The board’s role

Boards are familiar with signing off the annual report—historically the financial report and some commentary. Now all registered charities in Aotearoa New Zealand must include a Statement of Service Performance (SSP). Alongside the numbers, the board will certify and be accountable for this new level of reporting. Some boards struggle with this and largely leave the process to management, rubber-stamping a prepared document. This should not be the case. The three elements of the name make clear that this is integral to the board’s work:

• Statement—this is the board’s assertion to the community and should reflect and flow easily from the organisation’s board-owned statement of intent.
• Service—specifically how are we serving our community? What positive change do we exist to provide
• Performance—is it measured so stakeholders can assess whether time and money invested is generating an acceptable return?

Although management will do the detailed preparation, if the board has not done its thinking and provided clear intent then retrofitting to meet the new requirement will be neither easy nor useful.

In this article, BoardWorks Associate Craig Fisher comments on the intent of the new standard and the progress various organisations are making to deliver excellence in external accountability.

Until recently Craig was chair of the New Zealand RSM group. He was a standard setter with the then Institute of Chartered Accountants of New Zealand, and was appointed to the External Reporting Board’s (XRB) New Zealand Audit and Assurance Board on its establishment by the Government in 2011 until leaving in 2020. He currently chairs the XRB’s External Reporting Advisory Panel, and has been closely involved with creating the new service reporting requirements.

SSPs – what and why

SSPs became mandatory for all registered charities in Aotearoa New Zealand from 1 January 2022. Many have already been working to the new standard.

SSPs were developed to enhance the transparency of charities and to help them more effectively communicate their activities and impact to stakeholders, including funders, beneficiaries and others.

Annual financial statements have an important but limited role in accountability and transparency to stakeholders. They show the assets and liabilities under the entity’s control at a point in time and the results of its operations (surplus or deficit) over a specified period, usually a year.

The success of a charity, however, is not easily measured by whether it makes a surplus or a deficit. While a statement of financial performance is important—hygiene information that can be a measure of activity, and sometimes financial efficiency—it does not help assess whether the charity is actually delivering on its purpose. (In fact, the easiest way for a charity to improve its financial surplus is to cut expenditure on delivering on its purpose!)

Sadly, many funders and other stakeholders have made support decisions based largely on the limited information contained within financial statements rather than on a more holistic view of the entity. This has sometimes led to worthy, efficient and effective charities not being supported for such misguided reasoning as ‘they don’t look poor enough to need our support’.

The flow-on impact is that some charities have been influenced to structure their operations and accounting to show what they think will be the most desirable result to funders, when in fact this is usually detrimental to them operating with the most positive impact.

The development of service performance reporting was designed to provide a more appropriate measure of a charity’s operations and effectiveness: why it exists; what it set out to achieve in a period; and what it actually achieved.


What’s required?

The requirements for SSPs are expressed slightly differently for small and larger entities, but the broad conceptual intent is the same.

Service performance reporting is based around two elements:

1. Outcomes: what the entity is seeking to achieve in terms of its impact on society; and
2. Outputs: the goods or services that the entity delivered during the year.

The Tier 3 (< $2m annual expenses) accounting standard 1 for Not-for-Profit Public Benefit Entities requires the Statement of Service Performance to:

a) Describe the outcome(s) that the entity is seeking to achieve or influence through the delivery of its goods or services. The outcomes are likely to be closely related to the mission/purpose reported in the entity information section of the performance report. The main difference is that the mission/purpose is usually stated in broad or general terms and applies over the life of the entity. By contrast, the description of the outcomes in the statement of service performance should be more specific and focused on what the entity is seeking to achieve over the short to medium-term; and

b) Describe, and quantify to the extent practicable, the outputs (goods or services) the entity has delivered for the current year.

The standard for larger entities, PBE FRS 48, expresses the requirements in slightly more detail and contains more guidance. This makes sense as larger charities are generally more complex and may need to consider more measures.

Of significant relevance is that both accounting standards are principles-based rather than prescriptive, recognising that charities are unique regarding their purposes and activities, and should have flexibility to choose the measures that best allow them to communicate their impact. For charities that must be audited, however, their SSP must also be part of that audit, the aim of which is to ensure the truth and fairness of the SSP disclosures. Faced with a new statement and data set to audit, some key challenges for auditors will be:

• assessing the process used by the governing body and management to select the service performance measures reported
• ensuring appropriate data recording and reporting systems are in place and can be relied on
• ensuring faithful representation and that organisations are not just cherry-picking positive results
• grappling with reporting that may be a mix of quantitative and qualitative measures as well as qualitative descriptions

PBE FRS 48 also notes the importance of considering qualitative characteristics, which are attributes that make that information useful to users. The qualitative characteristics to be considered in preparing an SSP and choosing what to include are:

• relevance
• faithful representation
• understandability
• timeliness
• comparability
• verifiability.

In practice, however, qualitative characteristics may not all be fully achieved, and a balance or trade-off may be necessary.

How to prepare an SSP: Joined-up thinking

Many charities have found early adoption beneficial as it takes time to decide and refine what should be reported and how this should be presented. It is also important that appropriate systems are in place to collect and collate the relevant information for SSP reporting. This can take time to implement. Ideally all information in an annual financial statement should also be presented with comparative figures, which means making selections and ensuring accurate recording systems are in place and operating a year earlier than the mandatory reporting period.

One key to writing an informative and useful SSP is being clear on why the organisation exists, what it is attempting to achieve, and the strategies it will adopt to achieve its aims. The clearer the thinking and planning, the easier it is to report on.

Ideally in any organisation the governing body should be very clear on the organisation’s raison d’être—its reason for being—which should be outlined in a board-owned statement of intent that lays out the purpose and specific measurable outcomes.

The practical work begins, however, when an organisation sets the specific strategies, it will employ to achieve its aims. These may be annual or multiyear and enduring in nature. Regular monitoring and reporting to the governing body should focus on these strategies and their impact on the desired outcomes. Many organisations use a dashboard and KPIs (key performance indicators) to succinctly monitor and report their progress throughout the year. At the end of the year, their summary reporting is then largely just an aggregate of KPIs at the highest level.

The SSP is essentially a summary of the annual KPIs—the effect of the key strategies the organisation has employed to achieve its purpose. If you are clear on the big picture and how organisational effort is to be measured, then creating a valuable and informative SSP should be relatively straight-forward.

While some charities can show a direct link between their purpose and their impact through measurable KPIs, others find it more difficult to articulate and demonstrate their theory of change 2.

It is therefore common to see intermediate-level outcomes: Here are the things we can control, influence and be accountable for. In achieving these we are confident they will contribute to a higher-level, more complex outcome—often the work of many parties.

SSPs are also often a mixture of quantitative and qualitative descriptive information. Good reports are greatly enhanced by input from those who benefit from your work—either as quality measures or storytelling in the wider annual report.

From the experience of leading early adopters of SSPs, the most successful development experiences have involved strong ownership and direction from the governing body and active involvement at an early stage of a wide cross-section of people throughout the organisation. An SSP is not just a governance responsibility, a management task, an accounting exercise, a communication and marketing opportunity, or an operational team motivator. Done well, it should be all these things.

Notes:

1. PBE SFR-A (NFP) Tier 3: Public Benefit Entity Simple Format Reporting – Accrual (Not-for-profit)
2. "Theory of change" is a common term in the sector used to describe how an organisation chooses to deliver on its charitable purpose i.e., its strategy and tactics employed to effect positive change.