Financial Accountability d Mana.pment, 8(1), Spring 1992, 0267-4424 $2.50

THE IMPACT OF SORP2 O N THE UK CHARITABLE SECTOR: AN EMPIRICAL STUDY

ANTHONY HINES A N D MICHAEL JOHN JONES*

INTRODUCTION

Charities and voluntary organisations represent an increasingly important sector of the British economy. There are now over 175,000 charities registered with the Charity Commission in England and Wales (Charities Aid Foundation, 1990, p. 6). This excludes Scottish and other charities (such as churches and universities) which are exempt from compulsory registration and a large number of charities which have not registered. From approximately E7bn in 1980 (Charities Aid Foundation, 1987), the sector’s income had risen to about E15bn in 1989 (Accountancy, July 1989, p. 16), equivalent to approximately E8.7bn at 1980 prices, an increase in real terms in excess of 20 per cent.

However, despite their economic importance, there has been comparatively little attention paid to the provision of an adequate monitoring and control system, which would enable the performance of individual charities to be effectively evaluated and inter-charity comparisons to be made (see, for example, Smith, 1990). External financial reporting, in particular, has been characterised by a diversity of accounting practices and a paucity of accounting guidelines. The traditional lack of regulation within the charity sector has, however, been challenged recently. In May 1988, the introduction of SORPZ (Statement of Recommended Accounting Practice 2) brought a measure of authoritative guidance to the sector (ASC, 1988a).

SORPZ is thus a watershed in the development of accounting practices within the charity sector. It was a major attempt to ‘improve the quality of financial reporting’ within the charity sector and to reduce ‘the (current) diversity in accounting practice and presentation’ (ASC, 1988a).

A i m

This paper contains a longitudinal study of large charities’ reporting practices from 1988-90. Its main purpose is to assess whether or not SORPZ actually did have a significant impact upon the accounting practices of UK charities immediately after its introduction. The focus on SORPZ will further enable

*The authors are respectively, Senior Lecturer in Accounting at Portsmouth Polytechnic Business School; and Lecturer in Accounting at Cardiff Business School. They would like to thank Ken Ashford, Vivien Beattie, Roger Hussey, Maurice Pendlebury and Adrian Randall for their help and encouragement in writing this article. The paper also benefited considerably from the detailed comments of the anonymous referee.

49

50 HINES AND JONES

an evaluation to be made of the effectiveness of non-mandatory regulation in general, and may also give some insights into the role that accounting recommendations play in accounting change.

Structure

The paper is structured as follows. The next section outlines the historical background and context within which SORP2 was developed. The third section first investigates two prior studies into the impact of SORP2 on charities’ accounting practices and then explores possible parallels with the non- mandatory International Accounting Standards (IASs). The fourth section outlines the research methods employed in the study. The fifth section presents the main findings, which are discussed in the sixth section. The final section sets out the conclusion and some policy implications.

HISTORICAL BACKGROUND

From the early nineteenth century, voluntary, philanthropic and charitable organisations have flourished in the UK (Morris, 1955; Prochaska, 1990; and Morris, 1990), especially those concerning health and education (e.g. Berdahl, 1959; Sutherland, 1990; and Berridge, 1990). Surprisingly, therefore, there is no precise legal definition of a charity.

Indeed, successive governments seem to have been reluctant to legislate on charities. Up until 1960, the Charities Division of the Inland Revenue remained the sole arbiter of charitable status. The 1960 Charities Act transferred this power to determine prima facie registrable status to the Charity Commissioners. It also introduced the first general accounting provisions for charities. The 1960 Charities Act and accompanying Charities Statement of Account Regulation 1960 (S = 1960, No. 2425) required all English and Welsh charities to keep proper books of account and to prepare consecutive income and expenditure accounts and balance sheets. In particular, there were very general provisions relating to a charity’s assets, liabilities, receipts and payments. Charities with permanent endowments had to tile accounts with the Charity Commissioners. There was no general requirement for an audit.

The 1960 Act thus outlined a broad legislative framework, with respect to financial reporting, within which charities should operate. It still applies thirty- one years later. Other legislation, such as the 1985 Act, is largely inconsequen- tial with respect to financial reporting. More specific requirements may be placed on some charities if they are companies or were set up by Royal Charter or Act of Parliament. For example, the 1985 Companies Act requires those charities which are limited companies to prepare an income and expenditure account, balance sheet, supporting notes, a directors’ report and an auditors’ report.

THE IMPACT OF SORP2 ON UK CHARITIES

Table 1

51

Chronology

1960 1981 1981 1984 1985 1985 1987 1988 I988

1988 1988

1988

1989

1990 1991

Charities Act, accompanied by Charities Statement of Account Regulation ‘Charities’, an auditing guideline (APCAG) Bird and Morgan-Jones Research Report, ‘Financial Reporting by Charities’ Accounting by Charities: A Discussion Paper (ASC) Charities Act ED 38, Accounting by Charities (ASC) Efficiency Scrutiny of the Supervision of Charities (Woodfield Report) February, Monitoring and Control of Charities in England and Wales (PAC) May, SORPB, Accounting by Charities (ASC) and Accounting by Charities: A Guideline for the Smaller Charity (ASC) August, Charity Accounts - Consultation Paper (Charity Commissioners) Summer, The Regulation of Charitable Appeals in England and Wales, Home Ofice Consultation Paper July, Supervision of Charities in Scotland: A Consultative Memorandum, Scottish Home and Health Department October, Charities in Scotland: Framework for Supervision, Scottish Home and Health Department Law Reform Act (Miscellaneous Provision, Scotland) March, Monitoring and Control of Charities in England and Wales (PAC)

