Financial Management in the Voluntary Sector

New Challenges

Paul Palmer, Adrian Randall

• Publisher: Routledge
• Year: 2001
• Print ISBN: 9780415221597
• eBook ISBN: 9781134597765
• Topic: Business
• Subtopic: Business General
• Index: Business

The voluntary sector contains over 50,000 organizations, 320,000 paid staff, and 3 million volunteers. The accounting and financial management of organizations in this sector poses as many difficulties as that of major for-profit organizations, if not more so, given the absence of the profit motive upon which much traditional accounting, finance pr

1 Voluntary sector environment – definitions, history

Introduction

The sponsored chartered accountancy publication Financial Reporting by Charities (Bird and Morgan-Jones 1981) can arguably be cited as the authoritative beginning of the modern era for charity accounting practices. As Professor Gambling and his colleagues state:

[it] . . . was the first systematic study of the charitable sector by accountants, certainly in recent years.

(Gambling et al. 1990, p. 8)

We would not disagree with this pronouncement. Prior to this first modern major research study into charity accounting there had been a number of charity accountant practitioners who had published on issues pertaining to the specialist nature of charity accounts. Most notable are Manley (1977, 1979), Fenton (1980) and Sams (1978). In the United States, thirty years before the Bird research, there was the defining work of Vatter (1947). Vatter’s published doctoral thesis had laid out the principles of fund accounting upon which modern charity accounting and the SORP is now based. Bird’s work, however, ranks as important for three reasons. It is the first milestone in the development of modern charity accounting in the United Kingdom as it leads directly to the first Charity Statement of Recommended Practice (SORP). Second, the work is in the finest tradition of academic research in being critical of the subject matter it looked at. Third, a follow-up study (Bird 1986) was based upon empirical research, which has enabled the study to be replicated and tested to see if the findings are still applicable (Williams and Palmer 1998). What is particularly interesting is the timing of the report. In the introduction to their 1981 discussion paper the authors state:

the whole area of private non-profit organisations seems to have been neglected by accounting researchers by comparison with business.

(Bird and Morgan-Jones 1981)

The early 1980s can be seen as one of the defining periods in the history of the charity sector. In 1978 a report by Lord Wolfenden on the future of the voluntary sector described the following historical periods for charity:

• Paternalism to 1834
• Voluntary expansionism 1834–1905
• Emergence of Statutory Services 1905–1945
• Welfare State 1945–

The Wolfenden report’s mission was

to review the role and functions of voluntary organisations in the UK over the next twenty-five years.

(Wolfenden 1978, p. 9)

Wolfenden was published at the beginning of dramatic change, which was to see the end of the consensus of British political parties to the Welfare State that had been established since the end of the Second World War. The election in 1979 of a radical Conservative Government and its subsequent policies of privatization were fuelled by an economic theory that rejected State intervention and placed market forces as the determinant of survival. There was an emphasis on the individual taking responsibility for their life thereby leading to lower taxation and a limiting role for the State. The 1979 Conservative Government saw the voluntary sector as enhancing this role and therefore increased funding to the voluntary sector. At the end of the 1980s the Charities Aid Foundation (CAF) estimated that central government funding had increased in real terms by 90 per cent over the decade (CAF 1989, p. 5).

The Conservative Government of 1979–1997 also began to radically change the whole philosophical thrust of welfare delivery that had been developing since the end of the last century – giving responsibility for welfare back to the individual, for example, on State old-age pensions and compulsory social insurance which the Liberal Government had introduced at the beginning of the twentieth century. Instead, people were encouraged to ‘contract out’ of the State scheme and take up private personal pensions. No longer was the provision of personal welfare services to be delivered primarily by local government. Instead, the role of government both central and local was to be a resource provider in partnership with both existing voluntary organizations and the private sector. New and revised government organizations were also formed to be both resource agencies and service deliverers. For example, a revamped Housing Corporation in the early years of the government began to initially fund housing associations to provide the majority of new public homes for rent. It later encouraged associations to take up private finance to build homes. At the local level the Health Service was reorganized to allow GP fund-holding, health trusts were created and schools could ‘opt out’ from local government control.

The revolution of these changes has created what has been referred to as a ‘mixed economy of care’, in which the barriers between the providers are blurred. It has also meant that there are major issues in both social policy and micro management to be considered. As Professor Knapp and colleagues state:

The voluntary sector sits in an increasingly complex mixed economy. The variety of producers grows, the funding sources multiply, and different regulatory styles proliferate. Although it is still possible to distinguish four basic production or supply varieties – public, voluntary (non-profit), private (for-profit) and informal – the margins between them are blurred. Some behave in a manner fully consistent with the maximisation of either profits or managers’ salaries, and a growing number of public agencies are developing direct labour organisations and all the trappings – but without the benefits – of a commercial enterprise.

(Knapp et al. 1990, p. 184)

Before discussing the current government and policy it would be useful to devote some space to what is meant by or how we define the voluntary sector and a short history of its origins and principal developments. If a charity finance director is to fully contribute to their organization they should know how their sector has developed.

