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Charities as businesses?

In recent weeks, the Irish media has revealed yet another charity mis-using funds – this time the founders used a lot of the charity monies for personal purposes. 

Regulation of charities in Ireland is not as good as it could be – we have some legislation waiting to be enacted since 2009 as far as I know. But laws cannot prevent what happens within an organisation from happening; they can only penalise after the event. 

So what bugs me? Well, the title of this post really – it is something I picked up from the print media in recent weeks. I am sure I have said somewhere on this blog that accounting is the language of business,  so what about accounting for charities?  My own opinion is that charities must have proper accounting, and there are accounting standards already in place for charities. But I often wonder should we be careful and not allow charities to become too much like a business? For example, we should be using accounting in charities to drive efficiencies, not necessarily monitor revenue and costs like in a business. Nor should we be using accounting just to get funding for a charity. In short, what I am trying to say is that we need to be careful and try to not let accounting (and other commercial sector notions) detract from what a charity should be.

New code for Irish charities

In March 2011, the Irish Times reported on a new voluntary code for charities in Ireland. Yes, it’s a while ago and has been on my “to do” list for quite a while.  Following the enacting of the Charities Act 2009, all Irish charities must submit an annual activity report to the  Charities Regulatory Authority. Larger charities also have to complete and file audited accounts. The new proposed code aims to make charities more transparent financially, going beyond the requirements of the Act. The five key elements of the code are:

  • charities commit to good practice and ensure fundraising activities are open and legal
  • a donor charter will be introduced
  • a complaints and feedback procedure
  • a monitoring group will monitor code compliance
  • an annual report and a statement of annual accounts will be publicly available
The code is voluntary, and according to the article it is hoped that the vast majority of Irish charities will follow the code. This it would seem may be a good option as if the code is not followed the Regulator can legally develop further regulation for charities.

Management control in NGO’s

Non-governmental organisations (NGO) are increasingly being held to account for their performance and uses of funding. Indeed, the funding they obtain is more likely to be based on having sufficient competencies to use the funds in the best possible way.  Sounds like a business doesn’t it? But NGO’s are not businesses you might say, and they usually have a non-profit (and often very worthy) objective.

However, NGO’s are increasingly becoming like businesses. For example, the Charities Act (2009) in Ireland requires all charities to be formally registered and (in most cases) submit annual audited financial reports to a Registrar. From a management accounting view, NGO’s can of course adopt budgetary control and other performance measures as normally used in a business. A recent report from CIMA suggests “evidence shows that developing formal management controls can help NGOs to develop networks with government departments, funding agencies, other service providers and clients”. It goes on to say that management accounting can contribute in several ways to the success of an NGO:

  • Planning and control when formulating proposals for funding, often involving networks of partner agencies.
  • Clarifying within the NGO the importance of including economic efficiency as an organisational value alongside traditional welfare values.
  • Linking non-financial operational performance to financial concerns.
Making the link between such management accounting concepts and the underlying purpose of an NGO may not be that easy. While overall the CIMA research report suggests NGO’s can benefit from business like management control systems, it does mention that controls that are too formal or too financial may affect what the authors term “bonding capital”. This refers to the close interpersonal relationships of NGO members based on shared beliefs. If these shared beliefs are called into question by over formalised management controls, this could be to the detriment of the NGO.
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