PERFORMING AND INFORMING: EVIDENCE OF THE EXPENDITURE PATTERNS OF AUSTRALIAN INTERNATIONAL AID ORGANISATIONS

ACCOUNTABILITY BEYOND THE HEADLINES: WHY NOT-FOR-PROFIT ORGANISATIONS NEED TO COMMUNICATE THEIR OWN EXPENDITURE STORIES

Chris Ryan*

Helen Irvine*1

*School of Accountancy, Queensland University of Technology

ABSTRACT

This paper analyses the expenditure patterns of 97 Australian international aid and development organisations, and examines the extent to which they disclose information about their expenditure in order to discharge their accountability. NFP expenditure attracts media attention, with perceptions of excessive costs potentially damaging stakeholder trust in not-for-profit organisations. This makes it important for organisations to be proactive in communicating their expenditure stories to stakeholders, rather than being judged on their performance by standardised expenditure metrics. By highlighting what it costs to ensure longer-term operational capability, not-for-profit organisations will contribute to the discharge of their financial accountability and play a part in educating all stakeholders about the dangers of relying on a single metric.

KEY WORDS: not-for-profit; financial ratios; accountability; international aid organisations; expenditure information.

Type of paper: research paper

Acknowledgment.

We thank Matthew O'Connor for the preliminary literature review work he undertook on this project. It has provided a useful backdrop to the construction of this paper.

JEL CODE: M41

1 Corresponding Author: Helen Irvine, Address: School of Accountancy – Queensland University of Technology, GPO Box 2434, Brisbane QLD 4001, Phone: 07 3138 2856, Fax: 07 3138 1812, E-mail: helen.irvine@qut.edu.au

ACCOUNTABILITY BEYOND THE HEADLINES: WHY NOT-FOR-PROFIT ORGANISATIONS NEED TO COMMUNICATE THEIR OWN EXPENDITURE STORIES

INTRODUCTION

In recent years, not-for-profit (NFP) organisations have been criticised for a lack of transparency and accountability in their finances, and some argue this has translated into a waning trust in the honesty and efficiency of the sector (Ebrahim 2003; Chetkovich and Frumkin 2003; Szper and Prakash 2011). In particular, perceptions of excessive spending on particular items such as fundraising and general administration, have attracted headline attention (see for example Urban Institute, 2004; Gettler, 2007; Gonzalez, 2010). Donors to NFP organisations seek assurance that their contributions are being used efficiently and effectively (Choice 2008; Australian Government Productivity Commission 2010), so negative perceptions can be damaging to trust in the sector (Rowley 2011; Charities Aid Foundation 2011). We contend that organisations can enhance this trust by communicating explanatory expenditure information transparently to stakeholders.

The purpose of this paper is twofold. First, in the context of accountability, we examine the expenditure patterns of Australian international aid and development organisations with the aim of understanding any diversity in their expenditure patterns. Secondly, we analyse the disclosures made about these expenditures in the narrative of the entities’ annual reports and financial statements. This enables us to determine the extent to which organisations have communicated with stakeholders about their expenditure patterns and communicated their unique expenditure stories.

Espeland and Sauder (2007) argue that the response to increasing demands for accountability and transparency has led to a proliferation of metrics designed to evaluate organisations and individuals, with these measures often having unintended consequences. While proponents argue that these measures provide information to the public and consumers, critics argue that such measures are reactive and become the focus of attention rather than the organisational practices and activities that lie behind the metric (Krishnan et al 2006; Tinkelman and Mankaney 2007; Yetman and Yetman 2012). Because metrics and ranking tables alter the behaviour of individuals and organisations, this, in turn, shapes the redistribution of resources (Espeland and Sauder 2007).

Specifically, Palotta (2008) alerts us to the dilemmas inherent in evaluating or comparing the expenditures of NFP organisations. On the one hand, donors want the maximum amount of money to go towards the provision of programs, and the least amount of money towards administration and fundraising costs. On the other hand, a certain level of overhead expenditure is necessary to ensure the long-term financial resilience of NFP organisations (Tinkelman and Mankaney 2007). These organisations therefore need to be vigilant in not perpetuating the use of short term single metrics about their expenditure (Palotta, 2008). Transparent disclosures of financial and narrative information about costs can inform stakeholders of the reasons behind expenditure, and assist organisations to discharge a more meaningful accountability, rather than a watered-down formulaic accountability.

The majority of prior research into NFP financial expenditure patterns is based on US data and takes the form of expenditure efficiency ratios (see for example Tinkelman 1999; Okten and Weisbrod 2000; Hager 2001; Bhattacharya and Tinkelman 2009; Marudas 2004). Calculation of such metrics is possible because of the US’s sophisticated philanthropic environment (Hammack 1995; Gordon and Khumawala 1999) and the Internal Revenue Service’s requirement that tax-exempt NFP organisations must lodge a Form 990 (IRS, 2009). This provides a vast amount of data for research into, and evaluation of, NFP organisations’ performance, which arguably has instituted a disadvantageous and restrictive reporting regime (Pallotta, 2008). The calculation of these single metrics is controversial since they encourage the development of rankings or ratings tables (see, for example Tinkelman and Donabedian 2007; Sargeant et al 2009).

There are four common metrics (ratios) that are used to assess NFP expenditure performance: program expense ratio[endnoteRef:1], fundraising expense ratio[endnoteRef:2], administration expense ratio[endnoteRef:3] and cost of fundraising[endnoteRef:4] (Flack 2004; Greenlee and Tuckman 2007; Tinkelman and Donabedian 2007). These expenditure ratios have been used extensively to determine which NFP organisations most deserve the contributions of donors and volunteers, since contributors are believed to prefer expenditure to go towards program rather than administration or fundraising (see for example Weisbrod and Dominguez 1986; Posnett and Sandler 1989; Gordon and Khumawala 1999; Okten and Weisbrod 2000; Tinkelman 2006; Tinkelman and Donabedian 2009). [1: This is calculated as Program expense/Total expenses, and reveals how much of the total expenditure is devoted to delivering programs (Greenlee and Bukovinsky 1998; Flack 2004; Greenlee and Tuckman 2007; Yetman and Yetman 2012). ] [2: Calculated as Fundraising expense/Total expenses, this ratio indicates how much of the total expenditure is allocated towards raising funds (Greenlee and Bukovinsky 1998; Greenlee and Tuckman 2007).] [3: The ratio shows how much of the total expenditure goes towards administering the organisation. It is calculated as Administration expense/Total expenses (Greenlee and Bukovinsky 1998; Greenlee and Tuckman 2007).] [4: The ratio is calculated by Fundraising expense/Total funds raised, and indicates the cost of raising each $ of fundraising revenues (Flack 2004; Wing et al. 2004; Sargeant et al. 2009).]