The lack of further substantive legislation since 1960 is notwithstanding frequent criticisms of the 1960 Act. The Woodfield Proposals (Efficiency Scrutiny of the Supervision of Charities 1987) advocated that the 1960 Charities Act should be repealed and that there should be more stringent penalties, such as deregistration, for charities failing to submit accounts. The Public Accounts Committee (PAC, 1988) maintained that submission requirements were largely ignored by registered charities; that only a third of submitted accounts had been audited; and that the Charity Commission lacked financial expertise and resources. The PAC recommended that all possible and practicable steps not requiring legislation should be taken by the Commission to secure the necessary improvements. Since these criticisms, a governmentally instigated consultation paper (Home Of ice , 1988), a Charities White Paper (Home Office, 1989) and a Charity Commission consultation paper (August, 1988) have been published for England and Wales. In March 1991, the PAC again pointed out the slow level of improvement under current legislation. In Scotland, the Law Reform Act (Miscellaneous Provision, Scotland, 1990) has implemented two earlier consultative memoranda (Scottish Home and Health Department, 1988; 1989) bringing Scottish practice broadly in line with that of the English post-1960 Charities Act situation. However, despite frequently repeated calls in the popular press and in Parliament for legislation in England and Wales, none had been forthcoming up to the time of writing, Autumn 1991 (see, for example, Spink, 1988; Cardwell, 1990; Accountancy Age, 1990b; Randall, 1989 and

52 HINES AND JONES

1990; and Smith, 1990). Overall, the regulatory framework, within which the charities sector operates, remains a tripartite relationship between the state, national associations and the voluntary sector, with self-regulation being largely the order of the day (Wilson and Butler, 1985).

It is against this general lack of legislative involvement in the charity sector that the Accounting Standards Committee initiatives, which culminated in SORP2, should be considered. In the absence of detailed state accounting regulation, SORP2 represents the most realistic benchmark against which charities can be measured. There were four principal stages in its development: an ICAEW research report (Bird and Morgan-Jones, 1981); a discussion paper, ‘Accounting by Charities’ (ASC, 1984); ED 38 (ASC, 1985) in November 1985; and SORP2 (ASC, 1988a) in May 1988 (Hyndman and Kirk, 1988). The terms of reference of the Bird and Morgan-Jones report were:

to make a critical survey of the published accounts of charities, seeking to identify their reporting objectives and the problems that arise in trying to fulfil these objectives.

Their critical survey, and the subsequent Institute discussion paper (ASC, 1984), identified major differences between charities in respect of a variety of technical issues (such as the treatment of fixed assets) and also recommended new accounting principles. These were developed and elaborated by ED 38 (ASC, 1985) and SORP2 (ASC, 1988).

The broad aims of SORP2 were ‘to help improve the quality of financial reporting by charities’ and to reduce ‘the current diversity in accounting practice and presentation although the intention (was) not to standardise them’. SORP2 began by-defining the purpose of a charity’s annual report as to:

provide timely and regular information on the charity, enabling the user of the report to gain an understanding of the charity’s operations and achievements and a full appreciation of the charity’s transactions during the period and of its position at the year end. (SORP2, para. 1 )

The general thrust of SORP2 was to extend to charity accounting normal commercial principles, as encapsulated in relevant SSAPs. This continued the thinking of Bird and Morgan-Jones (1981) and the ASC Discussion Paper (1984). It was also complementary to the auditing position as set out in the Auditing Guideline on Charities (APCAG, 1981). This allowed the auditors of individual charities to judge the general appropriateness of accounting standards (although SSAP2 was prescribed). The ASC (1988b) issued special guidance on SORP2 for smaller charities.

In particular, SORP2 recommended the use of the accruals basis of account- ing. Generally, this was in line with the mainstream thinking of the not-for- profit sector (see, for example, Henke, 1988; Glynn, 1987; and Bryan, 1980). There was, though, little detailed discussion in either SORP2, or the 1984 ASC Discussion Paper, of a number of questions which have exercised accounting theorists with an interest in this sector. These include asking (1) whether commitment, cash or accruals accounting is the most applicable to charities

THE IMPACT OF SORPS O N UK CHARITIES 53

(Jones and Pendlebury, 1984), (2) whether ‘full’ accruals or ‘modified’ accruals is the superior method of recording charities’ results (e.g. Anthony, 1980), and (3) whether or not fixed assets should be capitalised and depreciated (Anthony, 1978 and 1980).

The main general recommendations of SORP2 were that the annual report of a charity should contain legal and administrative details, the trustees’ report and the accounts (para. 19). The accounts, to be prepared on the accruals basis, were normally to comprise six main elements: an income and expenditure account; a balance sheet; a source and application of funds statement; an explanation of accounting policies; details of fund movements; and explanatory notes (para. 24).

SORP2 made many more specific recommendations. A number of the common practices, identified by Bird and Morgan-Jones (1981), failed to fulfil the accruals convention, and distorted the ‘income’ for the year. The recorn- mendations in SORP2 were designed to correct this (Table 2 illustrates some

Table 2 Some Problems and Solutions of Charity Accounting

Problem

1. Many charities credited legacies directly to reserves or split them between revenue and reserves.

2. Many charities dealt with profits or losses on the disposal of investments and fixed assets in reserves.

3. Some charities wrote off all fixed assets immediately on acquisition.

4. The treatment of administration and fund-raising costs varied considerably, in particular, (a) No standard definitions, (b) Fund-raising expenses and net

income were netted off.

