If donors do not have access to consistent, high-quality, accurate financial information, why would they continue to invest? This is a top concern for non-profit organisations (NPOs) globally and a concern that Humentum and CIPFA aim to put to rest through the development of an international non-profit reporting standard.
Humentum itself is a non-profit working with humanitarian and development organisations to improve how they operate. It is located across several continents but ICAEW member Samantha Musoke, Humentum's Project Director IFR4NPO, is based in Uganda where the flow of donations through non-profit organisations is vital, and so is the reporting of it.
Musoke has worked as a chartered accountant in Uganda for 20 years, and most of her professional experience has been in the non-profit sector, but she trained and cut her teeth in the UK on the Charity SORP…the absence of which in Uganda is sorely missed.
“I thought I knew something about charity accounting, and then I came here and found that everybody does their own thing,” says Musoke. “There's no one guideline being followed.” This makes it extremely hard for users of accounts to understand what they are trying to convey.
“Fundamentally, it damages trust when all the reports you see look different from each other,” she says. “In the final analysis, donors want accountability and transparency – but the problem is compounded because they each tend to prefer their own format.”
An international survey, carried out in 2015 by the ICAEW and other accounting bodies, showed that 72% of respondents from 179 countries wanted an international standard. Interestingly, the appetite for a standard in the UK was not great – but the UK already has the charity SORP so that need is already met.
“Respondents were largely saying that they need an international standard that carries the weight of authority so that nonprofits can show they have prepared their financial statements in accordance with the standard and are a credible organisation,” says Musoke.
All of this is at the very heart of Humentum’s activities. “We are an international non-profit ourselves, with about 40 people in about seven countries, and we are fully virtual. We support the non-profit sector in their operations in terms of finance, HR, learning, diversity, safeguarding, advocacy, and so on,” says Musoke. “Our mission is for there to be an equitable, accountable and resilient charity sector that works really well.”
Once a clear appetite for a global reporting standard was established, and it was acknowledged that IFRS does not meet the needs of this particular sector, the question became: how to move forward. Humentum and CIPFA were given seed funding by the Ford Foundation and Open Society Foundation to launch the development process in July 2019. In January 2021, after an extensive global participatory development process, a comprehensive Consultation Paper was published that comprises a series of questions and proposals for detailed consultation. Now other foundations are coming on board to fund the next stages of the development process. A subsequent Exposure Draft is planned to be issued in 2023 with a further global consultation process, and the Final Guidance is expected in 2025.
The work is important, she says, because it is very much about building trust to unlock the investment into the social sector needed to achieve the Sustainable Development Goals and address burdensome and duplicative regulatory and compliance requirements that waste effort and money. “It’s about investors, civil society and citizens, and donors having trust in nonprofits,” she says. “There's evidence that international standards have been a significant driver of financing in the private sector. It gives confidence in markets and then we see capital investment. Now we need exactly that same thing internationally for non-profits. We're the only sector that doesn't have it.”
The feedback from the consultation will be the basis upon which an exposure draft will be built. “We think that narrative reports, alongside the numbers, are critical to building trust. The financials are important but they're not why these organisations exist,” she says. Reporting on impacts of funding and the ring-fencing of restricted grants all need a method and this method can only be delivered well through an international standard.
“Donors want to see how their money's been used, but also they want to know about risks and governance, and a whole host of other things,” says Musoke.
Accounting standard setters are very much involved in this process. The IFR4NPO Technical Advisory Group (TAG) itself comprises standard-setters from 14 different countries and five continents, with the IASB as an observer member. The TAG is chaired by Ian Carruthers, CIPFA’s Chair of Standards. The accounting standard setters are pooling their expertise and experience so that the guidance draws from good practice across the world while finding ways to drive greater consistency.
So, has the nonprofit sector itself bought into the potential of a new standard? Or, is there suspicion and scepticism that this could be just another layer of administration?
“We’ve held meetings in 20 different countries, with participants from 70 countries. The majority of people that have attended those meetings are, in fact, nonprofits themselves. But we've had regulators, donors and auditors in attendance as well. Overwhelmingly, the main reaction that we're getting to having our own international reporting standard is: ‘Yes please’.”
She adds that there are requests from the sector not to make the new standard too big or too complicated so that it serves all nonprofits of all sizes.
Musoke’s response to this valid concern is: “Please feed into this consultation so that the new standard meets your needs. Please, let your needs and thoughts be known so that we can develop it in a way that doesn't veer off in unhelpful directions. We want this standard to be relevant and user friendly. It should require enough information to build trust and not so much that it becomes an impossible burden.”
To respond to the consultation, please visit: http://www.ifr4npo.org/consultation-paper-response/
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