ACEs High: The Media Loves Complaining about the Amount of Cash That Many Charities Seem to Be Throwing Away on Internal Bureaucracy, but How Concerned Should We Really Be about the Huge Apparent Variations in Administrative Spending across the Sector? Rob Paton Analyses the Results of a Recent CIMA-Funded Research Project to Find the Answer. (Accounting Charities)

By Paton, Rob | Financial Management (UK), July-August 2002 | Go to article overview

ACEs High: The Media Loves Complaining about the Amount of Cash That Many Charities Seem to Be Throwing Away on Internal Bureaucracy, but How Concerned Should We Really Be about the Huge Apparent Variations in Administrative Spending across the Sector? Rob Paton Analyses the Results of a Recent CIMA-Funded Research Project to Find the Answer. (Accounting Charities)


Paton, Rob, Financial Management (UK)


I am told that a tabloid newspaper once parked some flashy cars outside the headquarters of Oxfam and took a photograph which it then published alongside an article denouncing the agency's overpaid administrators. That exercise in creative journalism took place many years ago, and public concern about the performance of charities has only increased since then. This often puts their management accountants in the firing line.

"How can you justify spending X thousand pounds or Y per cent of your total expenditure on bureaucracy?" the accountants are asked at the AGM. "How come A N Other Charity seems to be spending so much less on administration than you?" And there's the rub. Comparative measures such as the administrative-costs-to-expenditure (ACE) ratio are now much more widely available, and they vary considerably between charities.

But are these apparently large differences really a cause for concern? Until now, all we have known is that ACE ratios vary between fields of activity and also by organisational size (large charities seem to be more efficient). But even after taking these factors into account the variations can be striking. So it has been easy for the critics to insinuate that they are largely a result of inefficiency.

The trouble is that, until now, nobody has gone behind the reported figures to determine what is really going on. Our research has aimed to find out what has been happening to ACE ratios over the past few years and why they vary so much.

Our first question was quite easy to answer. Every year the Charities Aid Foundation collates the key elements from the accounts of the top 500 charities. We examined these figures over a six-year period in the 1990s and it became obvious that, overall, ACE ratios were declining significantly: the average fell from 11.4 per cent to 7.3 per cent. If these figures reflect underlying changes in efficiency, then UK charities have demonstrated a remarkable, sustained and hitherto unnoticed leap in performance over this time.

An alternative explanation for this big improvement would be that cost allocations were being changed in ways that improved the reported figures. You don't have to be a cynic to favour this interpretation--such changes can also be seen as the gradual working through of revisions to the charity reporting requirements and the Charity Statement of Recommended Practice (SORP) in the early 1990s.

The research team chose four different fields of activity to study: two we judged to be highly competitive and two that we thought were less so. Within each field we identified the five charities that had reported the highest ACE ratios and the five that had reported the lowest. We examined their published accounts going back several years to understand how their treatment of admin costs had evolved over time. Then we discussed the reasons for the differences between the "high" and "low" ACE charities with their finance directors, both individually and in group discussions.

From these discussions we found that most variations could be explained by two factors. First, different approaches to cost allocations often caused large variations in ACE ratios. The SORP that was in effect during the period in question required charities to report their spending under four headings: direct charitable expenditure (DCE), support costs (ie, those directly associated with DCE), fundraising costs and administration.

The guidelines for such allocations are clear on the underlying principles. But, given the diversity of charitable operations, considerable discretion over the application of these principles remains.

The results were often dramatic--for example, the ACE ratio of one of the charities fell from 15 per cent to 2 per cent once it had quite reasonably reapportioned between administration costs and DCE support.

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ACEs High: The Media Loves Complaining about the Amount of Cash That Many Charities Seem to Be Throwing Away on Internal Bureaucracy, but How Concerned Should We Really Be about the Huge Apparent Variations in Administrative Spending across the Sector? Rob Paton Analyses the Results of a Recent CIMA-Funded Research Project to Find the Answer. (Accounting Charities)
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