5. The treatment of subsidiaries varied considerably, many not being consolidated.

SORP2 Solution

All legacies (other than those received for permanent endowment) should be credited to income when received (para. 37).

Realised gains or losses to be included in the income and expenditure account although investments could be disclosed in a separate statement of investment gains (para. 46).

All fixed assets (except for ‘inalien- able’ and those with no cost, or market value) with a finite life should be capitalised and depreciated (paras 51, 52, 54).

(a) More description and allocation

(b) A minimum of netting should (paras 59 and 60).

take place (para. 61).

Subsidiaries, where activities are not fundamentally different, should be consolidated; subsidiaries with funda- mentally different subsidiaries should not be consolidated (paras 72 and 73).

54 HINES AND JONES

of the problems and suggested solutions). For example, by crediting legacies directly to reserves many charities were not fully reflecting the income for the year in the income and expenditure account; SORP2 proposed that they should be credited to income when received.

Although the Woodfield Report (1987), by expecting charities to conform to SORP2 (which was then under preparation), both influenced and enhanced SORP2 (Falk, 1987), SORP2 has not fully filled the vacuum left by a lack of governmental legislation. First, as is only to be expected, SORP2 concen- trated upon the narrower issues of annual reporting and not upon more general matters, such as the role of the Charity Commission and the registration of charities. Second, SORP2 was, by its very nature, non-mandatory and, although charities were encouraged to follow it, they were not obliged to do so. SORPs are less powerful and influential than SSAPs.'

IMPACT STUDIES

Two studies to date have focused on the application of SORP2. Ashford (1989) reviewed the conformity of 56 charities with SORP2 in 1988/90, concentrating upon the recommendations with regard to four main accounting policy areas: the content of the income and expenditure account; fixed asset accounting; investment valuation; and legacies. After illustrating charity-compliance with 14 examples, Ashford concluded that 'charity accounts still show a diversity of approaches in the area of accounting measurement bases' (p. 48).

Gambling et al. (1990) sought, by means of a cross-sectional research study into six individual charities, to understand in detail how, and to what extent, SORP2 could be applied to charities. Their study found not only much ignorance of the existence of the SORP, but also many reservations about specific proposals, especially the bases of capitalisation and depreciation of fixed assets according to normal commercial principles.

These studies thus provide both some valuable specific observations and some interesting case study evidence on the application of SORP2. However, neither study provides a systematic and comparative investigation into the impact of SORP2 on a sample of annual reports over time. Such a before and after study would provide additional and important evidence of not only the impact of SORP2 in particular, but also the effect of non-mandatory accounting pronouncements in general. During the literature review, no studies were found which specifically examined the impact of other SORPs.

There were studies, however, which focused on the adoption of non- mandatory International Accounting Standards (IASs). These statements, like SORPs, primarily set out best practice. The professional accountancy bodies which collectively constitute the International Federation of Accountants attempt to persuade regulatory bodies to adopt IASs.

This persuasive approach does not appear to have had much success. Evans and Taylor (1982) found only slight compliance with five international standards

THE IMPACT OF SORP2 ON UK CHARITIES 55

in six countries. McKinnon and Jannell (1984, p. 33) concluded, ‘the IASC has not succeeded in changing existing standards or setting new standards’. Finally, Nobes (1990, p. 49) found no evidence of IASs having a material impact upon US corporate reporting.

RESEARCH METHODS

To assess the impact of SORP2, it was necessary first to select, and then to obtain, a sample of charity annual reports both before and after the SORP’s implementation in May 1988. The survey focused on larger charities, since they have the highest national profile and are the most significant economically. For example, it has been estimated that ‘the largest 5% of charities receive 95% of the total income received by charities, make 95% of total expenditure and hold 95% of the total assets held’ (Ebling, 1988).

The top 54 charities were selected from Charity Trends 1985/86 (Charities Aid Foundation, 1986) on the basis of the largest voluntary income. In November 1990, letters were then sent to the Secretaries of these 54 charities requesting copies of their last three annual corporate reports, thus ensuring that one period before, and two after, the introduction of SORP2 (May 1988) would be covered. A follow-up letter was sent after a month, and then charities were telephoned. Overall, a total of 40 charities (1 7 companies, 8 established by Royal Charter, 3 by Special Act of Parliament, and 12 others) provided the three-year sequence of corporate reports which formed the database for this study (see the Appendix). Total voluntary income for the sample was €573 million in 1989 compared with €1,169 million for the top 400 fund-raising charities in the same period (Charities Aid Foundation, 1990, p. 141).

A checklist was designed for use on these one hundred and twenty annual reports. It was constructed by reference to SORP2 itself and to several previous research studies, which had been concerned with the diversity of charity accounting, such as Bird and Morgan-Jones (1981), Hyndman and Kirk (1988) and Gambling et al. (1990). The initial checklist comprised 63 questions which covered legal and administrative details, the trustees’ report, accounting policies, the income and expenditure account, balance sheet, audit report, source and application of funds statement and related charities. The checklist was piloted on 20 charities (60 reports) and then redrafted in order to focus on the proposals of the SORP which a review of the past literature had shown to be contentious and/or the pilot study indicated might have a significant effect on a charity’s external financial reporting.