However, this research is not without problems (Tinkelman and Mankaney 2007; Pallotta 2008; Tinkelman and Donabedian 2009). Ratios need careful interpretation (Weisbrod and Dominguez 1986; Posnett and Sandler 1989) as they can be subject to misrepresentation (Hager 2003; Jones and Roberts 2006; Krishnan et al. 2006; Yetman 2009). One pertinent example is the propensity of NFP organisations to report zero fundraising costs, despite reporting significant levels of fundraising revenue (Hager 2003; McCambridge 2012)[endnoteRef:5]. It is thus apparent that if explanations about NFP organisations’ expenditure were to accompany their financial data, stakeholders’ understanding of organisational performance would likely be enhanced. This is especially crucial where there is a culture of single metrics that attracts headlines in the media and and consequently shapes the public discourse surrounding NFP organisations’ performance. [5: Expenditure on fundraising should be assessed in conjunction with the cost of fundraising ratio (Greenlee and Bukovinsky 1998), since an organisation could still be considered efficient if its fundraising expense ratio is elevated, provided its cost of fundraising ratio is relatively low (Urban Institute 2004).]

This need for contextualisation is recognised by the Charity Commission for England and Wales, which does not set an acceptable level of fundraising expenditure. Instead, it recognises that there are many factors involved, encourages charities to achieve the best fundraising outcomes they can, and urges charities to be “open and transparent about these costs” (Charity Commission 2012: 5). Recognising that respondents view information about program expenditures of most interest (Charity Commission 2004), the Commission adopts a “story approach” whereby entities are urged to contextualise their operations, providing “narrative explanations to complement and interpret the financial statements” (Charity Commission 2009: 20). Further, the Commission’s Statement of Recommended Practice (SORP) eschews misleading metrics by not requiring expenditure to be disclosed line by line in the Statement of Financial Activities, and by not requiring administration costs to be reported on the face of the Statement (Charity Commission 2005, p. 15). Instead, it requires that the Notes include details of support costs and methods of cost allocation (Charity Commission, 2005, paras 166 – 167).

In spite of the controversy surrounding these expenditures, and the sector’s obvious sensitivity to the issue, there is a dearth of Australian research on the topic, primarily because of a lack of standardised data[endnoteRef:6]. In a bid to overcome this lack of data, we established a Memorandum of Understanding with the Australian Council for International Development (ACFID)[endnoteRef:7], the peak council of Australian NFP aid and development organisations (ACFID 2011a). This provided us with access to annual reports and financial statements for the 2008-09 financial year[endnoteRef:8]. From these we extracted data to calculate and analyse the four most commonly used expenditure ratios, and to analyse the narrative sections of organisations’ reports to determine the extent to which they disclosed additional information about their expenditure. [6: One reason for this is that to date, there has been no overall Australian NFP regulator to systematically collect data (Choice 2008). ] [7: The Memorandum of Understanding with ACFID permitted the compilation of a substantial database of annual reports (including financial statements) from a range of Australia’s leading international aid and development organisations. These reports were sourced with the approval of the organisations. ] [8: Most ACFID organisations are constituted as Public Companies Limited by Guarantee or Incorporated associations. Companies Limited by Guarantee come under the authority of Australian Corporations Law as administered by the Australian Securities and Investments Commission, and are required to prepare general purpose financial statements based on the accounting standards prepared by the Australian Accounting Standards Board (AASB). Incorporated Associations are governed by legislation unique to each state, with varying requirements ranging from audited financial statements according to Australian accounting standards, through to an appropriately classified income statement and balance sheet. In addition to complying with these requirements, all ACFID-affiliated organisations must present financial reports according to the requirements of the Code of Conduct. ACFID’s Code of Conduct Committee scrutinises all reports prepared by signatory organisations, ensuring compliance.]

Consequently, the findings presented in this paper provide valuable and unprecedented insights for researchers, practitioners and regulators. This is timely as the Australian NFP sector moves into a new era with the inauguration of a national regulatory body, the Australian Charities and Not-for-Profits Commission (ACNC), planned to commence its operations on 1 October 2012 (ATO 2011)[endnoteRef:9]. For the first time, Australian charities will be regulated at a national level. The ACNC, through its regulation encompassing registration, and the requirement that information should be presented in a prescribed type and form, has the potential to increase the amount of data available for analysis, to guide the resultant conversations that will ensue, and ultimately to shape the sector. [9: Australia’s 2011-2012 Federal Budget included the provision of $53.6 million over four years to establish this new regulatory body. ]

The next section of the paper presents the accountability framework on which the study is based. Following this, the method by which the study was conducted is outlined. Results and analysis are then presented, with the concluding section outlining the paper’s contribution and opportunities for further research.

THE ACCOUNTABILITY PUZZLE

It is generally agreed that accountability is an elusive term (Sinclair 1995), one that is not straightforward (Ebrahim and Weisband 2007; Alexander et al. 2010), and that has fundamental ethical roots (Lawry 1995) and professional connotations (Crofts 2009). Hoskin (1996) argued that with the “audit explosion” (Power 1994), there is a growing use of quantitative indicators in discharging accountability, and this has transformed the meaning of accountability.

Accountability is especially important in the light of NFP scandals (Gibelman and Gelman 2001; Ebrahim 2003) and increased rivalry within the sector for scarce resources (Chetkovich and Frumkin 2003; Greenlee and Tuckman 2007). For the NFP sector, the link between accountability, trust and funding makes this a serious issue. Strong “bonds” of accountability (Stewart, 1984)[endnoteRef:10] function to preserve public trust in an organisation and guard its reputation, and, in the case of NFP organisations, ensure continued funding (Lawry 1995; Tinkelman and Donabedian 2009; Alexander et al 2010). [10: Stewart (1984) defined the “bond” of accountability as consisting of two dimensions, the presentation of an account and the holding to account. Accountability “links” involved only one of these dimensions, and were therefore a weaker form of accountability.]

Kreander et al. (2009) maintained that accountability has not been adequately theorised in the case of NFP organisations. The need for NFP organisations to understand how they can achieve accountability “in a cost-effective, yet appropriate, manner” has been acknowledged as “vitally important”, so these organisations are able to devote their energy to the achievement of their mission (Geer et al, 2008, p. 70). While the manner of discharging this accountability may be debated, it is generally agreed that it centres on issues of who is accountable, to whom, for what, and how that accountability is discharged (Flack and Ryan 2005). In relation to the ‘who’ and ‘to whom’ questions, we argue that one of the keys to the unpacking of an understanding of NFP accountability is the acknowledgment that organisations are accountable to a variety of stakeholders both internal and external (Ebrahim 2003; Ryan and Irvine, 2012). As Roberts (1991) suggested, accountability is a social construct involving all aspects of organisational life. So, while accountability may be discharged to external stakeholders, it is the internal learnings in the organisation from that discharge that lead to a full understanding of the role accountability plays in developing a financially resilient organisation that is delivering on its mission (Ryan and Irvine 2012). In this context transformational NFP leadership has been identified as a strong indicator of accountability (Geer et al 2008).

