Identify the relevant facts of the above case study and to your role as financi

Identify the relevant facts of the above case study and to your role as
financial controller and advisor to XYZ Ltd.

The case study:

HOHO (Help Our Homeless Offspring) is a charity that works at reuniting homeless children
with their families. It also operates numerous halfway homes for their care, counselling and
shelter.

In funding its efforts, HOHO relies on a number of individual and corporate donors. It relies on their continued support at high funding levels to expand and sustain its initiatives. Many of the larger donors appreciate the profile that their donations bring, in particular from bi annual charity drives.

HOHO is currently seeking to qualify for its biggest donation drive. This drive is responsible for a large proportion of its annual donations. The fundraising legislation and permit conditions mean that expenditure at the charity must be classified as either directly related to administrative/fundraising or charitable dollars. To qualify for the drive, the expenditure-to funding ratio must be kept under 25%. These rules are very strict and the penalties are high in order to ensure non-charitable organisations do not take advantage of willing donors.

To succeed in their current environment, expensive TV advertising must be used. This will mean that costs exceed the 25% limit. The Chief Financial Officer (CFO) is hopeful that the need for TV advertising will be a short-term cost, i.e., the 25% ratio will be easy to meet in the near future.

The newly hired accountant for HOHO feels that there has been a misallocation of
administrative costs so that they are classified as program costs (i.e. upper management is pressuring for costs to be misallocated). The Chief Financial Officer (CFO) justifies this by saying that:

• all the other charities do it, and HOHO?s costs are actually better than those of
other charities;
• it is necessary to make companies donate funds; and
• the charity will be back under the 25% ratio in the short term.

Scenario:

Imagine you are the financial controller of XYZ Ltd a corporation that is a very large donor to HOHO. You have recently become aware that its TV advertising has resulted in the charity violating the 25% expenditure ratio for its charity drive. You know your organisation favours the profile it receives from this charity and though other charities request donations, your organisation supports only HOHO.