DISCUSSION OF MAIN FINDINGS

All charities produced an income and expenditure account and balance sheet, and some details of accounting policies, of explanatory notes and of fund

56 HINES AND JONES

movements. All 40 charities were audited, with nine being qualified in 1987/88 and 1988/89, and ten in 1989/90 (nine of these were the same charities each year). The main findings, expressed in terms of compliance or non-compliance (not applicable, and non-verifiable items first being deleted), are discussed below, the results being presented in Tables 3-5. The findings have been divided into three sections relating to compliance with SORP2’s recommenda- tions as to the income and expenditure account (see Table 3), the balance sheet (see Table 4) and other items (see Table 5).

Income and Expenditure Accounts

The two main aims of the SORP were (1) to ensure that the accruals convention was followed so that all income, expenses, gains and losses were accrued in the year receivable or incurred, and (2) to ensure that there was adequate disclosure of relevant items, such as gross income and publicity expenses. Neither of these aims has been completely achieved. For example, in 1989/90, compliance levels were only 55 per cent for unrealised gains and losses on quoted investments, with four charities taking gains direct to reserves; while publicity expenses were separately disclosed by only twelve charities (30 per cent). Nor was there much evidence of increasing levels of compliance; the only example of a big increase in compliance was charities switching to a policy of recording unrealised gains or losses in accordance with SORP2. All the charities conforming with the SORP in this respect were above the median of the sample in terms of voluntary income. The charities in this survey seem generally to have been convinced that all legacies should be credited to the income and expenditure account immediately. Legacies earmarked for capital expenditure did not seem to have been excluded. Although this complies with SORP2, as Ashford (1989, p. 27) points out, this may lead to measurement problems - receipts being credited at once, while expenses are deferred to future years because of depreciation. It also leads to difficulties in ascertaining the long- term regular resource inflows of charities.

Balance Sheet

The main thrust of the SORP was to ensure that fixed assets, excluding inalienable property, were (a) capitalised at cost less depreciation, and (b) depreciated, with the charge being based on the balance sheet carrying value. This does not appear to have happened. In 1989/90, 70 per cent complied with SORP2 by capitalising all fixed assets; while only 55 per cent depreciated them. Although this was an improvement upon the 1987/88 pre-SORP level for capitalisation of only 60 per cent, there was scarcely any improvement in the levels of depreciation (54 to 55 per cent). A more detailed analysis of the

THE IMPACT OF SORPP ON UK CHARITIES 57

Table 3

Compliance by Charities with Selected Significant Provisions of SORP2 Relating to Income and Expenditure Account

Topic ~~

Legacies accrued above the line, year received

Unrealised gains/(losses) accrued above the line, or statement of investment gains, for quoted investments

Realised investment gains/ (losses) accrued above the line

Realised fixed assets gains/ (losses) accrued above the line

Fund transfers below the line

Realisedhnrealised gains/ (losses) consistent

Separate disclosure: Fund-raising expenses Publicity expenses Administration expenses Charitable expenses

Total items

Compliance

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

Yes Yes Yes Yes

Yes No

I98 7/88 No. %

35 87 5 13

40 100

1 17 5 83

6 100

- - - -

- - - -

25 69 11 31

36 100

31 91 3 9

34 100

25 83 5 17

30 100

5 83 1 17

6 100

- - - -

- - - -

- - - -

- - - -

19 48 11 28 37 93 40 100

229 73 83 27

312 100 - - - -

~

1988/89 No. %

35 87 5 13

40 100

4 50 4 50

8 100

- - - -

- - - -

28 78 8 22

36 100

31 91 3 9

34 100

25 83 5 17

30 100

6 75 2 25

8 100

- - - -

- - - -

- - - -

- - - -

22 55 12 30 37 93 40 100

240 76 76 24

316 100 - - - -

1989/90 No. %

37 93 3 7

40 100

5 55 4 45

9 100

- - - -

_ - - -

30 a3 6 17

36 100

31 91 3 9

34 100

25 83 5 17

30 100

6 67 3 33

9 100

- - - -

- - - -

- - - -

- - - -

23 58 12 30 37 93 40 100

246 77 72 13

318 100 - - - -

58 HINES AND JONES

Table 4

Compliance by Charities with Selected Significant Provisions of SORP2 Relating to Balance Sheet

Topic

Quoted investments (market or cost)

Fixed assets: (a) All capitalised

(b) All depreciated

(c) Disclosure of valuation policies

(d) Funds adjusted for unrealised gains/(losses)

Total items

Compliance

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

198 7/88 No. %

40 100 0 0

40 100 - - - -

24 60 16 40

40 100

21 54 18 46

39 100

2 100 0 0

2 100

2 100 0 0

2 100

89 72 34 28

123 100

- - - -

- - - -

- - - -

- - - -

- - - -

1988189 No. %

40 100 0 0

40 100 - - - -

26 65 14 35

40 100

22 55 18 45

40 100

3 75 1 25

4 100

2 100 0 0

2 100

93 74 33 26

126 100

- - - -

- - - -

- - - -

- - - -

- - - -

1989/90 No. 70

40 100 0 0

40 100 - - - -

28 70 12 30

40 100

22 55 18 45

40 100

3 75 1 25

4 100

2 100 0 0

2 100

95 75 31 25

126 100

- - - -

- - - -

- - - -

- - - -

- - - -

treatment of capitalisation throws more light on this issue. Over the three years, the percentage capitalising freehold buildings rose from 90 to 98 per cent. However, only 35 per cent of those capitalising freehold buildings also depreciated them throughout the period. There was a big decline in the numbers (four down to one) writing off freehold buildings on acquisition. The percentage capitalising and depreciating all fixed assets, other than freehold buildings, rose from 58 to 70 per cent. It was generally the cheaper fixed assets, or the specialist ones with a low resale value (such as lifeboats), which were written off. Once capitalised, non-property fixed assets were depreciated by all but one charity in 1989/90. Larger charities were more likely to capitalise all their fixed assets. Fifty-eight per cent of the non-compliers were below the median for voluntary

