Walter Ross, FCA
Retired Partner of Ernst & Young, and former Director, Laidlaw Foundation

Accounting and accountability – we hear these words a lot, but do we know what they mean? Accounting refers to the activity of keeping track of things in orderly ways, and of measuring them over time. This activity can become obsessive – it fits nicely into a mechanistic and control-obsessed view of the world. We must never forget that there are lots of things, often the most important, that cannot be measured in any meaningful way. It is fairly easy to keep track of financial things denominated in monetary units but there are also many non-monetary things that can usefully be accounted for, monitored and measured. A good example would be the contribution made by the volunteers in your organizations. Finally, some things really cannot be measured – the quality of relationships developed within your organization and by your activities with clients, for example.

Accountability is quite different. It involves responsibility for performance. In the past this word usually referred to financial performance, but now the term seems to be used much more broadly. Corporate accountability, environmental accountability, community accountability, personal accountability; it seems accountability is everywhere. And with that other commonly used word these days – transparency- there are few places to hide.

I am not going to talk about budgeting tools, ideas for establishing relationships with funders, public and private, tips for understanding financial reports, best board reporting formats – you will have to figure these things out for yourselves in the context of your own organizations. You are the experts there and you have to tell your own story. But telling your financial story is an integral part of that narrative, and hopefully, the following five ideas will help you do that.

1. Financial reporting is a form of communication. For it to be effective, users must understand it.
This first idea is perhaps the most important one and the one I would like you to remember. Financial reporting is a form of communication. For it to be effective, users must understand it. The normal methods such as financial statements, Board reports, annual reports, budgets, grant applications, etc. are all communications tools. These communications may use a language that is unfamiliar to many but it is a language nonetheless, with its own conventions and rules, a grammar if you like. Above all its purpose is to enable communication, communication between two people, between an organization and its public, between an organization and its funders. If you are not communicating well -and I am putting special emphasis on the financial part of your story – you have a problem.

This idea that we actually communicate might make some of us accountants a little bit uncomfortable. However, the reality these days is that much financial reporting would not pass a basic communications test. The financial part of your story must be comprehensible to the intended users, both internal users in your organization, and external users. What are the implications of this simple but radical idea? First, telling the financial part of your story necessarily involves your accountant, but cannot be left to your accountant operating in splendid isolation. Second, to be comprehensible to multiple audiences you need to tell your story in different ways. It is fine for accountants to talk to each other in technical shorthand, but plain language is needed for everyone else. Variations on the plain language story may be necessary. Some users need the long version, some want the executive summary.

This central idea – the importance of communicating your financial story – links to my other four ideas. I would like to suggest that there are at least four important perspectives to incorporate into your financial story. Specifically, the perspectives of the historian, the crystal ball forecaster, the wizard and the change agent.

2. The perspective of the historian grounds us in the present by understanding, to the best of our ability, where we have been.
When the historian speaks of the past it is not usually about a random selection of unconnected events. Choices are made from a multitude of possible options to extract the relevant bits. Patterns are discerned, trends are identified. Which facts and patterns are selected will depend on the perspective of the historian, suggesting that there are many pasts depending on who is telling the story. Pasts are constructed to support a purpose, objective or ideology, or to justify performance. Fairness and balance are often lacking, making understanding difficult. As citizens, how are we to make sense of our public accounts for example? It seems that $23 billion disappears out of Ontario every year, and $6 or even $10 billion leaves Toronto. Where do these numbers come from and do they make any sense? How do we hold politicians accountable when they use and abuse financial statistics daily?

By invoking an historical perspective, my objective is to ask you to think about your own financial story. Do you understand it and how do you incorporate it into your story? Do you have a really good sense of where you have been, what your real costs are, where you are allocating your resources? Is pressure for greater efficiency causing you to compromise on the quality of your service and what are the implications of this? Many nonprofits have some form of service as their primary mandate. Do you have a good understanding of the costs of providing your services and is this money well spent? Or are you reluctant to talk about the costs, somehow believing that they should not need to be discussed? Do you have other important parts of your mandate, such as an advocacy component? Do you talk about them both, and the costs and benefits of both? Or do you spend resources on things that have nothing to do with your mandate?

Your financial story needs telling in ways that users of the information, both internal and external to your organization, will find useful. You can experiment with different ways to tell your history. Clear, simple presentations consistently reported over time provide insight into trends and identify successes and problems. Visuals, such as graphs and charts are often very effective. Sometimes information needs to be adjusted for the effects of inflation, sometimes for population changes as well. We could do a much better job of holding our political leaders accountable if we required the use of inflation-adjusted, population-adjusted statistics in most governmental financial reporting. These are a few reporting tools. You can decide for yourselves, which will help you to understand where you have been, to understand your history.

3. The perspective of the crystal ball forecaster helps us think about the future, our hopes and aspirations.
Do you have time to think about your future and what that means for your mandate tomorrow and ten years from tomorrow? Or are you too busy trying to protect last year’s budget. While you may think about the future in general terms, most nonprofits do not think rigorously about possible scenarios, and the likely impacts of these scenarios on their mandate.