It is in considering the inextricably linked ‘how’ and ‘what’ aspects of accountability that this paper provides strong insights. There are a number of ways in which organisations themselves can discharge accountability to their stakeholders. One method common to both for-profit and NFP organisations is through the production of annual reports and financial statements that give stakeholders the opportunity to evaluate, monitor and even control an organisation’s operations and efficiency (Buckmaster et al 1994; Buckmaster 1995; Gordon and Khumawala 1999; Flack and Ryan 2005; Greenlee and Tuckman 2007). What is important is the way NFP organisations communicate with their stakeholders about their performance in these reports, i.e. the ‘how’ and ‘what’ dimensions of accountability (Connolly and Hyndman 2004; Beattie et al 2004; Connolly and Dhanani 2009; Jetty and Beattie 2009; Agyemang et al. 2009; Charities Commission 2010; Cordery 2011; IIRC 2011).

The FASB (Financial Accounting Standards Board), responsible for setting accounting standards in the US, emphasised the importance of financial reports that demonstrate accountability not only for the ‘custody and safekeeping’ of organisational resources, but also for their ‘efficient and effective use’ (FASB 1980: para 40). Hyndman (1990, 1991) asserted that while most UK charity reports are dominated by financial information, users consider this to be less important than non-financial information that allows them to assess the performance of an organisation.

Despite a reported dearth of information on their organisations’ expenditure performance (Connolly and Hyndman 2003, 2004), annual reports nevertheless have the potential to be an important accountability and communication medium if they include sufficient narrative information, in addition to the financial statements, for users to fully understand the financial results presented. Hyndman and Anderson (1995) argued that, historically, accountability has suffered from an overemphasis on the presentation of financial statements. If the information in these reports is not accessible or able to be understood, the effective discharge of accountability is jeopardised.

Currently, stakeholders “should be primed to expect good quality narrative and numerical data on outputs and outcomes” (Cordery 2011: 32). The encouragement of this practice is evident globally, with the need for management commentary on financial statements well recognised (Charity Commission 2004, 2009; IIRC 2011). In relation to UK NFP organisations, the Charity SORP (Charity Commission 2005) has placed greater emphasis on the provision of narrative information. Similarly, in New Zealand, charities are encouraged to tell their story in ways other than the provision of financial reports (Charities Commission 2010).

This is especially important in the light of a UK survey that revealed a “huge disparity” between what the public believe charities spend on fundraising and what they actually do spend, with actual fundraising expenditure much less than perceptions about it (Charities Aid Foundation, 2011). This misperception points to a need for organisations that raise funds to communicate meaningfully with their stakeholders. Information about expenditure is an important indicator of the unique approach and priorities of an organisation.

The provision of such information can contribute to the discharge of a broader accountability, and to the alleviation of some of the accountability problems caused by a reliance on simplified financial metrics. These include the misapplication of costs, either deliberate or accidental, different cost allocation systems between organisations, ambiguous or subjective classification systems, or even an over-reliance on financial ratios (Hager 2003; Jones and Roberts 2006; Tinkelman and Mankaney 2007). In this vein, the manipulation of ratios to enhance organisations’ perceived efficiency has been documented (Jones and Roberts 2006; Krishnan et al 2006; Yetman 2009). Such practices undermine the notion of accountability and the implicit trust that stakeholders place in the NFP sector (Tinkelman and Donabedian 2009). Arguably, this is less likely to occur if organisations are released from expectations that the figures in their financial reports should comply with narrowly focused expenditure metrics, and instead, are encouraged to relate their own expenditure stories.

Aside from these obvious deficiencies and inconsistencies, metrics in the form of expenditure ratios or other financial indicators provide an incomplete picture of organisations’ performance, since they exclude a consideration of the quantity and quality of services provided (Tinkelman and Donabedian 2009). Thus financial ratios should be used with caution (Tinkelman and Mankaney 2007; Tinkelman and Donabedian 2009). It is important that stakeholders understand the activities behind the metrics, and in this regard there is a growing appreciation of the importance of narrative reporting to inform stakeholders about activities, and thereby to broaden the parameters of accountability (Beattie et al. 2004; Charity Commission 2008; Connolly and Dhanani 2009; Jetty and Beattie 2009).

With NFP organisations increasingly experiencing pressure to provide evidence of their accountability (Tinkelman and Donabedian 2009), and expenditure patterns subjected to public scrutiny, this study of the expenditure patterns of Australian international aid and development organisations is timely.

THE STUDY

The Australian Bureau of Statistics, using the Australian and New Zealand Standard Industrial Classification, divides NFP organisations into nine subcategories, one of which groups together environment, development, housing, employment, law, philanthropic and international organisations (ABS 2009). We reduce problems of heterogeneity by restricting the target population to just one of the elements of one of those subcategories, namely international organisations that deliver aid and development[endnoteRef:11]. [11: This is in contrast with a previous Australian study that compared NFP ratios across nine different subcategories (Buckmaster 1995).]

The international aid and development subsector is a particularly sensitive and topical area to research, with global awareness of poverty in developing countries given visibility in the United Nations’ Millennium Development Goals, through campaigns like Make Poverty History, the impact of natural disasters, and the Australian government’s commitment to providing international aid (Australian Government Productivity Commission 2010; ACFID 2011b). Government funding and consequent public scrutiny further emphasise the significance and relevance of accountability in the NFP sector and stakeholders’ demands for organisations to demonstrate efficiency and transparency in their operations (Ebrahim 2003, Gettler 2007, Australian Government Productivity Commission 2010).

ACFID’s Code of Conduct outlines requirements in the areas of organisational integrity, governance, communication, finance, personnel and management (ACFID 2009a)[endnoteRef:12]. Signatories to this Code represent a significant proportion of the NFPs operating in the international aid and development subsector, and certainly all of those eligible for AusAID NGO Cooperation Program grants[endnoteRef:13]. The ACFID Code encourages transparency in its signatory organisations, aiming for accountability and integrity in financial reporting. It specifies guidelines for financial practice, and requires the presentation of financial statements in a prescribed format (see Appendices 1 and 2) (ACFID 2009a, 2009b). [12: The ACFID Code of Conduct has been revised, with the new Code taking effect from January 2012 (ACFID 2010). Organisations’ 2008-2009 Annual Reports were prepared under the earlier version of the Code.] [13: Australian NGOs that have been accredited with AusAID and therefore comply with ACFID’s Code of Conduct, are eligible to receive funding through the AusAID NGO Cooperation Program (AusAID 2010). ]

The total population of ACFID signatories is around 110 in any single year. We have selected the annual reports of 97 organisations as the sample for this study, based on the availability and completeness of data included in their audited financial statements. In order to gain an understanding of these 97 organisations, we divided them into six income groups and analysed their income sources[endnoteRef:14]. Organisations in the study reported total income ranging from under $15,000 to over $1b, with varying degrees of reliance on funding sources. Figure 1 portrays the relative importance of the various income streams of all 97 organisations in the six income groups. It reveals that these income sources were most evenly balanced, on average, for organisations in the $5m-$10m income range. Organisations in the lowest income groups generally displayed the highest reliance on fundraising income. [14: Income was selected as it has been identified in prior literature as a suitable proxy for organisational size (see for example, Ahmed and Courtis 1999).]