THE IMPACT OF SORP2 ON UK CHARITIES 59

income. The decision to depreciate property did not appear to be related to the size of the charity.

Assuming that charities are aware of the provisions in the SORP, some of them appear to find the case for depreciation accounting unconvincing. Several possible reasons why this might be so are advanced below. First, if capital assets are the result of contributions, charities may feel that since there is no need to recover the cost from revenues no depreciation charge is needed (Anthony, 1980). This argument assumes, of course, that either the assets will not be replaced, or that at a future time new contributions will be forthcoming. Second, they may feel that depreciation is inconsistent with fund accounting; fund accounting should reflect the receipts and payments of a charity, and therefore depreciation (being an expense, not a payment) serves no useful purpose and may be positively misleading. Third, charities may feel that fixed assets represent commitments by past generations to provide present capital needs; future needs should be met by future generations. Current users should not, therefore, be expected to set aside provisions for depreciation. Fourth, it may be that charities prefer to expense their fixed assets at once, thus reducing the surplus of income over expenditure and of recorded fixed assets. Such policies might appeal to those charities which wished to portray a needy image, particu- larly where no distinction is made between voluntary income for capital and revenue purposes. However, once charities have capitalised fixed assets it would seem that depreciation, by reducing income, would be a preferred option.

This marked resistance by charities to adopt commercial methods of deprecia- tion finds some support in previous studies. Gambling et al. (1990a, p. 22) found that only one of the charities studied could be said ‘to capitalise and depreciate their fixed assets using normal commercial principles’. Ashford (1989, p. 42) found that the vast majority of charities which capitalised their assets depreciated them in line with SORP2, with the notable exception of freehold property. Of the two-thirds of charities which had capitalised freehold property, only half depreciated it.

Other Items

SORP2 sought to expand the amount of information which a charity discloses, so as to give a fuller picture of its activities. As regards ‘other information’, it was only partially successful. For instance, in 1989/90, only 33 per cent of charities indicated that they had allocated assetdliabilities to major funds. Moreover, perhaps more importantly, only 83 per cent provided a funds flow statement (none of this sample were exempt through being solely cash-based (para. 64, SORP2)). Nor was there much evidence of compliance levels increasing; indeed, those for funds flow statements actually fell back to 83 per cent from 88 per cent, having risen to 90 per cent in 1988/89. Th’ is movement away from the funds flow statement is worthy of note. This fall, one of the few declines in compliance, is particularly interesting since it parallels the

60 HINES AND JONES

Table 5

Compliance by Charities with Selected Significant Provisions of SORP2 Relating to Fund Accounts, Current Assets, Funds Flow Statements

and Consolidation

Togic

Fun& (a) Assets/liabilities allocated

to funds

(b) Fund structure disclosed

Current Assets Lower cost or NRV

Fun& Flow Statements Funds flow statement provided

Consolidation Not fundamentally different: Subsidiaries Consolidated

Fundamentally different: Not consolidated, information provided

Total items

Compliance

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

Yes No

1987/88 No. 76

12 30 28 70

40 100

31 78 9 22

40 100

- - - -

- - - -

39 98 1 2

40 100 - - - -

35 88 5 12

40 100 - - - -

2 100 0 0

2 100 - - - -

12 57 9 43

21 100

131 72 52 28

183 100

- - - -

- - - -

1988/89 No. 76

12 30 28 70

40 100

30 75 10 25

40 100

- - - -

- - - -

39 98 1 2

40 100 - - - -

36 90 4 10

40 100 - - - -

3 100 0 0

3 100 - - - -

13 62 8 38

21 100

133 72 51 28

184 100

- - - -

- - - -

1989/90 No. %

13 33 27 67

40 100

30 75 10 25

40 100

- - - -

- - - -

40 100 0 0

40 100 - - - -

33 83 7 17

40 100 - - - -

3 75 1 25

4 100 - - - -

13 59 9 41

22 100

132 71 54 29

186 100

- - - -

- - - -

THE IMPACT OF SORPZ ON UK CHARITIES 61

questioning of the importance of the funds flow statement in the commercial world in both the USA and the UK (Adams, 1988; and Jones, 1990). However, little evidence was uncovered that charities were introducing cash flow state- ments, as seems to be the putative position for UK companies (ASC, ED 54, 1990). It may, therefore, simply be (as discussed by Bird, 1984, and Ashford, 1989) that the seven non-complying charities felt that their income and expenditure accounts were surrogate receipts and payments statements which already disclosed ‘cash flow’ information, thus making cash flow/funds flow statements an irrelevance. Finally, there seems to have been a marked reluctance throughout the three years studied to disclose information about publicity and administrative expenses, especially in the form recommended by SORP2. This may accord with the image of charities as striving to portray themselves as weakly endowed and anxious to avoid giving the impression of money being spent on other than direct charitable purposes. O r more simply, it may be that, as Bird (1984) suggested, the lack of generally agreed terminology is an important inhibiting factor.

