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Hong Kong
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Centre for Asian Philanthropy and Society

New charity financial disclosure requirement brings further confusion to interpret charity’s financial information

Hong Kong Economic Times

Vincent Cheng (CAPS) analyzes the Hong Kong government’s latest requirement stipulating all charities to release audited financial accounts of their public fundraising activities. Intended to address public concerns over costly charity fundraisers, he believes the measure will instead further deepen public misperception and mistrust of overhead costs, and penalize less established charities with an even greater administrative burden.

Here is an age-old horror story of donations: people—with enormous goodwill—send money to a charity, hoping that these funds will be used to help those in need. To their dismay, they soon find out that a considerable portion of their donations goes to anything but that. The donor feels deceived, their money squandered for little or any return. These types of experiences and the worry about them, together with other mishaps or scandals, contributes to the trust deficit of the charitable sector. Hong Kong is not alone in this situation.

On 1st August 2018, the Hong Kong government issues a new regulation meant to increase transparency and accountability specifically on charities’ public fundraising activities, after complaints of the hefty price tag of fundraisers. Charitable organizations in Hong Kong are now required to place on a public website audited financial statements of each of their public fundraising activities (e.g. flag days, the sale of raffle tickets, or other charity sales). The new measure aligns with other efforts of achieving greater transparency such as HKCSS’s WiseGiving initiative, an information-sharing platform where charities can voluntarily share their mission, structure, governance, and financial information with the public.

While the government’s goal of increasing transparency is well-intentioned, this latest attempt is half-baked and will likely do more harm as it adds fuel towards the general public’s visceral, but misguided understanding regarding the administrative costs associated with both fundraising and project management. Unbeknownst to the policymaker, the new measure may also unwittingly penalize less established charities as all compliance takes time, effort, and often professional knowledge that many charities lack.

The two faces of regulations

The Doing Good Index by the Centre for Asian Philanthropy and Society (CAPS).

Regulations, in general, have two important purposes, as the inaugural Doing Good Index published by the Centre for Asian Philanthropy and Society explains. First, they can make it easy or more difficult to exist as a legal charitable entity. For the charitable sector to thrive, it is essential to have clear, easily understandable and enabling regulations which encourage organizations to register and operate within the law. Second, regulations can enhance transparency and accountability through, for instance, annual reporting requirements and assign legal liability for noncompliance.

Hong Kong performs reasonably well in the Doing Good Index, although it ranks behind Japan, Taiwan, and rival Singapore, and is on the same footing as developing countries such as Vietnam and Thailand. Generally, the charitable sector is mature and vibrant. Laws are established, clear, and easily understandable and charities are incentivized to register and operate within the law. Hong Kong is only second to Taiwan in this regard: only 17% of HK charity respondents find laws pertain to the charitable sector difficult to follow, the second lowest across 15 economies we surveyed (the Asia average is 39%).

But, Hong Kong could do even better with some relatively accessible fixes which could propel the charitable sector further. The recent directive for charities to share audited financial statements of public fundraising is no doubt intended to increase transparency. However, there are two potential issues with this well-intended measure, one operational which can be easily mitigated; another has to do with its underlying logic, which is less easy to fix.


A blinkered perspective of understanding charities

Close to half of HK respondents said that it took them more than 3 months to comply with the annual reporting requirement, which—for many—merely requires the submission of an audited financial statement. This percentage is the highest across 15 economies. One interpretation is that many charitable organizations do not have the capacity to adequately manage and explain their accounting practices as well as measuring the impact of the projects they manage. Grappling and complying with new requirements—especially those having to do with tax and fiscal policies—often equates to extra time, manpower, and resources. For nonprofits with tight budgets and stretched staff, they find it difficult to explain their programs and outcomes as well as their budgets in clear, compelling manners. Unfortunately, the result is that many people assume that they must have something to hide. For larger charities with professional staff, additional reporting requirements may work but the burden on small organizations can be life-threatening.

