The empirical link between internal audit, contract income and 'passthrough' efficiency in the top 500 UK charities

Toothill, A. ORCID: 0000-0002-5233-1683, 2016. The empirical link between internal audit, contract income and 'passthrough' efficiency in the top 500 UK charities. In: 14th European Academic Conference on Internal Audit and Corporate Governance, Erasmus University Rotterdam, Rotterdam, Netherlands, 6-8 April 2016.

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Abstract

This conference paper discusses some of the findings from the author’s PhD thesis which considers the ‘marketisation’ of UK charities (Bruce & Chew, 2011) and subsequent governance evolution within the sector. It is argued that the considerable flow of public funds into the sector has resulted in charities altering their behaviour through having to focus on priorities identified by government and operate in ways in which they prescribe. Also, extensive performance information is also supplied to government under contractual terms and conditions (Hyndman & Jones, 2011).
This study analyses financial statement data taken from a full set of the Charity Commission England & Wales database for years 2011 to 2013. The total income analysed represents the significant majority of the UK Charity Sector at approximately £50 billion per annum. The analysis covers £151 billion in total represented by 27,428 sets of financial results, across three reporting years and sixteen charity classifications. Sizes of organisations range significantly from one case that declared zero income right up to the largest charity with an income of £950 million. A regression model was derived from extant literature, and a smaller study conducted in New Zealand by Reddy et al. in 2013, in order to analyse the data.
Results of the regression analysis of the full financial data set showed a correlation between the level of contract income and operational efficiency, as defined by the traditional ‘passthrough’ metric, with a 1.5% increase in efficiency observed for a corresponding 10% increase in contract income (significant at 1%). This would suggest that charities driven by contractual obligations ensure the majority of income is ‘passing through’ to beneficiaries rather than cost savings contributing toward surplus funds. It would evidence a focus of attention on charitable goals rather than the ‘commercial’ behaviour of creating margins.
A sub-set of the charities was further scrutinised as to the presence of an audit committee, internal audit service, board gender diversity and board size. A 20% sample of the ‘Top 500’ charities (by income) was used. The charities in the sample ranged in annual income from £17million to £781million with an average (mean) income of £55 million. Results from the ‘Top 500’ data set analysis echoed those of the full data set with a slightly stronger correlation between contract income and operational ‘passthrough’ efficiency: a 2.6% increase in operational efficiency was derived from a 10% increase in contract income (significant at 1%).
A strong correlation was found between internal audit and operational ‘passthrough’ efficiency in the ‘Top 500’ charities. A 14% improvement in ‘passthrough’ efficiency was associated with the presence of an internal audit function (significant at 5%).
In conclusion, the argument that a considerable flow of public funds into the sector has resulted in charities altering their behaviour may be evidenced by the correlation between contract income and ‘passthrough’ efficiencies. Having to focus on priorities identified by the contract, and provide considerable amounts of performance data under contractual terms and conditions, appears to be increasing the focus on beneficiary outcomes. Results suggest that internal audit may play a significant role in assisting trustee boards to achieve this focus.

Item Type: Conference contribution
Creators: Toothill, A.
Date: April 2016
Divisions: Schools > Nottingham Business School
Depositing User: Jonathan Gallacher
Date Added: 15 Jan 2018 17:00
Last Modified: 15 Jan 2018 17:00
URI: http://irep.ntu.ac.uk/id/eprint/32430

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