20 August 2020
I recently participated in a panel discussion on the topic of Preparing Audit-ready Performance Reports. From the questions submitted and the types of participants, it was clear that larger charities are becoming seriously focussed on preparing service information in a way that is meaningful, compliant with the standards, and able to be audited without too much drama.
It is important that charities see this task, not as an onerous burden but as a positive experience that enables them to tell their wider story. In most cases charities are contributing primarily in ways that cannot be measured in financial terms, so we could say that service performance is their real reporting. Charities aren’t about making money, but about achieving ends, so to just report finances is missing the point. The financial information is just the engine room out the back – necessary but not actually the purpose of the entity.
This article uses a Q & A format to address some of the issues facing preparers of performance report information in New Zealand. It will also be relevant however to preparers in other jurisdictions and to auditors of performance information.
We start with some of the basics then skip through to more technical matters. In part 2 we look at specific audit issues.
Q. Who are the key players?
The Government, via the Charities Act 2005 determines who is required to report (i.e. registered charities). The XRB (NZ External Reporting Board) is responsible for what these entities are required to report, (XRB standards). And Charities Services monitors and enforces compliance with XRB standards by registered charities.
Q. What are the audit requirements for charities?
Currently registered charities with operating expenses of over $1m per annum in the prior two financial years must be audited, but charities with expenses between $500,000 and $1million in the prior two financial years may opt for a Review Engagement rather than an Audit (see Charities Act 2005 Sections 42C & 42D).
Registered charities with total operating expenditure of less than $500,000 are not required by law to have an audit or a review.
Of course, any charity not required to have an audit or a review may opt to do so if they wish or if it is required by funders or by their founding document. Audits and Reviews of charities are required to be carried out by a qualified auditor.
Q. What are the reporting requirements for charities?
In New Zealand, there are four reporting tiers, relating to entity size and level of public accountability.
Note that entities are not obliged to report in the Tier that they fit into. They may opt for more complex reporting if they wish (but not for less complex of course).
If the governing body has opted to adopt Tier 3 or 4 (special purpose reporting) over the default General Purpose reporting (compliance with PBE IFRS standards that apply to both Tier 1 and 2) they should document this decision. Under both Tier 3 and 4 reporting a note must be added specifying that the entity is permitted to apply the standard and has elected to do so.
Q. How are Tier 1 and 2 entities required to report?
For Tier 1 and 2 PBE entities the applicable reporting standard is PBE FRS 48. This was to be effective for reporting periods beginning on or after 1 Jan 2021, with early adoption permitted. However it has been agreed to delay for adoption for one year in the light of COVID-19.
Q. What are the main principles of PBE FRS 48?
Paragraph 15 says that:
An entity’s service performance information shall:
(a) Provide users with sufficient contextual information to understand why the entity exists, what it intends to achieve in broad terms over the medium to long term, and how it goes about this; and
(b) Provide users with information about what the entity has done during the reporting period in working towards its broader aims and objectives, as described in (a) above. (15)
It is important to note that PBE FRS 48 does not follow the standard terminology of “outcomes” and “outputs” as per the Tier 3 and 4 standards. The descriptions above however cover these and equate to the entity information (“sufficient contextual information to understand why the entity exists,“) outcomes (“what it intends to achieve in broad terms over the medium to long term, and how it goes about this“), and outputs (“what the entity has done during the reporting period in working towards its broader aims and objectives“) of the Tier 3 and 4 standards. Nor is the term “impacts” used.
This leaves quite a bit of flexibility in how the service performance information may be reported.
Addressing this in a slightly different way, paragraph 19 says that the reporting entity should consider:
- What it is accountable/responsible for.
- What it intended to achieve during the reporting period.
- How it went about achieving its service performance objectives.
Q. What are the qualitative characteristics and how do they relate together?
Paragraph 7 states that preparers must “…apply the qualitative characteristics of information and the pervasive constraints on information identified in the Public Benefit Entities’ Conceptual Framework (PBE Conceptual Framework)”.
This means “…balancing of the constraints on information results in service performance information that is appropriate and meaningful to the users of general purpose financial reports.”
The qualitative characteristics identified in the PBE Conceptual Framework are relevance, faithful representation, understandability, timeliness, comparability, and verifiability (para 8). Paragraph 9 elaborates on these. Some of these are obvious, some are less so.
The standard acknowledges that “… in practice, all qualitative characteristics may not be fully achieved, and a balance or trade-off between certain of them may be necessary” (para 8).
The pervasive constraints on information materiality, cost-benefit and balance between qualitative characteristics are identified in the PBE Conceptual Framework (3.32–3.42). This acknowledges that preparers cannot be expected to compile all possible service performance information. And doing so would actually be counterproductive. No-one would bother to read it all.
Even if they were to include every possible item, this would create issues such as inclusion of immaterial information, high compliance costs, and it would be more difficult for users to discern what is essential due to each qualitative characteristic given equal value of importance.
The selection process is as important as the reporting itself. Paragraph 44 states that the entity must: “…disclose those judgements that have the most significant effect on the selection, measurement, aggregation and presentation of service performance information reported …”
As we shall see, the auditor will be looking carefully at the selection criteria to ensure that it results in unbiased and relevant information being presented.
Q. What kinds of measures of information may be reported?
Paragraph 20 states that preparers must use:”…an appropriate and meaningful mix of performance measures and/or descriptions for the reporting period. The performance measures and/or descriptions used by an entity to communicate its service performance may be:
(a) Quantitative measures: Examples of quantitative measures are the quantity of goods and services, the cost of goods and services, the time taken to provide goods and services, levels of satisfaction using a rating scale on a questionnaire or survey, and numerical measures for service performance objectives or goals;
(b) Qualitative measures: Examples of qualitative measures are descriptors such as compliance or non-compliance with a quality standard, ratings such as high, medium or low, or ratings assigned by experts; or
(c) Qualitative descriptions: Examples of qualitative descriptions are those based on participant observations, open-ended questions on interviews and surveys and case studies. For example, how did an entity’s service performance activities change the well-being and circumstances of a client group?
Some service performance reports tend to be just a restating of financial results. This is not the point, although in some cases it may be appropriate. A good report will choose a mix of appropriate measures that flow down from the purpose of the organisation, what it set out to achieve and how, and what it did achieve. The measures used will reflect the result being measured.
See part two for what an auditor will be looking for in service performance reporting.
NOTE: This article is designed to give accurate but general information, however, Audit Assistant Ltd accepts no liability in any way to any person arising out of reliance on the contents for any purpose. Talk to your auditor or accountant for more information.