As I woke up one day, the strangest event had occurred. Suddenly and permanently the requirement to report audited financials had been lifted and no longer required. Just like that, no more annual accounting protocols, costs, or deadlines, no regulators, no fines and no shaming in red.
As I switched on the TV news, there was chaos all over the world. The Stock markets had crashed as investors were pulling out. Investments had been made based on guesstimates and bias representations from companies that did not materialise. Safe businesses were suffering huge losses and companies were running out of cash and being forced to close.
As legal disputes between shareholders and company managements were being drawn up by expensive lawyers, masses were being made redundant and risked losing their homes and livelihoods.
The Government was up in arms as suddenly there was a huge hole in their coffers as many companies understated their results for tax purposes. Hence, the public finances took a hit with many hospitals and schools now risked facing closure.
I frantically went online to assess the situation in the charity sector and was taken back by the result. Although there was no shareholding or profit making, the impact was equally severe.
Many Institutional funders pulled out from funding charities to implement their projects. These charities had failed to pass the minimum due diligence that came with annual audited accounts. As charities pitched for funding, they overstated their ability to deliver and ended up wasting and losing funds meant for beneficiaries in dire need.
The public trust on charities took a hit as there no longer was a credible mechanism to assess if these charities kept their accounts in proper order and if their accounts were true and fair.
What shocked me the most was the sudden holes in the finances that many charities were reporting. As if cash had disappeared. I had considered these charities to be strong in financial governance. These charities were now facing significant error or fraud in their accounts and there was no easy answer as there was no reference to an independent professional check. Consequently, many Trustees and CEO’s were removed from their positions in disgrace.
The World had ended up in chaos and it seemed no one was left immune, the rich and poor were equally and adversely impacted. All organisations were paying the price of this catastrophic change in the World.
As my confusion and shock peaked, I felt a tap on my head, and it was my wife waking me up for the morning prayer. She was waking me up from this never-ending nightmare.
As I sat on my prayer mat after my prayer, it dawned on me how important the annual financial reporting process is to the current World order and trust when dealing with finances. Organisations that take the annual financial reporting seriously not only fulfil a regulatory need they contribute to today’s World order and transparency.
I also learnt that preparing and compiling year end accounts process not only fulfils external reporting needs, it also has an effect of providing assurances internally that the accounts are free from any material misstatement, error or fraud.
Humans make mistakes and are susceptible to greed or quick wins. If gone unchecked this can accumulate significant harm in finances in the short and the long run. The role of external scrutiny of the accounts is to keep this in check and have a credible reference for internal and external stakeholders.
The external reporting process is important to financial governance and therefore requires priority, investment, and attention by those charged with governance of their organisations. They can either treat it as a box ticking exercise or an exercise that keeps their nightmares at bay.
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Author: Nasir Rafiq BA FCA is a widely experienced Finance Professional and Governance Expert. He works with business and charity organisations of all sizes and complexities.
Nasir is the Founder Director of Dua Governance Chartered Accountants and Business Advisors. A firm that specialises on governance advisory services to the charity and business sector