related documents
RR75 - Credit Unions in the UK - A Study of their Structure, Growth and Accountability
ACCA Research Report No. 75
This summary outlines the major themes in this research report. It provides a background to the growth of the credit union movement and the importance of accountability. It also presents the objectives of the empirical studies, together with key findings for credit unions in Great Britain and Northern Ireland.
THE UK CREDIT UNION MOVEMENT AND ACCOUNTABILITY THROUGH THE ANNUAL REPORT
Credit unions are member-owned, voluntary, self-help democratic institutions that provide financial services to their members. As member-owned, not-for-profit organisations (NFPOs) they are value-driven and committed to serving the financial services needs of disadvantaged communities and individuals, many of whom have been abandoned by mainstream banking. Credit unions have a distinct economic and social philosophy. They are financial, co-operative institutions and their co-operative credentials encompass a number of attributes including open membership and democratic control. Equally, limited returns on share capital, with any surpluses belonging to members, are also indispensable defining features. The role of education, so that members can exercise real control of their co-operative, is similarly essential to co-operative identity.
The UK credit union industry is relatively young, with a large number of new formations over the course of the last decade. Currently, there are nearly 1000 credit unions in the UK, of which approximately half have been established in the last 10 years. Total assets of these organisations are in excess of £500 million, with a membership base in the region of 525,000. 85% of UK credit unions have an asset level below £1 million, while only eight percent have assets in excess of £2 million. However, in terms of membership, 50% of the total membership of the UK movement is located in these large credit unions (those with assets greater than £2 million), while only 34% of the membership is located in the smaller credit unions (those with assets below £1 million).
Credit unions are accountable to various stakeholders, particularly members. Accountability can be viewed in terms of being answerable for one’s conduct and responsibilities. Accounting information can provide an important and regular mechanism through which major aspects of accountability are discharged, especially through the medium of the annual report. The provision of both financial and non-financial information, including wider social performance information, to discharge accountability is important for a number of reasons. Users of such information require it to make judgements and decisions that impact on economic and social wellbeing. It gives a visibility to the resources, activities and achievements of an organisation, thus enabling informed discussions and decisions. Moreover, the need to discharge accountability encourages management to concentrate on the issues that are of importance to those stakeholders who are outside the immediate management of the organisation and who often provide the resources for the organisation to function.
THE EMPIRICAL STUDIES
The objectives of the empirical studies included in this research report were:
In judging financial accountability, the focus was on the quality of financial statements, judged in terms of the provision of financial information published using appropriate GAAP. While there is no definitive list of the principles that are appropriate for credit unions in the UK, issues were selected by reference to legislative requirements, and research studies in the specific credit union sector and other not-for-profit sectors. Because of the underdeveloped nature of research into financial reporting by credit unions, a fairly broad-brush approach was used. In a sense, the items of information selected as the basis for analysis (‘basic items’ of information) represented a normative model of credit union financial reporting. With respect to a wider social-performance perspective, credit unions are NFPOs and have social objectives. The achievement of these, which may be extremely important to a range of stakeholders, including members, can rarely, if ever, be measured in financial statements. The extent to which ‘other information’, including wider social-performance information, was disclosed in annual reports was identified. The information received was analysed to identify the types of information, other than traditional financial information, that were frequently and routinely made available to members through annual reports. In total, 18 different information types that were frequently disclosed, consisting of six committee reports and 12 other information types, were separately identified.
We analysed 120 annual reports of credit unions to ascertain both the quality of the financial statements and the types of information, other than traditional financial information, that were frequently and routinely made available to members through annual reports. The analysis was undertaken between jurisdictions (Great Britain and Northern Ireland) and across three size-related classifications (large, medium and small credit unions). In addition, in order to obtain a more in-depth understanding of the issues, a series of interviews with key stakeholders was undertaken, focusing on the accountability of credit unions through the medium of the annual report. The main findings of the research were as follows.