[Figure 1 here]

The purpose of the paper is both to examine the expenditure patterns and the disclosures of organisations. For the purposes of calculating the expenditure patterns, expense data from financial reports was recorded in keeping with the categorisation required by the ACFID Code, as outlined in Appendix 2. One of the limitations of the study centres around the allocation of costs, since organisations did not provide details of how they allocated costs to the various categories[endnoteRef:15]. However, this limitation reinforces our contention that organisations need to communicate additional information about their expenditures. In order to satisfy the second objective of the study, we analysed the nature and extent of disclosures relating to expenditure on program, fundraising and administration, and the cost of fundraising. The location of disclosures in either the narrative section of the annual report and the notes to the financial statements was determined, together with their page length. [15: This issue is not unique to our study, as it has been acknowledged that possible misallocation of costs reinforces the danger of using single metrics to compare individual organisations (Hager 2003; Jones and Roberts 2006; Krishnan et al. 2006).]

This research is exploratory, and as such the findings of this study are not intended to be generalisable outside this target population of ACFID organisations. However, in presenting the data, we provide valuable insights into the expenditure and disclosure patterns of a previously unexplored group of NFP organisations, and highlight the potential of additional disclosures to enhance organisational accountability and stakeholder understanding.

EMPIRICAL EVIDENCE OF EXPENDITURE PATTERNS

Sample-wide descriptive statistics for the four expenditure efficiency ratios are presented in Table 1. Discussion on program, fundraising and administration expenses is combined, as these three expenditures comprise 100% of all organisational expenditure. The mean program expense ratio across all organisations was 76.6%, with a considerable range, from

0%-100%. A median of 81.5% confirmed the generally high degree of program expenditure across all organisations. The mean fundraising and administration expense ratios across the sample were 6.1% and 15.1% respectively, again with quite wide ranges, and medians that indicated fundraising and administration spending remained low in the majority of cases.

[Table 1 here]

These findings may reinforce the notion that NFP managers want to keep overhead costs (fundraising and administration) as low as possible, presumably as a means of attracting substantially larger contributions from donors. This pattern of expenditure is consistent with the findings of prior studies in other jurisdictions, that organisations report greater expenditure devoted to program and consequently less on overheads (administration and fundraising expenditure) (see for example, Harvey and McCrohan (1988); Yetman and Yetman (2012) in the US; and Hyndman and McKillop (1999) in the UK).

However, in line with Steinberg (1986), Tinkelman (1999, 2006, 2009), Tinkelman and Mankaney (2007) and Palotta (2008), we argue against the use of simplistic metrics. Instances of high program expenditure and consequently low overhead expenditure, as in this case, may indicate that longer-term infrastructure needs are not being met (Hyndman and McKillop 1999; Tinkelman and Mankaney 2007; Australian Government Productivity Commission 2010). The prior literature thus advises caution when interpreting ratios as benchmarks, and suggests that moderate fundraising and administration spending is not always detrimental to NFP performance, as media headlines might suggest. In fact such spending is vital for the long-term survival and capacity-building of organisations, and hence should be given appropriate consideration in the NFP budgeting process. In this case, given that it is costly to run programs, and administration and fundraising expense ratios were relatively low, each individual organisation needs to ensure that it is not using up its reserves and that it remains financially sustainable beyond the short-term.

Table 1 displays a mean cost of fundraising ratio of 12.8% across all 97 organisations. As with the previous expenditure ratios examined, the range of this ratio was also wide, with a low median of 5.2%. Cost of fundraising is a metric that also has the potential to attract headlines, with public dissatisfaction evident if it is regarded as high (Harvey and McCrohan 1988; Tinkelman 2006, 2009; Gonzalez 2010). It ought to be interpreted with care, however. Rowley (2011), in a UK study which examined the perceptions of more than 1000 residents, maintained that there is no “magic number” for an appropriate level of fundraising costs, and noted that charities actually spend less on fundraising than the public thinks. Similarly, Tinkleman and Mankaney (2007: 80) argued that the cost of fundraising ratio is limited in its usefulness to gauge the efficiency of fundraising efforts, since in some instances expenditure is “an investment in donor relationships”, which had longer-term benefits. In fact, a high cost of fundraising ratio in one particular period could point to future growth in fundraising revenue (Hyndman and McKillop, 1999).

On a more general level, what is noteworthy in Table 1 is that each of the ratios had a range that commenced at 0.0%, with the Program and Administration ratios extending to 100% and Cost of Fundraising ratio to a surprising 111%. To develop an enhanced understanding of the unique characteristics of organisations whose expenditure patterns were outside conventional expenditure parameters, we identified 7 “outlier” organisations[endnoteRef:16] and 20 organisations that reported zero fundraising costs even though they reported fundraising revenue[endnoteRef:17]. Our rationale for this was that because of their unusual metrics, they might be expected to provide some additional explanatory narrative about their expenditure patterns. They are examined in more detail in the next section of the paper (see Table 3), as are the 20 organisations that displayed zero fundraising costs (see Table 4). [16: For the purposes of this study, in order to identify some organisations whose ratios were hugely numerically distant from the mean, we determined outlier organisations to be those with any of the four ratios being three standard deviations from the mean. This resulted in the identification of seven organisations whose reports we examined in closer detail for any evidence of additional disclosures that might account for the ratios of unusual dimensions. Because of the related nature of PER, FER and AER, this approach also highlighted organisations which had a 0.0% in any of these three expenditure ratios. Because of the high PER mean, it did not pick up the two organisations that reported 100% PER, but since these also reported 0.0% in the other two categories of expenditure, they are included in the list of 20 organisations that reported zero fundraising expenditure (see Organisations H and T in Table 4). ] [17: These organisations prepared their accounts in line with the ACFID Code of Conduct that was current for the 2008-09 year. ACFID’s revised Code of Conduct, to apply from 1 January 2012 highlights the inappropriateness of reporting zero fundraising costs (ACFID 2010).]

The reporting of zero fundraising costs may appear counter-intuitive, given the increased competition for donations faced by organisations in today’s charitable environment (Ebrahim 2003; Chetkovich and Frumkin 2003), but it likely reflects perceptions that fundraising expenditure ought to be low in order to attract donors (Harvey and McCrohan 1988; Tinkelman 2009). It is a phenomenon that has been identified in both the US (Krishnan et al 2006; Yetman and Yetman 2012; McCambridge 2012) and the UK (Hyndman and McKillop 1999; Sargeant et al 2009).

Krishnan et al (2006) and Yetman and Yetman (2012) reported that organisations with zero fundraising costs often have fundraising revenue, leading to speculation that they may be misreporting or miscategorising fundraising costs, allied with program ratio inflation. Even if there was no misreporting in this case, the fact that an organisation reports zero fundraising costs would seem to indicate that there would be a case for some additional communication with stakeholders over this phenomenon. However, it is possible that these organisations may either legitimately not have incurred any fundraising expenses in generating their fundraising income, or they may have miscategorised their expenditure.

In an attempt to identify trends among organisations of similar size, the sample was refined based on the six income groups identified earlier. Table 2 presents the means of all four expenditure ratios of the 97 organisations in the study, according to their income group classification. In addition, it displays the number of organisations in each of the income groups that we identified either as outliers or which reported zero fundraising costs.