ANALYSIS

The overall compliance level with the 21 items selected from SORP2 for study in 1989/90 was 75 per cent (see Table 6). This general compliance, however, had barely increased over time, being 73 per cent in 1987/88. Of the 21 specific items investigated in 1989/90, only seven were complied with by over 90 per cent of charities, and thirteen by more than 75 per cent of charities. These levels of compliance had barely increased from the 1987/88 levels.

Four caveats should be borne in mind when interpreting the overall results. First, this study is primarily concerned with the SORP’s impact; it did not investigate the impact of the ED in 1985 or of any previously published recom- mendations. It is possible that major changes in accounting by charities had taken place prior to this study. However, even if this were the case, there was certainly some opportunity for even more compliance to be achieved when SORPP was issued, and this did not happen. Second, as seems common with accounting pronouncements (see, for example, Perks and Butler, 1977), considerable difficulties were experienced in ascertaining the exact meaning of the SORP’s recommendations and detecting whether or not the charities had actually adopted them. For example, it would not normally be possible to ascertain, by an examination of the annual report, whether one charity is connected with another. It is therefore impossible to test completeness of disclosure, only that where disclosure has been made the treatment accords with SORPP. This methodological problem is not believed to be important when ascertaining the aggregate trend of the results. This is because the results

62 HINES A N D JONES

Table 6

Summary of Compliance Levels by Charities with Selected Significant Provisions of SORP2

Topic

Income and Expenditure Legacies Unrealised gains/(losses) Realised investment gains/(losses) Gains consistent Realised fixed assets Fund transfers Fund-raising expenses Publicity expenses Administration expenses Charitable expenses

Balance Sheet Quoted investments

Fixed Assets All capitalised All depreciated Valuation disclosed Funds adjusted

Other Items Assetslliabilities to funds Fund structure Current assets Funds flow Subsidiaries different: (i) Consolidated

(ii) Information disclosed

Number items 3 75% < 75%

Number items >’ 90% c 90%

1987/88 %

a7

a3

a3 4a 28

17 69

91

93 100

100

60 54

100 100

30 78 98 88

100 57

13 a

21

a 13

21

Total compliance by items I No. I %

1988/89 %

a7

7a

a3

50

75 91

55 30 93

100

100

65 55 75

100

30 75

90

100 62

14 7

98

21

a 13

21 -

-

1989/90 %

93 55

67 91

a3

a3 5a 30 93

100

100

70 55 75

100

33 75

100 a3

75 59

13 a -

21

7 14

21

1988-90 % point change

+ 6

+ 14 - 16

0 0

+ 10 + 2

0 0

+ 38

0

+ 10 + 1 - 25

0

+ 3 -3 + 2 -5

- 25 + 2

160 157 25 - 2

THE IMPACT OF SORPL O N UK CHARITIES 63

were couched in terms of compliance or non-compliance (non-applicable and non-verifiable items were first detected) and the checklist was consistently applied. Third, as is the nature of any longitudinal study, there may be certain economic, social or political factors which may have infringed upon the accounting practices of the charities. For example, public concern over standards of monitoring and control in the charitable sector could have influenced accounting policy choices. These do not, however, seem to have had any obvious or significant impact. Fourth, these results are based on the larger charities and are not, therefore, necessarily applicable to small charities. Indeed, there is some evidence (Collett, 1991, p. 64; and Gambling et al., 1990) to suggest that compliance by smaller charities with SORP2 may be low.

CONCLUSION

This study investigated the impact of SORPP (May 1988) on the accounting practices of 40 charities over three years (1988-90). The main conclusion is that there was no evidence to suggest that SORP2 had a significant impact upon the accounting practices of UK charities. The ASC’s declared aim of improving the quality of financial reporting in the charity sector, and reducing the diversity in accouiiting practice and presentation, was not achieved in this period. This finding is in line with studies into the impact of the non-mandatory International Accounting Standards, which indicated that they also had little impact when introduced.

More specifically, the study found compliance with a selection of the SORP’s main recommendations to be steady at about 75 per cent. Charities seemed particularly reluctant to implement recommendations relating to the capitalisa- tion and depreciation of fixed assets and the disclosure of details about publicity and fund-raising expenses. This reluctance seems generally to comply with the wish of charities to portray themselves as underfunded and of solely pursuing directly related charitable activities. However, once capitalised, the failure to depreciate fixed assets is puzzling since this would have reduced both income and net assets.

The implications of this study relate to both charities and, more generally, to non-mandatory accounting pronouncements. Since SORP2 has done little to reduce the diversity of the accounting practices of charities, either a manda- tory accounting pronouncement or governmental legislation is required. At present, no mandatory accounting standard seems imminent and, therefore, government legislation seems required ifthe ASB’s aim of improving the quality of financial reporting is to be achieved. It is, therefore, particularly interesting to reflect that in the government’s White Paper, Charities: A Framework for the Future (Home Office, 1989, p. 27), there is a specific suggestion that large, non-incorporated charities (over €25,000 annual income) be required to indicate any reasons for departing from the SORP’s recommendations. Further, the White Paper also suggested that all charities model their trustees’ report and

64 HINES AND JONES

the legal and administration details in their annual returns on the SORP. Although there is no firm indication at present (Autumn 1991) when such legislation will be enacted, mandatory government legislation, incorporating SORP2, does seem a strong possibility.

