the entity is subject to audit then this information will have to be audited.  Hence for many PBEs this entire performance report will also require to be audited.  That is, the auditors will also have to opine over the entity and performance report information as well as the other financial information.

This may be challenging to some auditors initially who may not have experience with auditing non-financial information.  However the fundamentals of audit approach are the same; the auditor will need to understand and then test to assess the accuracy of the systems used to record the performance information reported.

This will of course mean some additional audit time and cost will be required.

So back to my tramping buddy I was able to leave him with my positive view that we are moving to a much better place in New Zealand in the next few years with regard to him being able to more easily assess how well a charity is delivering on its purpose.  After some teething issues we should have much better consistency of reporting and he should to be able to compare results between charities more easily.  And then we both had to stop talking as a mountain pass became our sole focus…

Footnote: I have been fortunate to be able to discuss some recent early adopter tier 3 sets of financial statements with a couple of significant philanthropic funding teams.  Very pleasingly the consensus view has been that the new tier 3 format with its additional entity information and other non-financial information content made these a far more useful information source to the funders.  Well done to the XRB!

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Craig Fisher