[Table 2 here]

A number of observations can be made from this data. First, consistent with the overall results displayed in Table 1, these figures reveal that the average level of program spending in each revenue bracket was high, and that the corresponding levels of fundraising and administration spending were low. Second, with the exception of the two highest income groups, the cost of fundraising appears to increase as the organisation gets larger. This is surprising given research that identifies economies of scale in the cost of some fundraising activities (Harvey and McCrohan 1988; Wise 1997; Hyndman and McKillop 1999; Kahler and Sargeant 2002; Sargeant et al 2009).

Third, the seven outlier organisations and the twenty that reported zero fundraising costs appear to be randomly distributed across income groups, with the highest number reporting zero fundraising costs in the lowest income bracket. However, closer examination revealed that the percentage of the organisations in the relevant income groups that were outliers rose from 6.7% for the fifteen entities in the $0-$250K category to 10% of the twenty entities in the >$10m category, i.e. the proportion of organisations that were outliers was higher in the higher income groups. This may indicate that as organisations increased in size, their characteristics became more unique in some way.

In a similar vein, the percentage of organisations that reported zero fundraising costs was highest (60%) in the lowest income group, and lowest in the top two income groups (0% of the eleven entities in the $5-$10m group and 5% of the twenty entities in the >$10m group). One explanation of this may be that in organisations of greater size, and presumably with more sophisticated accounting systems, there were fewer instances of misclassifications of fundraising expenses. There is thus some ambiguity and uncertainty in these expenditure metrics.

The next section of the paper addresses our second aim, which is to examine the extent to which organisations have disclosed information about their expenditures in their annual reports and financial statements. The extent of such communication is an important issue, as illustrated in the US study of Szper and Prakash (2011). They found that changes in ratings did not affect donor support, but that donors assessed the worthiness of organisations via other means. Our contention is that organisations face the challenge of providing information that is relevant to stakeholders, i.e. that they communicate their own expenditure stories.

EMPIRICAL EVIDENCE OF ADDITIONAL DISCLOSURES ABOUT EXPENDITURE

We examine the narrative sections of organisations’ annual reports and the notes to their financial statements for explanations or disclosures that elaborate on expenditure, analysing these communications in three ways. First, we examine the entire sample of 97 organisations to assess whether additional disclosures were made about expenditure, and if so, where those disclosures were made. Second, we examine the seven outlier organisations more closely to determine whether they have communicated their expenditure stories. Since they are organisations that have the potential to attract headlines because of their expenditure patterns, they might be more highly motivated, in discharging their broader accountability obligations, to inform stakeholders of the context of their expenditure. Third, we examine the 20 organisations that reported zero fundraising costs, and yet also reported fundraising income, to ascertain the extent to which they provide additional disclosures about their fundraising activities and the absence of any reported fundraising costs.

Figure 2 displays, for the 97 organisations, the number that disclosed information about their expenditures and where those disclosures were made.

[Figure 2 here]

Since expenditure on program attracts headline attention (Yetman and Yetman 2012), it is not surprising that this item comprised the highest number of disclosures (65 instances in the Annual Report and 53 in the Financial Statements, with 38 entities disclosing additional information about program expenditure in both documents). Only 17 entities did not provide any additional program expenditure information to their stakeholders. Equally unsurprisingly, given the controversy surrounding the cost of fundraising (Tinkelman 2006, 2009), there were fewer additional disclosures about this item than about any other expenditure item, with 79 entities providing no disclosure in either the annual report or the financial statements.

Studies examining NFP organisations’ additional disclosures have highlighted their inadequacy in meeting the needs of users (Connolly and Hyndman 2003) and their failure to demonstrate accountability to external stakeholders (Connolly and Dhanani 2009). While there will be many dimensions to this, one would be the amount of disclosures. Consequently, we examine the extent of disclosures, which, while they do not capture quality, nevertheless represent a significant indicator of the emphasis the organisations place on such communication. Figure 3 displays the very limited extent of disclosures across the population.

[Figure 3 here]

Of the 97 entities, 64 (66% of the 97 organisations) provided either no disclosures or less than a half a page of disclosures on their expenditure patterns in their annual reports, with 18 (19%) providing up to one page and a mere 8 (8%) providing over two pages of additional information. The extent of additional disclosures in the financial statements was similar, with 62 entities (64%) providing either no disclosure or less than a half a page, and only six (6%) providing over two pages.

Research has proposed that financial and quantitative information may not be understood by stakeholders, or perhaps not well received (Jetty and Beattie 2009), so the failure of so many organisations to provide explanatory narrative about their expenditure patterns represents a communication opportunity lost. Recognising the dearth of needed expanatory information and the inappropriate nature of many traditional metrics, Pallotta (2008: 173) proposed a national US agency that would provide “in-depth program, organizational, and financial information in numeric and narrative formats, updated annually, for every active charity in America”.

Since our focus is on understanding disclosure patterns rather than conducting statistical analysis, instead of excluding outlier organisations, we further examine their reporting practices. Based on the information in Table 3, which displays the characteristics of the seven identified outliers, we make a number of observations.

[Table 3 here]

· All organisations produced quite lengthy reports, yet their expenditure disclosures were quite minimal. The total length of the seven organisations’ reports ranged from nineteen pages to 69 pages, which only highlights the relatively small attention given to expenditure information. Connolly and Hyndman (2004: 147) observed that in the UK, larger charities generally disclosed more than smaller charities, perhaps in response to “greater scrutiny” from outside agencies. Seven organisations is too small a number on which to generalise about this, but with the exception of Organisation F, this Australian data was not supportive of the UK situation. The level of reporting indicates that organisations are providing some level of accountability to their stakeholders, although Connolly and Dhanani (2009) noted in a study of the top 104 UK charities, that accountability (particularly fiduciary, financial and operational management) weakened over a five-year period even though reports were longer and narratives had increased.

· There is no identifiable disclosure pattern based on organisational size or reliance on fundraising income, except that the largest amount of disclosure was produced by Organisation F, which reported total income > $10m. Organisation E reported only 0.1% of its income from fundraising and produced no disclosures, but two other organisations (A and D) that also produced no disclosures demonstrated a relatively high reliance on donations and memberships.

· No organisations were identified as outliers based on their Program Expenditure Ratios, which reinforces the perceived importance of expenditure on program, and confirms literature that indicates program costs may be inflated by “understating fundraising and overstating program expenses” (Yetman and Yetman 2012: 2). Surprisingly, however, Organisation A reported zero program expenditure, and yet provided no additional disclosures that may explain this.

