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Connolly and Dhanani, 2009

Executive summary

This study builds on previous research relating to external charity reporting by using different approaches. Specifically, it presents two major contributions to the literature.

First, it is the first in-depth study of the form and content of the narrative element of charities' reporting documents. We know of no study that has attempted a detailed, multidimensional and systematic analysis of charity reports; recent content analytic studies in charity narrative reporting are partial in their approach, that is, they examine particular issues (such as performance reporting) or pre-selected index items. The application to charity reports of a methodology for documenting the attributes of narrative disclosures contained in corporate annual reports is a first within the not-for-profit literature.

Second, it offers insights into why charities choose to disclose (or not disclose) in their public reporting documents, by conducting interviews with those responsible for preparing the reporting package. In particular, the interviews provide insights into the perceived role of charity disclosure and the decisions made by charities in determining their disclosure policies. This allows us to understand the barriers to improving the transparency and accountability of charity reporting, thus supporting evidence-based policy making.

KEY FINDINGS

The interviews with key charity personnel highlighted that, consistent with stakeholder theory, charities recognise their duty and responsibility to account to their diverse stakeholder groups. There is general acceptance that charities are accountable to both their upward (funders, donors and supporters) and downward (beneficiary and client groups) stakeholders, and that other groups such as oversight agencies, the government and the public at large are also important. Charities, it appears, do not implicitly rely on their altruistic motives and 'doing good' to make up for such responsibilities. Therefore, it is disappointing that 36% of charities contacted did not fulfil their statutory obligation and provide a copy of their annual report upon request.

Although, in broad terms, annual reports and annual reviews may serve to discharge accountability to all stakeholder groups, the interviewees indicated that annual reports, apart from their statutory role, are aimed at upward stakeholders and the public at large (even if not read). In contrast, annual reviews are typically targeted at downward stakeholder groups, and the public as well. Charity websites appear to have a wider target audience and are directed at both upward and downward stakeholders. Increasingly, and perhaps unsurprisingly, the Internet is envisaged as being able to play a progressively more significant role in the communications strategy of charitable organisations, particularly as their 'window'/'shop front'. With reference to annual reports, the emphasis on upward stakeholders is to be expected since, consistent with the views of the ASB, charity supporters (existing and potential funders, which are akin to investors in the private sector) are interested in income generating and spending activities and the financial position of charities. Nevertheless, there is evidence that charities distinguish between different types of funders and supporters, and target specific audiences through different campaigning and communications strategies.

These results have important implications for the various initiatives developed to improve and take forward UK charity accountability. When compared with the findings of Connolly and Dhanani, who examined 2000/01 charity annual reports, the analysis of the 2005/06 annual reports included in this research suggests that accountability appears to have weakened over time, with this research finding lower disclosure levels for a significant proportion of the items examined under each of the three themes of accountability. This was despite an increase in the length of the annual reports over the same period and the precedence of narrative information over financial information. These changes may, in part, be explained by the fact that Connolly and Dhanani focused exclusively on fundraising charities, whereas this research examined both fundraising and non-fundraising charities. Fundraising charities are perhaps, in their drive to raise funds, more likely to account for their activities than non-fundraising charities. A cross-sectional analysis of the fundraising and non-fundraising charities included in this research, however, generated no statistically significant differences between these two groups of charities. An alternative reason for the changes may be that since 2000/01 charities are increasingly using mechanisms in addition to the annual report through which to discharge accountability. The consequence of this is that there is less emphasis on accountability through the annual report.

The analysis of the annual reports and annual reviews indicates that fiduciary and financial managerial accountability-type disclosures are more commonly found in annual reports, while the annual reviews, where available, focus principally on operational managerial accountability-type disclosures. As a result, annual reviews help to fill the operational managerial accountability gap identified in annual reports. Such practices appear to have continued despite similar observations by the Charity Commission and its recommendations to provide relevant accountability disclosures in annual reports, even if they appear elsewhere. When asked about these findings, the interviewees opined that the two documents essentially fulfil different functions and, consequently, their content is deliberately different. Specifically, annual reports are considered to be the 'grey' documents that are prepared for statutory purposes and are useful for larger donors. In contrast, annual reviews, which were often considered to be the more important of the two documents, are perceived as the more user-friendly documents that enable charities to 'tell their story'. The difference in function of the two documents appears to stem from two interrelated concepts.