UK CREDIT UNION REPORTS LACK QUALITY
This research suggests that, at present, accountability, in both financial and non-financial terms, including that relating to wider social accountability, is weak. For instance, when focusing on the quality of financial statements, it was found that the disclosure of 16 fairly basic items of information was, at best, patchy. Moreover, in terms of the disclosure of 18 ‘other information’ types, the majority of which were required either for annual return, trade association rule or legislation-related purposes, the situation was significantly worse. Such a situation may undermine the ability of users, particularly members, to make appropriate judgements and decisions. Given that the powers of direct interrogation by members of credit unions are limited, such weaknesses can disadvantage them. However, it is suggested that without external pressure there may be inadequate incentive for credit unions to change existing reporting practices. Appropriate guidance, provided by the trade associations or by the accounting profession, would help considerably. Without this help for preparers and auditors of accounts, the dangers of misrepresentation, misunderstanding and fraud are increased. The widespread adoption of suitable guidance would also provide for greater confidence in the control processes within credit unions, which may be a desirable (or indeed necessary) condition for further growth of the sector.
Multiple accountability confusion, and limited resources and expertise may be possible explanations of low quality reports
The substantial non-disclosure of fairly basic and fundamental information in the annual reports of credit unions may be related to the problem of credit unions having multiple accountabilities and being confused as to priorities and the information needs of particular stakeholders. It is possible that accountability to the FSA or the Registrar through the need to complete the annual return, which demands fairly significant information provision, may take priority over providing information to members and others through the annual report. In addition, UK credit unions, which in the main are in the transition stage of development and run primarily by unpaid volunteers with no particular training in detailed accounting matters, may lack the resources and expertise to be proactive in the provision of comprehensive information. Whereas the FSA and the Registrar may be perceived as having formal authority with respect to the completion of the annual return, the relatively weak position of individual users may lead to few, if any, concerted calls for improvements in annual reports.
Little difference in financial accountability with respect to size and jurisdiction
Overall, there are very few significant differences in the quality of financial reporting between GB and NI credit unions, and between credit unions of different sizes. In terms of jurisdiction it might have been expected that because of the greater maturity of the sector in Northern Ireland and the larger average organisation size, accounting practice would have been of a higher quality. However, with respect to all 16 items of financial information analysed, there was little evidence that this was the case.
More pronounced differences in wider accountability with respect to size and some with respect to jurisdiction
With respect to ‘other information’, including wider social performance information, there were fairly significant differences. With respect to all 18 items of ‘other information’, disclosure was more extensive in Northern Ireland than in Great Britain, and by larger credit unions than smaller ones. Overall, the results appear to suggest a more accountable credit union sector in Northern Ireland. This greater disclosure may be driven by the Irish League of Credit Union (ILCU), which is motivated by the fact that committee-report information (aspects of which were included in the ‘other information’ analysed) has greater statutory backing in the Republic of Ireland where most ILCU credit unions are located. This impact appears to permeate the reporting of ILCU credit unions in Northern Ireland.
When size was the focus for analysis, and jurisdiction was ignored, evidence was found of more extensive disclosure among the large and medium credit unions when compared with small ones. Overall, with respect to the 18 items of ‘other information’, the results suggest that larger credit unions demonstrate a much broader sense of accountability, including wider social accountability.
‘Regulators’ dissatisfied with current reporting and encouraging change
A number of ‘Regulators’ saw current annual reports as deficient in meeting the information needs of members and argued for a radical rethink of information content and form of presentation. In general, they demonstrated a positive view of the potential of the annual report as a medium through which accountability could be discharged, and saw it as a means for effective and direct communication between the credit union and its members. In addition, the ‘Regulators’ viewed both financial information and ‘other information’, particularly relating to a wider social accountability and governance, as important. Such emphases stress the need for more member-focused annual reports, and possibly a reduction in prominence of audited financial statements in such reports. Perhaps the broader remit of ‘Regulators’ within the credit union movement, and their detachment from the routine minutiae of administering a credit union, explained such views.