· Organisations F and G, which are identified as outliers because of their high Fundraising Expense Ratios, are both in the largest income group. Prior literature has demonstrated that there are economies of scale for larger organisations (Harvey and McCrohan 1988; Wise 1997). However, it has also been reported, based on a study of the 500 largest charities in England and Wales, that the fundraising expense ratio increases with the size of the organisation (Hyndman and McKillop 1999). This can indicate that cost savings from the Program and Administration ratios are diverted to fundraising activities, which promise future growth. Such a strategy, together with other factors that affect the level of fundraising expenditure, for example the life cycle of the organisation, its size and fundraising methods and the popularity of the mission (Harvey and McCrohan 1988; Tinkelman 2006), indicate the benefit to both stakeholders and NFP organisations, of additional explanatory disclosures. Stakeholder reliance on the output of monitoring agencies can have “unintended, unfortunate consequences”, as in the case of a fundraising initiative in the US that reported “high up-front” but low marginal fundraising costs (Tinkelman 2009: 492). This indicates the necessity of effective communication about an organisation’s unique fundraising characteristics and costs. In fact, Organisation F provided the highest level of disclosure of all the outliers, and of the entire 97 organisations, providing narratives about its fundraising expenditure, and linking it to programs.

· There was evidence of extremely large cost of fundraising ratios that were not accompanied by explanatory narrative. Three organisations (B, C and E) reported outlier levels of Cost of Fundraising, Organisation E with an amazing 111%, but none provided additional disclosures about this.

· Organisations A and D, whose Administration Expense Ratios were 100% and 71.5% respectively, also provided no explanation of why these expenditures were so high. Tinkelman and Mankaney (2007) indicated that NFP organisations should increase their administration expenditure, for example to build necessary infrastructure or to meet the costs of regulatory reporting. However they also pointed out that managers would need to provide a justification of this expenditure, particularly to reassure stakeholders that program expenditure was not adversely affected.

In summary, the paucity of additional disclosures in the reports of these seven outliers reflects poorly on the level of accountability they achieve with their reports and could indicate a lack of awareness on the part of the organisations of the significance of their expenditure patterns and the advisability of communicating their own stories to stakeholders. Even where they have shown large expenditures in certain categories, there is no evidence that any of the organisations have communicated their expenditure stories. In short, the organisations do not appear to be responsive to the visibility they may attract from unusual expenditure patterns.

The third way we obtained an understanding of the disclosure patterns of organisations was to focus on the twenty organisations that reported zero fundraising expenditure. The prevalence of reporting of zero fundraising costs, while noteworthy (20.6% of the population of organisations in the study), is not unusual, as already outlined. Two of these organisations (A and D, as outlined in Table 3) were also identified as outliers, because they reported high Administration Expense Ratios. Because all twenty of these organisations reported a 0.0% in this category, there were no disclosures about either the fundraising expenditure or the Cost of Fundraising in their reports. However, to ascertain any reasons why there were no reported expenditures related to fundraising activities, we examined both the annual reports and financial statements of these twenty entities for possible explanations. The results are outlined in Table 4.

[Table 4 here]

Fundraising income as a proportion of total income varied widely across the twenty organisations, from 0.02% in the case of Organisation W, to 99.9% for Organisation P, with no obvious link to the level of total income. Zero fundraising expenses may be expected due to materiality issues, where fundraising income represents only a diminutive fraction of total income, such as with organisations W and Y, and to a lesser extent, D, H and K. Further investigation of the annual reports of R, S, D and W provided no additional insights about why they might have reported zero fundraising costs. A close examination of the reports of the remaining organisations’ reports enabled us to discern information that provided some insights about why no fundraising costs were recorded, but this was not obvious. Reasons included a reliance on single large donors, spontaneous donations, the contributions and fundraising work of volunteers[endnoteRef:18], and generous media coverage of the mission. [18: It is interesting to note that four of the zero fundraising expenditure organisations mentioned volunteer contributions to the fundraising activities in their reports (Organisations L, M, O and P). L, M and O were in the $0-$250K income range and P in the $250K-$500K income range. This could indicate that smaller organisations placed more reliance on volunteers for fundraising activities, where larger organisations may have more sophisticated fundraising systems, or employ professional fundraisers. ]

It is possible, but unlikely, that all of these organisations legitimately did not incur any fundraising expenditure, however further information would need to be provided to confirm this. Prior studies have highlighted some reasons for the reporting of a zero or low fundraising expenditure ratio. These include misallocation or differences in cost allocations (Sargeant et al 2009), difficulties in relying on information from financial statements to construct fundraising ratios (Tinkelman 2006), “inappropriate reporting” (Krishnan et al 2006: 399), or a response to awareness of public criticism of high fundraising costs (Harvey and McCrohan 1988) and a deliberate understatement of fundraising expenditure (Yetman and Yetman 2012). This is particularly salient, given the requirement in ACFID’s revised Code of Conduct, that “signatory organisations should not give the impression that fundraising has no costs” (ACFID 2010: 15).

It is also possible that the preparers of reports were not aware that additional information would prove useful for those trying to interpret financial accounts, particularly in the absence of guidance from regulators. The need for the communication of performance-related information has been identified as important in the UK (Hyndman and Anderson 1995; Connolly and Hyndman 2003, 2004; Connolly and Dhanani 2009; Jetty and Beattie 2009), while in the US some researchers are acknowledging the shortcomings and misleading nature of charity ratings tables (Pallotta 2008; Tinkelman and Donabedian 2009).

it would therefore appear from this analysis that at the very least, the organisations in the sample significantly neglected the potential to contextualise their financial performance and communicate transparently with their stakeholders. Although they provided financial statements as mandated, they may not have fully or meaningfully discharged their broader accountability responsibilities by communicating appropriate voluntary information in either their financial statements or annual reports.

CONCLUSION

The expenditure patterns of NFP organisations attract media attention and reflect the increasing accountability demands of stakeholders. NFP organisations must be willing to be subject to public scrutiny if they are to maintain public trust and thereby ensure the continuation of their operations. This means that NFP organisations must be able to communicate transparent information about their performance, including their expenditure patterns.

Concerns about these accountability and communication issues in relation to Australian NFP organisations motivated this study of NFP expenditure patterns and disclosures, and was made possible by the availability of ACFID data.

A detailed analysis of the annual reports and financial statements of 97 organisations revealed a high commitment to spending on program, with relatively low expenditure on administration and fundraising activities, and a low cost of fundraising. Further analysis revealed that additional explanatory disclosures about these expenditures were very limited. Even those organisations whose expenditure patterns could be interpreted as unusual provided little disclosure of the reasons why this might be the case. An explanation for this edearth of additional disclosures on expenditure patterns could be that the preparers of reports, particularly of the narrative sections of annual reports, focus more on presenting a “good story” in a publicity mode, rather than an “objective, transparent account” in an accountability mode (Connolly and Dhanani 2009: 7). We identify the lack of communication about these unusual expenditure patterns as missed opportunities, when annual reports and financial statements could have been used to communicate transparent information about the real costs of running the organisation, thus building trust and educating stakeholders about the real cost of running a NFP organisation.

These findings have implications for NFP regulators and managers. Within this relatively comparable population of organisations reporting according to the ACFID Code of Conduct, evidence of variations in expenditure patterns, coupled with uncertainty about how expenditures were allocated, indicates that there will likely be huge incomparability of data for Australia’s broader NFP sector. Given this observation, any suggestion about benchmarking the expenditure of Australian NFP organisations would seem to be irrelevant, unjustified and misleading. A regulatory regime that requires organisations to tell their own stories rather than disclose or conform to standardised metrics, will encourage transparent demonstrations of accountability and enhance the public’s understanding of NFP costs (Connolly and Hyndman 2003; Pallotta 2008; Connolly and Dhanani 2009).