1. A recognition of the different layers of accountability between two distinct upward stakeholder groups (ie between the larger donors and fund providers who, in accordance with the ASB, are likely to understand and interpret not only the financial statements but also the financial performance and position of charities, and the smaller supporters and volunteer groups, who may lack the necessary financial acumen to interpret detailed financial information).
2. A theory of communication that suggests that different types of publications and forms of media should be used for different audiences.

One consequence of the publication of both annual reports and annual reviews is the risk of a conflict between accountability and publicity, which is presumably what the Charity Commission was seeking to address by encouraging charities to include accountability-type information in annual reports, even if it was available elsewhere. Specifically, when charities use annual reviews alongside annual reports (or indeed the equivalent content in annual reports, where annual reviews are not produced), the content of the annual reviews often appears to be centred on what will make 'a good story' and 'an interesting read' rather than an objective, transparent account of developments within the organisation during the financial period. Consequently, charities appear to stray from the accountability agenda towards publicity where only the 'good news stories' are relayed.

In relation to operational accountability disclosures in both annual reports and reviews, activities-type information dominates and there is an absence of performance-type information. Indeed, 51% of the charities failed to provide performance-type information. Moreover, across all types of disclosure, the reporting of future or forward-looking information was extremely limited. The implications of this are, first, there may be an absence of systems to capture and subsequently report such information. Although, as the SORP only requires charities to disclose this information if it is measured, the disclosure levels do not necessarily reflect limited SORP compliance. Second, the absence of performance-type information and the focus on activities-based information suggests that charities seek to demonstrate the legitimacy of their activities to external stakeholders on the basis of the activities and projects in which they engage, rather than on the reported difference that they have made to the communities that they serve. In other words, charities appear to seek legitimacy for their actions on the basis of the nature of their work (ie charitable activities and projects) rather than from evidence of the resulting societal change. Indeed, the interviews corroborate this latter view, with several of the interviewees acknowledging that there was an information gap both internally, in terms of assessing performance, and externally, in terms of reporting it to external audiences. Nonetheless, there is evidence that some charities are seriously beginning to consider ways in which they may better report the 'impact' of their activities – a development that is to be welcomed.

In relation to website practices, only 4% of the charities did not have their own website. Most websites were professionally developed, with appropriate website presentation and Web page design, features that collectively enabled ease of use. These practices compare favourably with those in the corporate sector and are arguably better than those in the public sector, perhaps reflecting the constructive role that websites play in charity communication. Nonetheless, from a fiduciary perspective, exercised by presenting annual reports and disclosures in relation to governance practices on the Internet, practices are not universal and approximately one-third of the charities failed to upload their annual report onto their website. One possible explanation for this is that charities use the Web pages themselves as a means of communicating with external stakeholders rather than through these formal documents. Although this appeared to be the case in relation to activities-type information, for which almost all charities provided descriptions and discussions, disclosures in relation to governance-type activities were less prevalent. Although interviewees acknowledged the importance of the Internet, given the number of charities that failed to provide a copy of their annual report on their website and the limited managerial accountability information provided, it appears that charities are failing to fully use the potential of the Internet as a mechanism for discharging accountability.

These results have important implications for the various initiatives designed to improve charity accountability and take the sector forward. Specifically, the 2005 SORP, which raised the profile of the trustees' annual report, appears to have had limited impact on reporting practices. It may be that because the annual reports included in this research relate to financial periods shortly after the publication of the SORP, charities have not had sufficient time to embrace the recommendations fully. Similarly, the ImpACT Coalition and the 2006 Codes of Fundraising Practice , established by the Institute of Fundraising, were also in their infancy at the time of this research. Indeed, all the interviewees supported the Charity Commission as the regulator of the sector, and acknowledged that compliance with the SORP provided a level of credibility that would have otherwise been absent. Moreover, compliance was perceived as a benefit to both the individual organisations and the sector as a whole, and comparability within financial statements regarded as a useful tool for users. Finally, while accepting that the Guidestar UK and SIRs were not introduced specifically to influence the accountability content of annual reports and annual reviews, as broader drivers of charity accountability, the interviews reinforced the view that they do not influence accountability practice.

The content analysis of the annual reports of the respondent social enterprise organisations (SEOs), and the examination of their websites, suggests that their accountability practices are similar to those of charities. In the annual report, the emphasis is on disclosing the mission and vision of the organisation and the activities undertaken to help achieve these, together with details of good governance practices. Disclosures in relation to managerial accountability are deficient. Website practices support these findings as there is a tendency simply to relay organisational objectives and activities. Nevertheless, the websites, like those of charitable organisations, are well organised and designed, with the information being presented in a succinct and visually attractive manner.

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