The issue of definition

The definition of ‘Charity’, in 2000, relates to the estimated 200,000 charities registered respectively with the Charity Commission in England and Wales, the Scottish Claims Branch of the Inland Revenue and in Northern Ireland. This definition, however, fails to encompass the estimated 300,000 voluntary bodies in this country, which, while not being registered charities, are viewed as belonging to the ‘Charity Family’. Moreover, these nonregistered charities can equally enjoy the tax exemptions of registered charities; for example, the 10,000 Industrial and Provident Societies which are ‘exempt charities’ under the 1993 Charities Act. As former Deputy Charity Commissioner and Barrister Francesca Quint explains:

The word ‘charity’ has a general meaning in ordinary speech and a special meaning in English law.

(Quint 1994, p. 1)

In our book we are primarily interested in registered charities, in part due to the accounting regulations which prescribes statutory practices they must follow, but also because the top 10,000 charities account for approximately 90 per cent of the sector’s income (NCVO 1998). However, we use this terminology as a generic interchangeable term with voluntary organization, which we will define by reviewing the definitions of the sector that have been debated. The first question to answer is: why does a definition matter?

Without a clear definition how do you attempt any form of quantitative analysis, for example, as a percentage of the economy, and thereby how important is it or how does a government determine an appropriate regulatory regime? At an organizational level without a context and statistics how can you plan? How can you evaluate the organization’s performance against others?

The lack of a clear definition has engendered an active debate (Perri 6 1991) on the need for and attempts to formulate a definition to encompass activities and organizations that do not fall into the categories of profitmaking or government organizations. Indeed, Salamon and Anheier (1994) have argued that the absence of a precise and conceptual definition is a principal reason for the relative deficiency of academic studies and a distinct body of literature on this sector of activity. The lack of a definition is not an exclusively UK problem. The European Commission in 1987 established a working party to attempt to provide a legal personality based on the French concept of the ‘economie sociale’, which refers to associations, co-operatives, mutual and other voluntary organizations. However, by 1991 the working party, recognizing the difficulties involved, instead produced three separate statutes governing respectively co-operatives, mutuals and associations. The lack of a precise definition has also applied to the United States where the economist Burton Weisbrod argues:

The wide diversity in the non-profit sector is both what makes it difficult to formulate consistent and appropriate public policy and an effective existing public policy.

(Weisbrod 1988, p. 162)

The legal definition

From the English perspective the debate in Charity Law can be said to begin in 1601 with the ‘Preamble’ to the Elizabethan Statute of Charitable Uses. The 1601 preamble provided a series of headings, which were classified as charitable activity. The tradition of defining charity law in this way, it has been argued by charity law academic and Charity Commissioner Jean Warburton, is due to the influence of Chancery lawyers, who belong to the ‘black letter law tradition’, which is

concerned with the exposition of the law rather than detailed consideration of its effect beyond the actual imposition of duties and obligations on institutions and individuals.

(Warburton 1993, p. 5)

Warburton argues that it was not until 1979, with Chesterman’s Charities, Trusts and Social Welfare, that a lawyer effected a different approach. In his book Chesterman places the 1601 Act in a historical context reviewing the law against the political and economic crisis of the Tudor period. The absence of lawyers questioning the definition as opposed to the interpretation of charity is probably the reason why Quint can state:

There is no exhaustive list of charitable purposes, and no strict legal definition of charity, but charitable purposes have been classified as:

• the relief of poverty;
• the advancement of education;
• the advancement of religion; and
• other purposes beneficial to the community.

Every charitable purpose will come within one (or more) of these four categories, but not every purpose which is within these categories is necessarily charitable. Deciding whether a given purpose is charitable depends on legal precedent and analogy from legal precedent. Sometimes, a purpose, which was not regarded as charitable in the past, will be accepted as charitable as times change. An example of this is the promotion of racial harmony, which was accepted as a charitable purpose only during the 1980s. The opposite can also occur.

(Quint 1994, p. 1)

The opposite occurs in the case of gun clubs, which were encouraged and founded at the time of the Boer Wars towards the end of the nineteenth century, when riflemanship was found to be lacking and the defence of the realm was considered to be at risk. Following the Gulf War, the reality of amateur riflemen still being needed to defend the national interest was questioned and gun clubs were no longer considered charitable. The tragic events at Dunblane perhaps also contributed to the decision.

The four headings quoted by Quint derive from the Pemsel case of 1891 and the judgement by Lord MacNaghten. The MacNaghten judgement in the tradition of Common Law was in turn based on an earlier judgement by the then Master of the Rolls, Sir Samuel Romilly, in 1804.