NFP organisations have the opportunity in their annual reports and the notes to their financial statements, to communicate with stakeholders about their performance by voluntarily providing additional explanatory information about their expenditure patterns. These disclosures represent one aspect of confronting the realities of what it costs to run a NFP organisation to ensure its longer-term sustainability and of the necessity of meeting stakeholders’ need for information about an organisations’ financial health. Transparent and informative disclosures about expenditure have the potential to draw the focus away from narrow, short-term focused expenditure metrics and instead, contributed to the discharge of a broader accountability.

The study has some limitations, both theoretical and practical. It has been suggested that the calculation of expenditure ratios from financial statements is not an accurate or appropriate strategy, since it ignores “current, marginal information” about the use of donations (Tinkelman 2006: 461). Reliance on data from a single year has been said to ignore potentially substantial variations between years (Kahler and Sargeant 2002). In addition, there is extensive criticism on the calculation of narrow financial metrics because of their limited ability to portray organisational performance, and because of allocation differences.

However, it is not our intention that the expenditure ratios we have identified and calculated should be seen as an end in themselves, but rather that they should be considered in the light of organisations’ mission-related activities and achievements, and their individual characteristics including their size and fundraising methods. On the basis of this study, we advocate the longitudinal, internal use of expenditure efficiency metrics by NFP boards in order to highlight the issues unique to their organisations (Ryan and Irvine 2012). Through the enhanced use of the annual report and financial statements these issues can then be communicated to stakeholders as the unique stories behind expenditure patterns.

It is clear that further empirical research on the performance and accountability of Australian NFP organisations is required, particularly at this juncture in Australian NFP history, with the inauguration of the new national regulator. It would be useful to expand this study longitudinally to ascertain changes in both expenditure patterns and communication about those patterns. The diversity of the Australian NFP sector presents a further opportunity for research that explores whether levels of program spending are as high (and fundraising and administration spending as low) in other Australian NFP subcategories as they are in that of international aid and development.

This paper provides the first empirical insights into the previously unexplored topic of Australian NFP expenditure performance and disclosure. It is hoped that these insights will enlighten the debate over NFP expenditure expectations and disclosures, as regulators and policy-makers move the Australian Government Productivity Commission’s (2010) agenda forward and the new formed ACNC takes up the challenges of regulating the sector.

APPENDIX 1: ACFID CODE OF CONDUCT – SELECTED EXCERPTS

4. Communication with the Public

4.1 An Annual Report is to be produced and made available to the organisation’s own members, supporters and members of the public upon request.

5. Finances

5.1 The Organisation will have internal control procedures which minimise the risk of misuse of funds. Reporting mechanisms which facilitate accountability to members, donors and the general public will be used. The Organisation will have adequate procedures for the review and monitoring of income and expenditure. Loans to and transactions with Governing Body members or related parties shall be publicly disclosed. Loans to staff shall be disclosed to the Governing Body.

5.2 Notwithstanding any other legal requirements, the Organisation must publish in their Annual Report, financial statements prepared in accordance with the Code of Conduct Summary Financial Report Format found in the Guidance Document to the ACFID Code of Conduct. Additionally, organisations may choose to publish their Full Financial Statements within their Annual Report.

5.3 Code of Conduct Summary Financial Reports and Full Financial Reports must be audited by at least a qualified accountant who is a member of CPA Australia, the Institute of Chartered Accountants in Australia, the National Institute of Accountants or by a Registered Company Auditor. The Auditor’s statement of the summary reports presented must accompany the financial report in the Annual Report.

5.4 Where an organisation chooses to publish only their Code of Conduct Summary Financial Reports in their Annual Report and not the organisation’s Full Financial Report, the Annual Report must make reference to the fact that the Full Financial Report is available on request. Any other organisational publications that detail, summarise, or comment on financial performance must also indicate that the Full Financial Report is available on request.

5.5 Donations shall be used as promised or implied in fundraising appeals or as requested by the donor. When funding is invited from the general public for a specific purpose, the Organisation shall have a plan for handling any excess and shall make this known as part of the appeal. Organisations shall substantiate, upon request, that their application of funds is in accordance with donor intent or request.

5.6 The use of ratios in publications shall at all times be accompanied by a note explaining how these have been determined.

10. Definitions

Annual Report. The annual report is one of the principal windows of Organisational performance, activity and accountability. It should be both reflective of the pursuits, issues and achievements for the period being reported and be predictive on future directions and activity. It shall contain, as a minimum:

· a statement of the Organisation's goals or purposes;

· a summary of overall program activities by country or region;

· the names, qualifications and experience of current members of the Governing Body as well as those who served at any time during the period being reported on;

· financial statements using the Code of Conduct Summary Financial Report Format; and an audit opinion on the financial statements, clearly identifying the auditor (name, company, address and signature). (Reproduced from ACFID 2009a: 5-6, 14)

APPENDIX 2: FINANCIAL REPORT TEMPLATE FOR INCOME STATEMENT ANALYSIS

ACFID Code of Conduct Categories (ACFID 2009b)

The Study’s Categories

Revenue

Income

Donations and Gifts

monetary & non-monetary

Fundraising Income

Legacies and bequests

Grants

AusAID, other Australian, other overseas

Grant Income

Investment Income

Investment Income

Other income

Other (Commercial) Income

Expenses

Expenses

Overseas projects

Funds to overseas projects, other project costs

Program Expenses

Domestic projects

Community education

Fundraising costs

Public, government, multilateral and private

Fundraising Expenses

Administration

Administration Expenses

Excess of revenue over expenses (shortfall) from continuing operations

Surplus (Deficit)

APPENDIX 3: DISCLOSURES OF ADDITIONAL INFORMATION ABOUT EXPENDITURE: NUMBER OF ORGANISATIONS, PLACE AND TOPIC OF DISCLOSURES (see Figure 2 for bar graph representation)

 Additional narrative information about …

Disclosures in Annual (Narrative) Report

Disclosures in Financial Statements

 

Disclosures in both Annual Report and Financial Statements 

No disclosures in either Annual Report or Financial Statements

 

No. of entities

% of total

No. of entities

% of total

No. of entities

% of total

No. of entities

% of total

program expenditure

65

67.01%

53

54.64%

38

39.18%

17

17.53%

administration expenditure

41

42.27%

31

31.96%

17

17.53%

42

43.30%

fundraising expenditure

31

31.96%

25

25.77%

11

11.34%

52

53.61%

cost of fundraising

7

7.22%

14

14.43%

3

3.09%

79

81.44%

APPENDIX 4: LENGTH OF DISCLOSURES IN ANNUAL (NARRATIVE) REPORTS AND FINANCIAL STATEMENTS (see Figure 3 for bar graph representation)

Length of disclosure

Disclosures in annual (narrative) reports (n=97)

Disclosures in financial statements (n-97)

No. of entities

% of total entities

No. of entities

% of total entities

0

28

28.9%

40

41.2%

>0.5 page

36

37.1%

22

22.7%

0.6 – 1.0 page

18

18.6%

10

10.3%

1.1 – 1.5 pages

7

7.2%

9

9.3%

1.6 – 2.0 pages

0

0.0%

10

10.3%

>2.0 pages

8

8.3%

6

6.2%

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BIOGRAPHY OF AUTHORS

Christine Ryan

Chris Ryan is Professor and Head of the School of Accountancy, Queensland University of Technology. She researches the accountability implications for non profit organisations. She is on the editorial advisory boards of Accounting, Auditing & Accountability Journal, Pacific Accounting Review and Accounting Research Journal. She a Fellow of CPA Australia and a member of the Institute of Chartered Accountants in Australia. She currently serves on the Queensland State Council of the ICAA.