I suggest that you keep a crystal ball sitting on your desk. What are the trends that are really affecting your organization? Are you capable of meeting the expected demand for your services? Are your services becoming obsolete? Could you model some possible scenarios? What are the implications and costs of not providing your services? Would these perspectives help you to tell your story and how it might unfold? Would this information be useful to you in running your organization now or to others that depend on, or are funders of, your activities? Good forecasting is dependent on the selection of realistic scenarios based on clearly stated assumptions. Testing the sensitivity of important assumptions is often helpful as it provides ranges for probable outcomes.

The crystal ball takes you into a speculative realm, a world of what ifs. This knowledge of future possibilities gives you a better sense of what you should be doing today and tomorrow. In short, it enhances the quality of planning processes which is what budgeting is all about. Do you use your budgeting process as an annual (or more frequent) opportunity to constructively reflect on the past and consider future possibilities? Constructing a likely future of your organization in dialogue with the past is the crystal ball’s contribution to your organization.

4. The wizard informs challenges and inspires our historian and our futurist, stimulating new ideas and causing us to think about existing patterns in new ways.
In this age of corporate shenanigans, I am not really trying to promote the image of the accountant as wizard. My accounting wizard is a more friendly type, possessed of a strong sense of the public good. But does two plus two always equal four? Are things always as they seem, can they be transformed?

There is a belief that accounting is mathematical and very precise. This is understandable because, for the most part, activities are represented by monetary equivalents, stories get told in cold numbers and complexity is reduced to a “bottom line”. But hidden beneath these “bottom lines” is a great deal of subjectivity, and many estimates, judgments and preferences underlie acceptable alternatives. Your accounting wizard should be able to explain the possibilities. If something isn’t making sense to you your wizard should be able to transform the results with a few changed assumptions or alternative presentations. Perhaps costs can be allocated in different, more meaningful ways. Perhaps you never really knew the full cost of some of your activities. Perhaps you are looking at the wrong “bottom line”. For example, to understand what is going on in the financing of Ontario’s universities perhaps the “bottom line” should be student/faculty ratios rather than the monetary surplus or deficit. Be warned, be skeptical. The wizard contributes transformative possibilities but demands scepticism. Both contribute to understanding.

5. And finally, the change agent pulls these ideas together and provides the spark that makes things happen.
An understanding of where you have been, a sense of the future and a touch of wizardry come together in the change agent. The change agent adds clarity of vision, an understanding of constraints and a determination to mobilize for change. By way of example, a couple of Maytree sponsored initiatives come to mind. I’m thinking of the Caledon Institute for Social Policy, the work of Mary Gordon’s Roots of Empathy in influencing our school systems and Paul Born’s Tamarack Institute in tackling the issue of poverty community by community. It is often an individual that provides the spark but usually there is an idea with transformative power in the background. As a corporate example, British Petroleum used the idea that they are an energy company, not just a producer of oil to set the stage for the start of a corporate transformation.

The change agent is expert at identifying the essential problems, understanding possible systemic remedies, overcoming inertia, mobilizing coalitions and schmoozing with the right folks. Incentives are usually needed to stimulate change, and the change agent is an incentives expert. Cash is a good motivator, a fact well understood in the corporate world. The change agent pulls it all together and makes things happen.

In conclusion, good financial reporting is an integral and essential part of telling your story. The story demands a solid sense of history and possible futures, thoughtfully imagined, and highlighting opportunities and strategies for change.

Walter Ross, FCA

Retired Partner of Ernst & Young, and former Director, Laidlaw Foundation

Walter Ross is a fellow of the Ontario Institute of Chartered Accountants and a retired partner of Ernst & Young. He is past president of the Laidlaw Foundation and the Family Service Association of Toronto.

Walter has extensive experience in both the financial and philanthropic communities. Walter’s top priority is his involvement as a founding Director and Treasurer of the Temagami Community Foundation. This organization was created by aboriginal and non-aboriginal community members with the common goal of creating a community institution and fostering business partnerships. He is the Treasurer of the Canadian Environmental Grantmakers Network and an advisor/mentor to a number of individuals and organizations such as Social Capital Partners, the Evergreen Foundation, and the Nature Conservancy of Canada and others. Walter is also a Director and Chair of the Audit Committee of Trimin Capital Corp., a public company listed on the TSX.

Walter is particularly interested in exploring the social and environmental dimensions of economic activity. He aims to better understand the connections between these often separate realms, and seeks approaches to problem solving that overcome inertia in the face of societal need. Walter believes we need stronger and better, but often less, public regulation. In addition, he thinks that good financial reporting is a necessary prerequisite for public accountability, in both for-profit and nonprofit entities.

Walter’s activities are influenced by but cannot be blamed on his immediate family; his wife and three children forming the unlikely group of social worker, artist/activist, Buddhist monk and mathematician. He reads widely, with strong preferences for history, biography, and particularly fiction, and accounting and business texts when absolutely necessary.

Good Resources on Financial Management and Reporting

Beyond Poverty and Affluence: Towards a Canadian Economy of Care. Robert Goudzwaard and Harry de Lange, U of T press, 1995

Social Capital Partners

CIBC’s Annual Accountability Report

British Petroleum’s Sustainability Report

The Culture of Contentment, J.K.Galbraith, 1995

Accounting Standards in Evolution, Ross M. Skinner, 1987