‘Managers’ view the annual report as having limited importance
Most ‘Managers’ perceive that the annual report is rarely read by, and of limited interest to, members of the credit union. To some extent, these perceptions provide some explanation of the state of credit union reporting via the annual report. The interviews depicted reporting by credit unions that was constrained by convention; reactive rather than proactive; and often relied too much on accountants and auditors for direction. While notable exceptions were identified, most credit union ‘Managers’ displayed a lack of motivation, perhaps because of limited resources, in changing reporting practices. Given that ‘Managers’ have some influence regarding the contents of annual reports, perceptions of a lack of readership or understanding by members could, at the very least, lead to an ambivalent attitude as to the importance of such documents. Most ‘Managers’ expressed a desire to improve reporting to members, but there was little evidence in the interviews that significant changes had occurred in the recent past, possibly suggesting that major future changes are unlikely without external intervention.
Changes are needed
Overall, the research included in this report is the first major piece of work on the accountability of credit unions in the UK. It suggests that the quality of reporting through annual reports by credit unions is mixed and, because of this, the potential for adverse consequences, including inefficiency, a lack of member-interest focus and, possibly, fraud, is increased. Indeed the increasing number of credit unions in Great Britain experiencing financial difficulties might suggest that change is needed. The credit union movement in the UK is, to some extent, at a crossroads, with the FSA assuming responsibility for the financial regulation of the sector in Great Britain. It is likely that the FSA will place more emphasis on detailed reporting by credit unions, in line with the requirements that the FSA already places on other financial institutions. It would be a pity if this only translates into the detailed reporting of largely financial data to a regulatory body. This research has demonstrated that this, however laudable it may be, will not encourage stakeholders (with the exception of the regulator) to become involved in monitoring, reviewing and engaging with the credit union. Given that credit unions are member-owned and member-run co-operative organisations, which emphasise self-determination and democratic principles, it would seem essential that improved accountability to members be encouraged through the production of member-focused annual reports. This in turn will maintain confidence in the movement. Indeed, such improvements could be viewed as a necessary condition for stability and growth of the sector. However, without guidance, possibly provided by the trade association(s), supported by the FSA, Registrar(s) and accounting bodies, it is likely that the present poor state of credit union reporting will continue.
Hyndman, McKillop, Ferguson and Oyelere, 2002
Executive summary
This summary outlines the major themes in this research report. It provides a background to the growth of the credit union movement and the importance of accountability. It also presents the objectives of the empirical studies, together with key findings for credit unions in Great Britain and Northern Ireland.
THE UK CREDIT UNION MOVEMENT AND ACCOUNTABILITY THROUGH THE ANNUAL REPORT
Credit unions are member-owned, voluntary, self-help democratic institutions that provide financial services to their members. As member-owned, not-for-profit organisations (NFPOs) they are value-driven and committed to serving the financial services needs of disadvantaged communities and individuals, many of whom have been abandoned by mainstream banking. Credit unions have a distinct economic and social philosophy. They are financial, co-operative institutions and their co-operative credentials encompass a number of attributes including open membership and democratic control. Equally, limited returns on share capital, with any surpluses belonging to members, are also indispensable defining features. The role of education, so that members can exercise real control of their co-operative, is similarly essential to co-operative identity.
The UK credit union industry is relatively young, with a large number of new formations over the course of the last decade. Currently, there are nearly 1000 credit unions in the UK, of which approximately half have been established in the last 10 years. Total assets of these organisations are in excess of £500 million, with a membership base in the region of 525,000. 85% of UK credit unions have an asset level below £1 million, while only eight percent have assets in excess of £2 million. However, in terms of membership, 50% of the total membership of the UK movement is located in these large credit unions (those with assets greater than £2 million), while only 34% of the membership is located in the smaller credit unions (those with assets below £1 million).
Credit unions are accountable to various stakeholders, particularly members. Accountability can be viewed in terms of being answerable for one’s conduct and responsibilities. Accounting information can provide an important and regular mechanism through which major aspects of accountability are discharged, especially through the medium of the annual report. The provision of both financial and non-financial information, including wider social performance information, to discharge accountability is important for a number of reasons. Users of such information require it to make judgements and decisions that impact on economic and social wellbeing. It gives a visibility to the resources, activities and achievements of an organisation, thus enabling informed discussions and decisions. Moreover, the need to discharge accountability encourages management to concentrate on the issues that are of importance to those stakeholders who are outside the immediate management of the organisation and who often provide the resources for the organisation to function.