Helen Irvine

Helen is a Professor at the School of Accountancy, Queensland University of Technology, and is a CPA. Her research interests include financial reporting and not-for-profit accounting. She is on the editorial advisory board of Accounting, Auditing & Accountability Journal and Australasian Accounting Business & Finance Journal, and conducts ad hoc reviews for numerous other journals.

Figure 1. Funding streams of the 97 organisations in the study

Table 1. Range and diversity of expenditure patterns of the sample

Ratio

Mean

Median

Standard Deviation

Range%

Low

High

Program expense (PER)

76.6%

81.5%

17.4%

0.0%

100.0%

Fundraising expense (FER)

6.1%

2.4%

8.0%

0.0%

36.5%

Administration expense (AER)

15.1%

10.4%

15.7%

0.0%

100.0%

Cost of fundraising (CoF)

12.8%

5.2%

19.4%

0.0%

111.0%

Table 2. Calculated expenditure efficiency ratios by annual revenue, “outliers”, and organisations reporting zero fundraising costs

Income group

No. of entities

Expenditure ratio means (%)

No. of entities[endnoteRef:19] [19: Two organisations were identified in both the outlier and zero fundraising cost categories, although reporting zero fundraising costs alone was not sufficient to satisfy the three deviations either side of the mean test we applied to identify outliers (see Tables 3 and 4). The two organisations were in the $0-$250K and $1m-$5m income groups.]

Outliers

Zero fund-raising costs

PER

FER

AER

CoF

0-250K

15

72.3

3.5

24.2

4.4

1

9

250K-500K

5

87.5

2.7

9.8

3.1

0

2

500K-1m

16

78.0

3.0

16.0

9.4

1

3

1m-5m

30

74.4

5.2

17.3

11.6

2

5

5m-10m

11

81.2

5.5

9.9

23.2

1

0

>10m

20

78.1

12.6

8.3

19.5

2

1

Total

97

 

 

 

 

7

20

Figure 2. Disclosures of additional information about expenditure: number of organisations, place and topic of disclosures (see Appendix 3 for detailed figures)

Figure 3. Length of additional expenditure disclosures in annual (narrative) reports and financial statements (see Appendix 4 for detailed figures)

1

Table 3. Information and disclosures by identified ‘outlier’ entities (Note: expenditure ratio that identified the organisation as an outlier is shaded)

Entity

Mission

Income Group

($)

Expenditure ratios (%)

Additional information disclosed in Annual Report or Financial Statements

Page length of reports

Length of Disclosures (pages)

PER

FER

AER

CoF [endnoteRef:20] [20: Organisations A and D both reported zero Fundraising Expense Ratios and zero Cost of Fundraising, and are also included in Table 4, in the list of twenty organisations that reported zero fundraising costs. However, they were not identified as outliers because of this, but rather because they reported a 100% Administration Expense Ratio and a 71.5% Administration Expense Ratio respectively (see Table 3).]

A

Account-ability

0-250K

0

0

100

0

This member-based entity received 72% of its income from members, with only 3.3% from donations, and no grants. There were no additional disclosures to explain the high administration expenditure.

23

0

B

Medical R & D

500K-1m

49

7.9

43.1

84.5

Income was from investments (75%), donations (15.2%), and grants (7.3%). Even though the cost of fundraising was high, the organisation provided no disclosures about its fundraising expenditure.

19

<0.5

C

Anti Traffick-ing

1m-5m

83.9

7.6

8.5

86.6

70% of income came from grants and 8% from donations. The narrative disclosure (<0.5 page) was of a general nature, with no explanation of why the cost of fundraising might be 86.6%.

43

<0.5

D

Medical

1m-5m

28.5

0

71.5

0

71% of the income was from grants and 23% from memberships. There was no explanation of the high administration expenditure, or any other additional expenditure disclosures.

69

0

E

Medical

5m-10m

88.8

0.1

11.1

111

Income was from grants (50.6%), commercial (48.3%), investments (1%) and a minuscule reliance on fundraising (0.1%). Despite the high cost of fundraising ratio, there was no explanation of any expenditures.

50

0

F

Refugee Program

>10m

52.7

36.4

10.9

53.1

Donations (70%) and grants (30%) made up the income. There were some narratives about fundraising expenditure, mainly to explain which programs benefited from various fundraising activities.

36

>2

G

Environ-mental

>10m

49.9

35.5

14.6

44.3

68% of the income was from donations. There were scant narrative disclosures about expenditure, despite a two-line note in the financial statements about the organisation’s recruitment of “new supporters”.

45

<.0.5

Table 4. Expenditure disclosures of organisations reporting zero fundraising expenditure

Entity

Mission

Income group ($)

% Fund-raising revenue[endnoteRef:21] [21: This represents the percentage of total revenue derived from fundraising sources. We have included all organisations’ donations income as a category of Fundraising income. However, we acknowledge that some organisations may have unsolicited donations, which, under some State fundraising legislation, may not constitute fundraising income. ]

Additional information disclosed in Annual Report or Financial Statements that may explain zero fundraising costs

 H

Environ-mental

0-250K

9.9

Financial statements and annual report included the statement that there was no single fund raising activity for a designated purpose that generated 10% or more of total income for the year. Donated funds were from a single corporate donor to purchase equipment. PER 100%.

 I

Sustain-ability

0-250K

72.7

Annual report notes postponement of some fundraising activities due to the global financial crisis and plans for future fundraising programs. Financial statements note no fundraising activities subject to charitable fundraising legislation.

 J

Develop-ment

0-250K

72.8

A donation from a regular donor comprised 85% of total donations received.

 A

Account-ability

0-250K

75.5

Financial statements note the organisation’s funding is mainly from subscription revenue. Annual report notes that no single fundraising activity for a designated purpose generated 10% or more of total income.

 K

Medical

0-250K

17.9

Financial statements and annual report included the statement that there was no single fund raising activity for a designated purpose that generated 10% or more of total income for the year; donations and gifts include monetary and non-monetary items.

 L

Human-itarian aid

0-250K

73.6

A series of spontaneous donations were received from individuals and local businesses. Volunteers distributed donations made during the year.

 M

Medical

0-250K

79.4

The organisation receives the support of regular volunteers at head office and corporate sponsors who raise funds on their behalf.

 N

Develop-ment

0-250K

62.0

Financial report specifically stated there were no fundraising costs. Chairman's reported plans to institute a