Financial Management and Reporting

Accounting. Financial reporting. Do you react to these words with fear and trepidation? Does financial management exist under the radar screen in your organization, an unproductive compliance necessity? Is the language of financial reporting incomprehensible? What would happen, asks Walter Ross, if we thought of the activity of the accountant as that of an historian, or a crystal ball forecaster, or perhaps even a wizard?

Five Good Ideas

1. Financial reporting is a form of communication. For it to be effective, users must understand it.
2. The perspective of the historian grounds us in the present by understanding, to the extent possible, where we have been.
3. The perspective of the crystal ball forecaster causes us to think about the future, our hopes and aspirations.
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.
5. The change agent pulls these ideas together and adds the spark that makes things happen.

Good resources

• Robert Goudzwaard and Harry de Lange, Beyond Poverty and Affluence: Towards a Canadian Economy of Care. U of T press, 1995
• Social Capital Partners at www.socialcapitalpartners.ca
• CIBC’s Annual Accountability Report can be found at www.cibc.com.
• J.K.Galbraith, The Culture of Contentment, 1995.
• R. M Skinner, Accounting Standards in Evolution, 1987.

Presentation

Accounting and accountability. We hear these words a lot, but do we know what they mean?

Accounting for this accountant refers to the activity of keeping track of things in orderly ways, and of measuring them over time. This activity can become obsessive – indeed 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. Things that go into and mostly out of your bank account. 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, as noted above, 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   Accountability is everywhere. And with that other commonly used word these days – transparency- there are few places to hide.

Perhaps this is why so many of you are here today, anxious about this more accountable and more transparent world. My understanding of the purpose of this Maytree series is not to tell you what to do but rather to encourage thinking and discussion. So I am not going to talk about best budgeting tools, best ideas for establishing relationships with funders, public and private, tips for understanding financial reports, best Board reporting formats, things of that nature. You are going to 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 for this accountant at least, telling your financial story is an integral part of that narrative, and hopefully, my five ideas will help you do that.

What is going on here? An accountant talking about story telling?

My first idea for your consideration is perhaps the most important one and the one I would like you to remember.

1. Financial reporting is a form of communication. For it to be effective, users must understand it.

The normal methods – financial statements, Board reports, annual reports, budgets,  grant applications, etc. – are all communications. 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 throughout this presentation I am putting special emphasis on the financial part of your story – you have a problem.

There are probably a few accountants here today. This idea that we actually communicate might make some of us accountants a little bit uncomfortable. It’s nice to stay in our own well-paid world, guardians of a complex activity, the experts, just leave it to us. 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. You could even experiment with different ways of telling the story that might be appealing, but stop short of writing fiction I must add even though you might be tempted at times.

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 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 s/he is not usually talking 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. Spin masters of course abound.  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?

This could lead me on a serious tangent, perhaps a topic for another day. My objective today, by invoking an historical perspective, 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 in this audience will 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 to your organization and external to it, 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. Some don’t like numbers. Try visuals. Graphs and charts are often very effective. Sometimes your 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.  But I digress again. 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 causes us to 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 many may think about the future in general terms I suspect most do not think rigorously about possible scenarios, and the likely impacts of these scenarios on your mandate.

May 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.

Our crystal ball has taken us into a speculative realm, a world of what ifs. But would this knowledge of future possibilities not give you a better sense of what you should be doing today and tomorrow? In short, would it not enhance the quality of your planning processes? Did I just say “planning processes”? That’s what budgeting is all about. How many of you use your budgeting process as an annual (or more frequent) opportunity to constructively reflect on the past and consider future possibilities? Your likely future 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 – of Enron and Hollinger – I am not really trying to promote the image of the accountant as Wizard. My Wizard is a rather more friendly type, possessed of a strong sense of the public good. But does 2 plus 2 always equal four? Are things always as they seem, can they be transformed?

You know one of the really strange things about accounting, and measuring stuff, is the belief that it is all nice and 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 among acceptable alternatives. Your AccWiz – your accounting wizard that is – should be able to explain the possibilities. If something isn’t making sense to you your AccWiz should be able to wave a special pencil and 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. Perhaps AccWiz is just pulling your leg because s/he likes to see your reaction. Be warned, be skeptical. Creating cash is tricky.

So the wizard contributes transformative possibilities, and 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 our change agent. To this our 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 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. Consider for example, the idea that British Petroleum is an energy company, not just a producer of oil. This idea sets the stage for the start of a corporate transformation. (BP _ “Beyond Petroleum” was a wonderful idea, but subsequent events like the Deepwater Horizon tragedy offer a cautionary tale. Radical corporate change is very difficult even for well intentioned visionaries. September 2023) 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. 

So the change agent pulls it all together and makes things happen.

There you have it. 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, highlighting opportunities and strategies for change.

 I know I am only allowed five ideas, but I might be able to slip in a couple more and one practical suggestion under the guise of explaining my five good resources, only one of which is an accounting textbook.

Robert Goudzwaard is a Dutch political economist whose book Beyond Poverty and Affluence makes a distinction between two kinds of activities, “production activities” and activities he calls “caring activities”. Many of you are engaged predominantly in caring activities to use his term. You sometimes experience tension I expect because many, perhaps including some on your Board, think in terms of production and efficiency. Janice Stein has also written on this topic in her Massey Lectures, titled The Cult of Efficiency. Goudzwaard’s distinction, I think, is helpful in understanding and telling your story.

Social Capital Partners is a Toronto based philanthropic initiative with a mandate to apply venture capital principles to social issues. Some might question certain aspects of this mandate but, like the wizard, it stimulates thought. One of the most interesting aspects for me is their attempt to measure “social” returns. This work is in its infancy but merits consideration and further research. In some ways it is the flip side to John Elkington’s book, the Triple Bottom Line, which is influencing some corporate entities, particularly in Europe, to think about and measure the social and environmental impacts of their activities in addition to the more traditional financial measurements.

Which leads me to a corporate source and a practical idea. Check out the CIBC’s most recent Annual Report. A few years ago as part of the latest revisions to the Bank Act, Canadian Chartered Banks were required to produce an annual “Public Accountability Report”. This year the CIBC included both its Public Accountability Report and its Financial Report in their Annual Report thereby providing a fuller story of their activities and prospects. Public Accountability Reporting is also in its infancy but it will evolve and improve in the future. You might also look at their Financial Report which includes a “Management Discussion & Analysis of Results”. This analysis is intended to enable shareholders of the Bank to see through the eyes of management, to understand what has happened in the past and what the prospects are for the future. 

How about preparing a “Public Accountability Report” for your organization?

My fourth source is for the change agents among you. I have trouble understanding why obvious problems, at least they seem obvious to me, go unresolved. J.K.Galbraith’s small book “The Culture of Contentment” seems to me to offer insights into the nature of inertia and the reasons the status quo is perpetuated. Anyone seriously interested in change must understand the enemy.

And finally, for the accountants among you, may I suggest chapter 25 of Ross Skinner’s textbook “Accounting Standards in Evolution”. This chapter describes accounting for nonprofit organizations and governments, and while a little out of date, still presents a good concise summary of the differences between for-profit and not-for-profit accounting.

I hope these thoughts and sources will challenge you to think about the way you tell your story and stimulate conversation at your table. I will look forward to the question period to see if I have started something useful. At a minimum I hope you will think about your accountant in a new light.