As an auditor, educator and consultant, I am often confronted with the conversation that is the lack of transparency in financial reporting.
Whether it is a client who is pressed due to a difficult situation, or a student who has had a negative experience with an organization or a funder who feels dubious about what they are reading in a set of financial statements, over the past few years, my experience of and conversations about non-transparency have led me to an inquiry about transparency, and the sources of, impact of, and transformation of non-transparent practices. In my experience, non-transparent ("less than clear") reporting practices come in a variety of forms, including but not limited to: 1 - The omission. Something has happened that isn't obvious and it is hoped that by not mentioning it outright or by mentioning it in an obsure way, it will be overlooked. 2 - The spin. Something has happened and the reporting of it is represented in the "best light" or in ways that can be taken in a more positive way, or minimized, or ignored. 3 - The pointed finger. The organization chooses to report on an issue by framing it as another's "fault" or due to an event out of the organization's control. 4 - The "It's none of your business". As in no reporting what-so-ever. This one might even look like "we'll just skip reporting this period". To an auditor these items may be seen as inconsequential to the financial statement user or an indication of fraud, or anything in between. While the two ends of the spectrums are clear as to how to proceed, it is the area in between that warrants attention. What is the impact of reporting that is inaccurate, even when not fraudulent, to the organization and to the stakeholders of the organization? Taking a step back, what is the purpose of financial reporting? Financial reporting is a way to provide a "what happened" and "what is so" conversation to users of financial statements. It is a story of the activities and the position of an organization, over a period of time, and at a given time, in terms of financial measurements, in the U.S., dollars. It also includes the narrative, in the form of notes to the financial statements. For management reports, it may include reports to the board of directors, management reports to grantor agencies or an annual report posted on an organization's website. It is also a tool that is used by viewers of any and all of these statements and reports to provide information pertinent to the users needs, such as "health" of the organizations to lenders, use of money to funders, and how well the organization is on track towards its mission, to the Board of Directors. Here in lies the rub. Those who provide statements, whether at a staff, director or board level may experience pressure to have things look a certain way, or to not have them look a certain way. For example. A funding source will only fund organizations which receive over $50,000 per year. The organization wanting to apply for the grant has only raised $40,000 in the current year, yet "knows" that it will raise the money in the upcoming year, but hasn't yet, so it obtains a "promise" of a donation from someone that may or may not actually donate the money in the following year, and books it as a "promise to give" donation, thus raising it's current year receipts to $50,000, so it can apply for the grant. Another example. A bank has loaned an organization funds and has a requirement that the organization maintain a debt coverage ratio of 1.25 at it's fiscal year end. The organization does this by manipulating the purchase of items for the current fiscal year by not recording the purchases made on credit, prior to the fiscal year end, until the payment date after the end of the fiscal year. While both of these scenarios may not pass audit scrutiny, in an unaudited set of financial statements they could not only easily pass, but also become standard operating procedure, justified, normalized and tone-setting in an organization. Internally prepared financial statements, management reports, grant applications and other informational data is often not audited, even when the financial statements are. You may say to yourself, what harm? It's simply the game we all play to have it all work. And the non-workability of operating this way is ignored or worse, not even in the awareness of the organization. Once we begin altering the facts of what actually happened, we are telling a history of altered view, a story that is not entirely true, accurate, or factual. We then rely on this altered history to inform us of how to operate in the future. Often times, we even delude ourselves into believing this altered history as factual and then are confused as to why the results of our operations, utilizing this information, does not provide consistent results. Well, that presumes that we even USE the information we accumulate and compile! (That is a different conversation, for another day). The first obvious impact of non-transparent practices is one of loss of functionality of one of the greatest tools available to run a business - the factual results of operations. Another clear impact of non-transparent practices is the risk. There is always a risk of information you have hidden, spun or shadowed to get out, or get out of control. We may convince ourselves this is not a risk, yet plenty of newspaper headlines beg to differ! An impact that may not be so apparent is the erosion of the ethical foundation of the organization. The slippery slope begins with one step. It may start as a lack of transparency around an item or two, and then it may and often does migrate into a practice of assessing every transaction for negotiable truths and as alternative facts. Another impact that may not be so clear is that these practices provide an erosion of self for those involved. Presenting something nonfactual as factual causes dimunition of a person's word, for themself even if no one else is aware. This human self-dimunition has a rippling impact that is also another coversation for another day, but I will say here, goes way further than you would first imagine. So what, you might ask, then is the "right" thing to do? Bust the covenant? Lose the grant opportunity? Especially when other organizations are doing the same thing? We should choose to be hindered by telling the truth and being absolutely transparent? As an auditor, of course, I say yes - be transparent. As a business person and someone who is interested in human behavior, I say... this is a much larger issue and one that is not solved by being transparent, alone. There is accountability and opportunity enough to touch everyone involved. The banker who doesn't understand the business model or industry to which he/she is lending, the donor who is randomly or at least haphazardly selecting a requirement without really looking at what that provides, a Board of Directors who is uneducated about the ebbs and flows of the business and/or industry. The metric creators and shapers, and enforcers have a part in this dance of deception. There is much that is possible with a wholistic approach to resolving non-transparency and it reaches far beyond the business setting. It is my interest to be in the exploration of this topic, and effecting movement in this area. I believe that the inquiry into how to resolve the unworkable dance between ill-suited expectations and the fear of the resultant sanctions and penalties with non-transparency and all its impacts will provide a much larger access to transforming how we do business and how we be humans together. This blog post is but the beginning of this conversation. I thank you for joining me.
0 Comments
|
AuthorMara G Mann, CPA ArchivesCategories |