THE EMPIRICAL STUDIES
The objectives of the empirical studies included in this research report were:
- to conduct a critical analysis of recent annual reports of credit unions, from both a financial-accountability perspective and from a wider social-performance perspective
and
- to identify the perceptions of key stakeholders (‘Managers’ and ‘Regulators’) with respect to the discharge of accountability by credit unions.
In judging financial accountability, the focus was on the quality of financial statements, judged in terms of the provision of financial information published using appropriate GAAP. While there is no definitive list of the principles that are appropriate for credit unions in the UK, issues were selected by reference to legislative requirements, and research studies in the specific credit union sector and other not-for-profit sectors. Because of the underdeveloped nature of research into financial reporting by credit unions, a fairly broad-brush approach was used. In a sense, the items of information selected as the basis for analysis (‘basic items’ of information) represented a normative model of credit union financial reporting. With respect to a wider social-performance perspective, credit unions are NFPOs and have social objectives. The achievement of these, which may be extremely important to a range of stakeholders, including members, can rarely, if ever, be measured in financial statements. The extent to which ‘other information’, including wider social-performance information, was disclosed in annual reports was identified. The information received was analysed to identify the types of information, other than traditional financial information, that were frequently and routinely made available to members through annual reports. In total, 18 different information types that were frequently disclosed, consisting of six committee reports and 12 other information types, were separately identified.
We analysed 120 annual reports of credit unions to ascertain both the quality of the financial statements and the types of information, other than traditional financial information, that were frequently and routinely made available to members through annual reports. The analysis was undertaken between jurisdictions (Great Britain and Northern Ireland) and across three size-related classifications (large, medium and small credit unions). In addition, in order to obtain a more in-depth understanding of the issues, a series of interviews with key stakeholders was undertaken, focusing on the accountability of credit unions through the medium of the annual report. The main findings of the research were as follows.
UK CREDIT UNION REPORTS LACK QUALITY
This research suggests that, at present, accountability, in both financial and non-financial terms, including that relating to wider social accountability, is weak. For instance, when focusing on the quality of financial statements, it was found that the disclosure of 16 fairly basic items of information was, at best, patchy. Moreover, in terms of the disclosure of 18 ‘other information’ types, the majority of which were required either for annual return, trade association rule or legislation-related purposes, the situation was significantly worse. Such a situation may undermine the ability of users, particularly members, to make appropriate judgements and decisions. Given that the powers of direct interrogation by members of credit unions are limited, such weaknesses can disadvantage them. However, it is suggested that without external pressure there may be inadequate incentive for credit unions to change existing reporting practices. Appropriate guidance, provided by the trade associations or by the accounting profession, would help considerably. Without this help for preparers and auditors of accounts, the dangers of misrepresentation, misunderstanding and fraud are increased. The widespread adoption of suitable guidance would also provide for greater confidence in the control processes within credit unions, which may be a desirable (or indeed necessary) condition for further growth of the sector.
Multiple accountability confusion, and limited resources and expertise may be possible explanations of low quality reports
The substantial non-disclosure of fairly basic and fundamental information in the annual reports of credit unions may be related to the problem of credit unions having multiple accountabilities and being confused as to priorities and the information needs of particular stakeholders. It is possible that accountability to the FSA or the Registrar through the need to complete the annual return, which demands fairly significant information provision, may take priority over providing information to members and others through the annual report. In addition, UK credit unions, which in the main are in the transition stage of development and run primarily by unpaid volunteers with no particular training in detailed accounting matters, may lack the resources and expertise to be proactive in the provision of comprehensive information. Whereas the FSA and the Registrar may be perceived as having formal authority with respect to the completion of the annual return, the relatively weak position of individual users may lead to few, if any, concerted calls for improvements in annual reports.
Little difference in financial accountability with respect to size and jurisdiction
Overall, there are very few significant differences in the quality of financial reporting between GB and NI credit unions, and between credit unions of different sizes. In terms of jurisdiction it might have been expected that because of the greater maturity of the sector in Northern Ireland and the larger average organisation size, accounting practice would have been of a higher quality. However, with respect to all 16 items of financial information analysed, there was little evidence that this was the case.