The implication for non-mandatory accounting pronouncements seems to be that they are ineffective. Consequently, the Accounting Standards Board’s decision to concentrate upon standards, and to downgrade SORPs, does seem to have some justification. Research on the impact of other SORPs would be helpful in assessing whether they could have an effective role in the future. For example, a longitudinal study could be undertaken on the impact of Accounting in UK Universities (CVCP, 1989)’ by examining university annual reports from 1987-91.

APPENDIX

List of Charity Accounts Surveyed

Volunlary Income 1989 €000

Baptist Missionary Society 2,978 Barnados 25,778 British and Foreign Bible Society 5,087 British Heart Foundation 20,705 Cancer Research Campaign 31,689 CAFOD 7,336 Children’s Society 11,713 C M S 4,625 DGAA 2,681 Help the Aged 2 1,668 Imperial Cancer Research Fund 40,295 Institute of Cancer Research 9,088 Leonard Cheshire Foundation 7.658 Leprosy Mission 5,672 Leukaemia Research Fund 6,037 Marie Curie Cancer 14,290 Methodist Church Overseas 2,829 Multiple Sclerosis Society 6,546 Muscular Dystrophy Group 3,761 National Children’s Home 9,000 NSPCC 22,868 National Trust 43.418 National Trust for Scotland 5,017 Oxfam 49,266 Royal Air Force Benevolent Fund 8,030 Royal British Legion 11,432 Royal Masonic Hospital 2,925 RNLI 40,487 RSPB 11,097 RSPCA 20,457 Save the Children Fund 36,502

T H E IMPACT O F SORPP O N UK CHARITIES 65

APPENDIX (continued)

List of Chari ty Accounts Surveyed

Voluntary Income 1989 €000

Scout Association Sight Savers SSAFA Spastics Society Sue Ryder Foundation Tear Fund USPG World Vision of Britain World Wide Fund for Nature

509 6,585 4.221

22,349 6,226

13,739 4,144 5,415

18,898

TOTAL 573,021

Source: Charities Aid Foundation, Charify Trends, 13th edition, 1990.

NOTE

1 SORPs were extant from December 1985 to October 1990, when a decision was taken by the Accounting Standards Board not to formally approve or issue Statements of Recommended Practice - instead it plans to issue negative assurance statements stating that there are no principles within particular SORPs contrary to current accounting practice (Accountancy Age, 18.10.90; Accountancy, November 1990). When extant, a SORP must be distinguished from a SSAP. A SSAP had mandatory status in that professional accountants should comply with all SSAPs unless they gave a misleading view, in which case they were entitled to depart from them. Unjustified disclosures should have been disclosed in the auditors’ report. A SORP, on the other hand, was non-mandatory. Compliance by preparers and auditors was encouraged; but non-compliance neither needed to be disclosed nor would lead to a qualified audit report (Ebling, 1985). A special type of SORP - a franked SORP - also existed, being prepared by an interested party and then being approved by the ASC (e.g., Accounfing in UK Uniucrsities).

REFERENCES

Accountancy (1989), ‘Charity at Home’ (July 1989), p. 16. - (1990). ‘No Adoption for SORPs’ (November 1990). p. 10. Accountancy Age (1990a), ‘ASB Decides not to Approve SORPs’ (18 October 1990). - (1990b), ‘Government Criticised by PAC on Charity Accounts’ (6 December 1990), p. 3. Accounting Standards Committee (1984), Accounting by Charifics: A Discussion Papcr (1984). - (1985), ED 38: Accounting by Charifies (1985). - (1988a), Stafemenf of Recommended Racficc 2: Accounting by Charifics (May 1988). - (1988b), Accounting by Charities: A Guide for the Smaller Charity (1988). - (1990). ED 54: Cash Flow Sfafmcnfs (July 1990). Adams, R. (1988), ‘Cash Flow Statements: The Transatlantic Effect’, Accounfancy (November 1988),

Anthony, R.N. (1978), Financial Accounting in Non-Businas Olgunuafionr, Accounting Standards Board pp. 111-113.

(Stamford: Connecticut, 1978).

66 HINES AND JONES

- (1980), ‘Making Sense of Non-Business Accounting’, Harvard Business Review (May-June

Ashlord, J.K. (1989), ‘Charity Accounts’ in Financial Reporling 1989-90: A Survey of UK Reporling

Auditing Practices Committee Auditing Guideline (APCAG) (1981), Charities (ICAEW: London,

Rerdahl, R.O. (1959), British Uniunsities and fhe Sfafc (Cambridge University Press: London, 1959). Herridge, V. (1990), ‘Health and Medicine’ in The Cambridge Social History ofBrifain, 1750-1950,

Vol. 3, Social Agencies and Institutions, F.M.L. Thompson (ed.) (Cambridge University Press: Bath, 1990), pp. 171-242.

