Case Study 02 - Horace Hoi Organisation

In the country of Laland, aid organisations registered as charities are not subject to the same financial reporting requirements as limited companies (this is not the case in many other countries where they are treated equally in law). One person to take advantage of this is Horace Hoi who has led his vigorous campaign in favour of animal protection for the past 25 years. As a highly competent self-publicist for his charity and an engaging media performer, he has raised the public profile of his charity substantially. He can and does raise large amounts of money for his charity through his personal charm and passionate appeals on television and in large meetings of supporters. His charity is called the 'Horace Hoi Organisation' (HHO) and its stated aim is to 'stop animals suffering'.

Mr Hoi has recently become the subject of criticism by the media because of allegations that he lived a lavish lifestyle and personally owned a large mansion and a number of classic cars. The HHO recently bought a private jet to support Mr Hoi in his travels around the world for speaking engagements and for his work for the HHO charity. One journalist reported that most of the donors to HHO are well-meaning individuals, mainly of modest means, that care greatly about animal suffering and who would be 'horrified' if they knew of the luxury in which Mr Hoi lived.

Despite the fact that Mr Hoi had claimed that he personally takes only a modest salary from the organisation for his work, a journalist recently estimated Mr Hoi's personal wealth, thought to be gained from the HHO, to be around $10 million. When challenged to disclose the financial details of the HHO and Mr Hoi's own personal earnings, a HHO spokesman simply replied that this was not required under the law in Laland and that the HHO was therefore fully compliant with the law. The HHO has refused to join a group of other charities that have undertaken to make full financial disclosures despite it not being mandatory in law. The HHO says that although it does produce financial information for the charity and tax authorities, it has no intention of making this information public. The HHO also makes no disclosures about its governance structures and was once criticised as being 'intentionally opaque in order to hide bad practice'.

In yielding to the media pressure to provide some information on its financial affairs, HHO eventually published a pie chart on its website saying that its expenditure was divided between animal shelters (57%), field work helping animals (32%), administration (6%) and other causes (5%). This was the totality of its public financial disclosure.

Required:

(a) Discuss the ways in which charities differ from public listed companies and explain how these differences affect their respective governance structures. (9 marks)

(b) Define 'transparency' and construct the case for greater transparency in the governance of the Horace Hoi Organisation. (8 marks)

(c) Audit committees can have a role in reviewing internal controls and addressing areas of deficiency.

Required:

Explain how an audit committee might assist in addressing the apparent internal control deficiencies at HHO. (8 marks)