More pronounced differences in wider accountability with respect to size and some with respect to jurisdiction
With respect to ‘other information’, including wider social performance information, there were fairly significant differences. With respect to all 18 items of ‘other information’, disclosure was more extensive in Northern Ireland than in Great Britain, and by larger credit unions than smaller ones. Overall, the results appear to suggest a more accountable credit union sector in Northern Ireland. This greater disclosure may be driven by the Irish League of Credit Union (ILCU), which is motivated by the fact that committee-report information (aspects of which were included in the ‘other information’ analysed) has greater statutory backing in the Republic of Ireland where most ILCU credit unions are located. This impact appears to permeate the reporting of ILCU credit unions in Northern Ireland.
When size was the focus for analysis, and jurisdiction was ignored, evidence was found of more extensive disclosure among the large and medium credit unions when compared with small ones. Overall, with respect to the 18 items of ‘other information’, the results suggest that larger credit unions demonstrate a much broader sense of accountability, including wider social accountability.
‘Regulators’ dissatisfied with current reporting and encouraging change
A number of ‘Regulators’ saw current annual reports as deficient in meeting the information needs of members and argued for a radical rethink of information content and form of presentation. In general, they demonstrated a positive view of the potential of the annual report as a medium through which accountability could be discharged, and saw it as a means for effective and direct communication between the credit union and its members. In addition, the ‘Regulators’ viewed both financial information and ‘other information’, particularly relating to a wider social accountability and governance, as important. Such emphases stress the need for more member-focused annual reports, and possibly a reduction in prominence of audited financial statements in such reports. Perhaps the broader remit of ‘Regulators’ within the credit union movement, and their detachment from the routine minutiae of administering a credit union, explained such views.
‘Managers’ view the annual report as having limited importance
Most ‘Managers’ perceive that the annual report is rarely read by, and of limited interest to, members of the credit union. To some extent, these perceptions provide some explanation of the state of credit union reporting via the annual report. The interviews depicted reporting by credit unions that was constrained by convention; reactive rather than proactive; and often relied too much on accountants and auditors for direction. While notable exceptions were identified, most credit union ‘Managers’ displayed a lack of motivation, perhaps because of limited resources, in changing reporting practices. Given that ‘Managers’ have some influence regarding the contents of annual reports, perceptions of a lack of readership or understanding by members could, at the very least, lead to an ambivalent attitude as to the importance of such documents. Most ‘Managers’ expressed a desire to improve reporting to members, but there was little evidence in the interviews that significant changes had occurred in the recent past, possibly suggesting that major future changes are unlikely without external intervention.
Changes are needed
Overall, the research included in this report is the first major piece of work on the accountability of credit unions in the UK. It suggests that the quality of reporting through annual reports by credit unions is mixed and, because of this, the potential for adverse consequences, including inefficiency, a lack of member-interest focus and, possibly, fraud, is increased. Indeed the increasing number of credit unions in Great Britain experiencing financial difficulties might suggest that change is needed. The credit union movement in the UK is, to some extent, at a crossroads, with the FSA assuming responsibility for the financial regulation of the sector in Great Britain. It is likely that the FSA will place more emphasis on detailed reporting by credit unions, in line with the requirements that the FSA already places on other financial institutions. It would be a pity if this only translates into the detailed reporting of largely financial data to a regulatory body. This research has demonstrated that this, however laudable it may be, will not encourage stakeholders (with the exception of the regulator) to become involved in monitoring, reviewing and engaging with the credit union. Given that credit unions are member-owned and member-run co-operative organisations, which emphasise self-determination and democratic principles, it would seem essential that improved accountability to members be encouraged through the production of member-focused annual reports. This in turn will maintain confidence in the movement. Indeed, such improvements could be viewed as a necessary condition for stability and growth of the sector. However, without guidance, possibly provided by the trade association(s), supported by the FSA, Registrar(s) and accounting bodies, it is likely that the present poor state of credit union reporting will continue.