Bird, P. and P. Morgan-Jones (1981), Financial Reporting by Charifies (ICAEW: London, 1981). -( 1984). ‘Charity Accounts’ in Financial Reporling 1984-85: A Surucy o f UK Published Accounts,

Bryan, E.L. (1980), A Financial Reporling Model fo r Nof for Profit Associations (UMI Research Press:

Cardwell, Z. (1990), ‘Call for New Charity Accounts Statute’, Accountancy Age(22 November, 1990),

Charities Act (1960). c. 58, accompanied by Charities Statement of Account Regulation (1960). - (1985), c. 20. Charities Aid Foundation (1986), Charity TrendF 1985/86 (CAF, 1986). __ (1987). Charity Trends 1986/87 (CAF, 1987). - (1990), Charify Trends 13fh Edifion (CAF, 1990). Charity Commissioners (1988), Charify Accounfs: Consulfalion Paper (London, August 1988). Collett, C . (1991), ‘Winners’ Marks of Distinction’, Accounfancy (January 1991), p. 64. Committee of Vice-Chancellors and Principals (CVCP) (1989), Accounting in UK Uniuersifies (May

Ebling, P. (1985), ‘Recommendations on Accounting Practice’, Accountancy Agc (12 December,

-( 1988), ‘Giving Evidence on Charity Accounting’, Accountancy& (24 March, 1988), p. 16. Evans, T.G. and M.E. Taylor (1982), ‘Bottom Line Compliance with the IASC: A Comparative

Falk, F. (1987), ‘SORPZ as a Fund-Raising Aid’, Accountancy (December 1987), pp. 77-78. Gambling, T . , R. Jones, C. Kunz and M. Pendlebury (1990) Accounting by Charifiest The Application

Clynn, J. (1987), Public Secfor Financial Confrol and Accounting (Basil Blackwell: New York, 1987). Henke, E.O. (1988), Introducfion to Non-Rojif Organisafion Accounting (PWS-Kent: Massachusetts,

Home Office (1988). The Regulation of Charitable Appeals in England and Wales, Consultation Paper

- (1989), Charities; A Framework for the Future (May 1989). Hyndman, N. and R . Kirk (1988), ‘Charities Called to Account’, Management Accounfing (October

Jones, M.J. (1990), ‘Decisive Opportunity’, Certified Accountant (December 1990), pp. 29-31. Jones, R. and M. Pendlebury (1984). Public Sector Accounfing (Pitman: London). Law Reform Act (Miscellaneous Provision Scotland, 1990). McKinnon, S .M. and P. Jannell (1984), ‘The International Accounting Standards Committee:

Morris, M. (1955), Voluntary Organisations and Social Rogrcss (London: Gollancz, 1955). Morris, R.J. (1990). ‘Clubs, Societies and Associations’ in The Cambridge Social History OfBritain,

1750-19.50, Vol. 3, Social Agencies and Instifufions, F.M.L. Thompson (ed.) (Cambridge University Press: Bath, 1990), pp. 357-393.

Nobes, C.W. (1990), ‘Compliance by US Corporations with IASC Standards’, Brifish Accounting Reuiew, Vol. 2 2 , No. 1 (1990), pp. 41-49.

Public Accounts Committee (1988), Monitoring and Control ofcharities in England and Walex (February 1988). - (1991). Moniforing and Control o f Charities in England and Wales (March 1991). Perks, R.W. and L.B. Butler (1977), ‘Accountancy Standards in Practice: The Experience of

1980). pp. 83-93.

Pracfice, L.C.L. Skerratt and D.J. Tonkin (eds.) (ICAEW: London, 1989), pp. 23-48.

October 1981).

D.J. Tonkin and L.C.L. Skerratt (eds.) (1984), pp. 36-60.

Michigan, 1980).

p. 2.

1989).

1985). p. 15.

Analysis’, ~nlemafionalJournal of Accounting, vol. 10 (1982), pp. 114-128.

ofSORP2, Certified Research Report, No. 21 (London, 1990).

1988).

(Summer 1988).

1988), pp. 36-37.

A Performance Evaluation’, InfemationalJournal o j Accounting (Spring 1984). pp. 18-34.

SSAP 2’, Accounfing and Business Research (Winter 1977), pp. 25-33.

T H E IMPACT O F SORPZ O N UK CHARITIES 67

Prochaska, F.K. (1990). ‘Philanthropy’ in The Cambridge Social Histoy ofBrit&, 1750-1950, Voi. 3, Social Agencies and Insfitufions, F.M.L. Thompson (ed.) (Cambridge University Press: Bath,

Randall, A.J.L. (1989), ‘Pressure to Put More Heart into Accountability’, Accountancy (December

- (1990), ‘Charities: Use Carrots, Not Sticks’, Accountancy Age (19 April 1990). p. 14. Scottish Home and Health Department (1988). Supnuision of Charities in Scotland: A Consultative

___ (1989), Charities in Scotland: A Framework for Supervision (October 1989). Smith, T. (1990), ‘Action Needed to Redress Charities’ Problems’, Accountancy Age (6 December

Spink, H. (1988), ‘Random Testing Call for Chanty Accounts’, AccounfuncyAgc(3 November 1988). Sutherland, G. (1990), ‘Education’ in The Cambridge Social History of Britain, 1750-1950, Vol. 3,

Social Agencies and Instifutions, F.M.L. Thompson (ed.) (Cambridge University Press: Bath, 1990). pp. 119-169.

Wilson, D.C. and R.J. Butler (1985). ‘Corporatism in the British Voluntary Sector’ in Private Interest Gounnment, W. Streeck and P.C. Schmitter (eds.) (London: Sage, 1985). pp. 72-86.

Woodlield Report (1987), Efficiency Scrutiny of the Supervision of Charities (HMSO, 1987).

1990), pp. 395-443.

1989), pp. 70-71.

Mmorandum (July 1988).

1990), p. 14.