Social accounting and third sector organisations

In recent years, much attention has been paid to the roles and the responsibilities of not-for-profit or charitable organisations. These mission-based entities seek social impact rather than profitability for shareholders and comprise what is known as the third sector (TS) of economic activity (Lindsay et al., 2014). Even though the origins of third sector organisations (TSOs) are associated with the birth of the big cities and the industrial revolution in the UK (Emmanuel, 2014), focus on these socially-driven entities and their performance has increased over recent years, primarily due to the alleged failure of not-for-profit organisations to efficiently deploy financially sustainable services and achieve associated programmatic goals.

Like public sector entities, TSOs are under pressure to be accountable for delivering value added services to their constituents. However, the way TSOs are held accountable is different; they are expected to manage a ‘double bottom line,’ in that they must deliver a measurable and meaningful social impact for their beneficiaries, while also responsibly and transparently accounting for the financial resources entrusted to them by their donors (The Scottish Government, 2011). The TS accounts for a substantial part of many countries’ economies. In England and Wales, for example, the TS annual income is estimated at £75 billion, which renders it vulnerable to fraudulent activities and potential misuse of financial resources. Third sector trustees therefore have a duty to manage and protect their organisation’s financial resources responsibly; ensure that funds are accurately accounted for and to ensure delivery of their mission as providers of social care and welfare to those in need.

This, however, is not always enacted and has attracted considerable media attention and negative perceptions of TS service social accountability. Indeed, following some recent TS scandals, (such as the Kids Company1 which collapsed in 2015 triggering a financial and child abuse investigation, Rotherham Children’s Services who were accused of a lack of social care and child abuse, and the Cup Trust tax avoidance2 scandal), the Charities Commission3 reported “our trust in the third sector has hit an all-time low”. This has led to more robust reporting; governance and accountability structures being demanded within this sector.

After introducing the TS in more detail and discussing its nature and purpose in society, this chapter will define what accountability means in this arena and will investigate TSO accountability through three key lenses: reporting frameworks, the ‘not-for-profit starvation cycle’ and TSO governance. The reporting framework applied by TSOs focuses on the illustration of a not-for-profit organisation’s sources and uses of funds, but it fails to highlight how activities performed by the organisation create measurable and meaningful social impact for program beneficiaries. With regard to the ‘not-for-profit starvation cycle’, donors expect charities to deliver more with less and tend to penalise those charities with high overhead costs. This often results in the delivery of fewer services and an undermining of the organisation’s ability to create meaningful and measurable impact (Bedsworth et al., 2008). The manner in which the organisation is governed has a direct impact on its ability to achieve financial and social objectives. Multiple governance methods exist in this sector, which is plagued by poor management, weak control over decision-making and the need to satisfy the interests and expectations of multiple constituencies (Caers et al., 2006). This culminates in agency problems and accountability failures as well as the loss of organisational legitimacy and the erosion of financial support. (Cordery et al., 2017). Following this the chapter will discuss the three forms of accountability typically found in TSOs: upward, downward and holistic. The chapter ends with important remarks, conclusions and critical takeaways.