Financial governance: prognosis negative
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Through the emergency ward they came. A government department, pushing a wheelchair that carried a not-for-profit (NFP) organisation the department was funding. The situation was grim. The NFP organisation was haemorrhaging financially. They were making a mess on the carpet and it was beginning to stain.
As financial doctors, specialists in the NFP sector, our advice was sought. What we uncovered was not pleasant. Making sure that the government department was comfortably seated, we presented our findings. On all levels of the organisation, from the finance officer to the CEO, from the board right through to the auditors, the whole thing stank. Quite simply, the financial governance was completely inadequate.
Checking the pulse (the finance officer)
First we examined the role of the finance officer and looked at the characteristics of the person who was keeping the chair warm. They lacked experience and did not have the necessary qualifications for the role. Partly because of this, they took direction from the CEO in relation to all finance matters. Their power to question or to point blank refuse to follow inappropriate instructions was non-existent. With furrowed brow we moved on.
Taking the temperature (the CEO)
Next we looked at the CEO. This person had about as much financial experience and qualifications as the office cleaner. Despite this, they had complete access to the cookie jar, also known as the accounting system, and would often enter journals and move amounts around without explanation.
They spoke glowingly to the board about its role representing where the organisation was at. As one often does when offered a cookie, the board scooped up every last crumb, without question.
When recruiting to fill an administration manager position with the organisation, the CEO felt it appropriate to appoint a close family member to the role. The administration manager was then duly made responsible for approving all payments out of the organisation, including expense reimbursements to the CEO and administration manager themselves. Cookie anyone?
Measuring the blood pressure (the Board)
The level of financial expertise that was evident amongst the board members made the CEO look like a guru. Basically, they trusted the CEO and chose to exist in a state of ignorance. When the board was first alerted to the dire state of the organisation’s finances, they opted to back the CEO’s claims to be able to trade them out of the situation. They had survived this long, why should things be different now?
It further came to our attention that, in another masterstroke, the board had recently decided, in their wisdom, to approve a 15 per cent pay rise for the CEO (who had instigated the idea), when the organisation itself was only expecting a 5 per cent increase in its income for the year concerned. Anyone got a calculator?
The CEO had also proposed – after a payroll error resulted in himself and the finance officer being paid several thousand dollars too much one pay period – that rather than pay the money back to the organisation, these erroneous payments should be classified as bonuses, which the board agreed to. There was no mention of achieving performance targets, the ability of the organisation to afford the payments, or consideration given to bonuses for other staff members.
Checking the throat (the auditors)
Say ‘aaaaahhhhh’. Next on the examination hit list were the auditors, surely they hadn’t been infected too. Let’s just say that we are glad we wore gloves. The auditors had not qualified their audit report on the basis of going concern issues, despite the serious circumstances that were clearly evident. They also neglected to provide a management letter to the board noting the significant issues identified during the audit, including the dire financial position of the organisation.
Diagnosis
Along the way we had discovered that the organisation had a disorganised chart of accounts from which it very was difficult to get information. In fact, it was more likely to provide inaccurate readings of the organisation’s financial health. They did not do a budget, “what’s a budget?”, and had an overdraft facility which they were using, despite receiving quarterly funding grants in advance. The organisation had about $80,000 in its bank account while having over $600,000 in unspent grant liabilities. They had a negative net equity position amounting to $300,000.
In short, the whole thing was a disaster. The organisation was on its deathbed and we provided the most serious of diagnoses. It was an extreme case to be involved with, but one that serves as an example to all NFP organisations.
All contributors to the financial governance of an organisation must play their part. Symptoms, if they arise, need to be dealt with before a situation becomes irrecoverable. Being wheeled into an emergency ward is never a pleasant experience.
Andrea Petersen and Brenton Cox are from Not-For-Profit Accounting Specialists.
Menchie Khairuddin is a writer Deputy Content Manager at Akolade and content producer for Third Sector News. She is passionate about social affairs specifically in mixed, multicultural heritage and not-for-profit organisations.