The more important issue, however, is understanding what is included in administrative costs (or more commonly known as overhead cost outside of Hong Kong), and why these are necessary and useful. While a blow by blow report of each public fundraising activity will quell public concerns over the costs of these fundraisers, it will not necessarily allow the public to come to a meaningful conclusion on how effective these charities are in doing their job. Why is that?

Firstly, funds for charities come from a variety of sources, so a measure that only necessitates explaining those funds raised as a result of a public exercise, only tells a portion of the story. Most charities in Hong Kong also receive funding from government and corporate sponsorship, funding streams that are not accounted for in the new regulation. In fact, those charities which raise considerable government and corporate support may rely less on the public.

More importantly, there are several points to bear in mind when thinking about administrative costs, which generally include such items as the salaries of administrative personnel and rent, in many cases of Hong Kong and internationally. Funds spent on raising more funds are also considered part of overall administrative expenses because they do not go directly to project support. Here is the main issue: these expenditures differ greatly from one charity from another due to their age, size, the nature, and function of charitable activities. Charities which require higher skilled professionals will certainly have higher overhead costs. In Hong Kong with a very low unemployment rate, charities compete with government and the private sector to find and hired skilled staff. Only by paying reasonable wages can they hope to compete for many of these employees.

But this lopsided attention on financial matters of charities is perhaps reflective of the larger context of oversight of Hong Kong’s charitable sector. With the exception of fiscal matters, there is little continual oversight for Hong Kong’s charitable sector after the approval of their tax-exempt status. For instance, charity’s eligibility to continue to be tax-exempt, which is determined by the organization’s objective and may change across time, is not a remit of any governmental body. Nor does governance mishaps of charities, except perhaps with criminalizable acts, or those receiving lump sum grant from the government.

A dedicated charity commission is needed

The Law Reform Commission (LRC)’s 2013 suggestion of having charitable organizations be registered and overseen by a future charity commission in the long run was a good step towards Hong Kong’s regulatory progression, an issue reiterated an audit report released by the Audit Commission in 2017. The LRC suggested an oversight system similar to the one used in the Philippines and currently being adopted by several countries in Asia.

The Law Reform Commission released its report on charities in December 2013. Source: The Government of the HKSAR.

The Philippine Council for NGO Certification (PCNC) in the Philippines was set up as an accreditation body with the blessing of the Filipino government to scrutinize aspects of charities’ mission, projects, governance, and financial information every one, three, or five years. Only with this accreditation can donors to the organization receive a tax subsidy. If respected charitable sectors practitioners who understand the operations, together with professionals in legal and accountancy team up to monitor, accredit, and offer timely and appropriate professional assistance to charities, as with the case the Philippines, charities in Hong Kong can become more accountable, transparent, at the same time, an enabling ecosystem for these organizations to grow and prosper. The future charity commission—as a standard bearer—can also educate to the public of the appropriate ways to understand and evaluate the work of charities they support, and show that which charities are checking all the boxes under this rubric. It will, in short, help build trust for those working in the charitable sector.

Overall, while we applaud the government’s bid to increase transparency and accountability of the social sector, the downside of the new measure requires attention. There are easy fixes to give the public a fuller picture in the shorter term: we recommend the government request charities to submit their annual audited financial statements ready for Inland Revenue Department’s review, and make them public on one centralized governmental platform for public scrutiny. Specific accounting requirements can be made to make clear of the specifics as deemed necessary for better transparency and accountability, such as fundraising administrative cost or overall administrative cost in these statements. With this measure in place, at least 74% of Section 88 charitable organizations, which are legally incorporated as a limited company, will be made more accountable and transparent. Some charities in the city have taken the initiative to achieve this goal on their own. World Vision Hong Kong, for instance, has put their audited financial statements online and gone the extra mile to lay out clearly how donations are spent. In the long run, a one-stop charity commission which registers, oversees, and provides professional support to the charitable sector should be set up to offer to inspire confidence and trust for all those endeavoring to make Hong Kong a better place.

 

This op-ed is an extended version of the Chinese op-ed ran originally in the Hong Kong Economic Times.