The MacNaghten judgement is still in force and represents for the Charity Commissioners the litmus test as to whether they will register a new charity. A government committee in 1952 (Nathan) and a review of charity law in 1976 chaired by Lord Goodman both wished to retain the Mac- Naghten judgement in a statutory definition of charity, but this recommendation was rejected. The 1992 Charities Act did not attempt a new definition as the government White Paper Charities: A framework for the future explained:

In considering the question of charitable status the government have taken note of the deliberations of the Nathan and Goodman Committees, both of which went into the subject in some depth. They have also taken into account the views expressed more recently at seminars, which have been held by the Home Secretary and the Charity Commission. These seminars were designed to test opinion in the legal and charitable worlds and were attended by, amongst others, Chancery judges.

The view of the legal experts and of others who were present on these occasions was not, as might be expected, unanimous on all points, but was quite clearly against any substantive change in the present law. The Government incline to agree with this view . . .

(Home Office 1988, p. 5)

Most recently, the National Council for Voluntary Organizations (NCVO) has again begun a programme of work reviewing the law on charitable status (NCVO 1998). It has set up a research programme which will examine the foundations of charity law by an examination of the intellectual case for a special status for certain types of organization or activity. In particular, the following questions were posed:

• How is charitable service distinct from public service and what role does altruism play in modern charity?
• How would we define ‘genuinely charitable purposes’ and how do they relate to public benefit considerations?
• Should advancement of religion continue to be a charitable purpose?
• Are politics and charity inevitably opposed?
• What is the role of the Charity Commission and does it have appropriate powers and duties?

Alternative definitions

In the absence of a statutory definition for charitable activity, alternative definitions of ‘charitable activity’ have arisen, which also have the advantage of encompassing the whole sphere of economic activity that is not in either the private or the public area. Academics attempting to define the sector have adopted one of three distinct approaches (Kazi et al. 1992):

1. The residual, or negative, approach explicitly defines the sector of terms of what it is not.
2. The categorical approach, based on particular principles, attempts to define the sector in terms of organizations that meet particular criteria, in essence a quasi-legal approach.
3. The aggregational approach enumerates the sector in terms of accepted sub-categories, using various consensual or implicit criteria.

Chronologically, in post-1945 academia, the starting point is that provided by Lord Beveridge in 1948 in his book Voluntary Action:

The term ‘Voluntary Action’ as used here means private action, that is to say action not under the directions of any authority wielding the power of the State.

(Beveridge 1948, p. 8)

The problem of the use of the word ‘voluntary’ is that it fails to recognize that many voluntary organizations employ paid staff. The Nathan Committee, in the introduction to their report, borrowed heavily on Beveridge’s definition in describing the rationale for their appointment:

The essence of voluntary action is that it is not directed or controlled by the State and that in the main it is financed by private, in contradistinction to public, funds. It embodies the sense of responsibility of private persons towards the welfare of their fellows; it is the meeting by private enterprise of a public need.

(Nathan 1952, p. 1)

The consensus to the Beveridge term voluntary action was beginning to be challenged in the late 1950s. Madeline Rooff’s definition instead using the term ‘voluntary organizations’ (Rooff 1957, p. xiii). Perri 6 (1991) suggests that the change was in part due to the shift in the nature of government relations to voluntary organizations with an increase in grant aid.

The term ‘non-profit’ has also acquired a degree of currency in attempts to define voluntary organizations. This has primarily derived from American economists (Hansmann 1980; Weisbrod 1988; Steinberg and Gray 1993) and has become the wholesale definition in the United States. Weisbrod defines the term non-profit as

restrictions on what an organisation may do with any surplus (profit) it generates.

(Weisbrod 1988, p. 1)

This concept of ‘non-distribution constraint’, that is that any surplus or profit generated cannot be distributed to those in control of the organization leading to the adoption of the term ‘non-profit’, has not, however, become widespread in the United Kingdom. In part this may be because of the different national traditions that have conceptualized the respective UK and US voluntary sectors, the most obvious difference being the creation of a Welfare State in the UK after the Second World War, which determined relations with the voluntary sector. Recognizing these cultural differences, not just in the UK but throughout the world, there has been a concerted attempt in the United States to widen out the definition by adding additional characteristics, notably by Salamon and Anheier for the John Hopkins Comparative Non-profit Sector International Study. The definition for this study of the voluntary sector in twenty-six countries around the world encompasses not only non-profit distributing but also concepts of independence and voluntarism.

Termed the Structural/Operational Definition, it comprises five key features:

1. Formal – institutionalized to some extent, for example legal incorporation, or if not, having regular meetings or rules of procedure.
2. Private – institutionally separate fr...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• The Authors
• Preface
• Acknowledgements
• 1 Voluntary Sector Environment – Definitions, History
• 2 Management Issues
• 3 Charity Accounts – the Background
• 4 Published Accounting Standards
• 5 Issues in Charity Accounting
• 6 Regulatory Framework and Audit Requirements
• 7 Management Accounting
• 8 Performance Evaluation for Voluntary Organizations
• 9 Banking and Investment
• 10 Charity Tax
• 11 Future Directions
• Appendix
• Bibliography