Reporting

Accounting & Finance

The Nightmare of Reporting

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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.   End –     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

Accounting & Finance

When assumptions don’t work

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Those that run organisations are expected to make decisions. These can be trivial and some with significant long-term impacts. They are often presented with scenarios where they are required to make decisions for the betterment of their organisations. These decisions could relate to appointments, procurements, ending or starting partnerships, strategic direction or related to communications. How these decisions are taken determines how risk is managed and disasters averted within an organisation. Bad decisions can indicate Bad governance. The quality of decision is based on the quality of the source. Is it based on assumptions or assurances? The difference between both is crucial and can be explained by how a surgeon conducts surgery. A surgeon when conducting lifesaving surgery must also make decisions. How these decisions are made gives us a glimpse on how assumptions can differ from assurances.   A surgeon regardless of his skill and experiences must rely on assurances provided by test results, machine sounds, camera, touch, tools and importantly opinion of other professionals. The more complicated the surgery, the more assurance is needed. This is how risk is managed. All these together give the experienced surgeon assurances on how much risk he/she can take and/or if the surgery is on track. Just imagine, if the surgeon decides to ignore all and just uses “assumptions” based on past experiences or what he/she may have heard or read from elsewhere to conduct the complex and life-saving surgery. One can imagine, this surgeon is playing with life and risking death on the table. The more experienced the surgeon, the keener he/she will be on relying on assurances from data, test results, tools, and opinion of other professionals. This is not about being weak or being undermined. This is about quality of professional decision making to save lives. Those that run organisations can learn from this example. Those charged with governance that rely on assurances tend to get it right compared to those that rely on assumptions and hearsay. Personal experiences of founders and leaders can be important but also dangerous when ignored over other means of assurances when making important decisions. The larger the organisation, the more need for robust assurance mechanisms. Below are some examples of assurances that can be used in decision making context: Comparing and Contrasting is a skill that leaders must have     Management regularly reports to their Boards. The Board members in their positions should have the ability to compare and contrast that information with other sources of information. Sometimes these alternative sources must be created for this purpose. For example: Does the reported finance information agree back to independently audited accounts? Does the HR report agree back to staff surveys or outcomes of tribunal cases / HR compliant investigations? Does the operations reporting agree back to independent evaluations and client / beneficiary feedback surveys? Is the Management submission on a matter supported by robust legal and finance advice? Do Management individually report to the Board and are these position holders consistent in their representations? Is there an independent and competent Internal Audit function that provides a robust professional assurance to the Board on ALL aspects of the organisation?   If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur Professionals can be individuals or firms. A good widely experienced professional can provide an independent assessment beyond the organisation’s internal politics and embedded assumptions. Home truths from independent professionals can do wonders for cleaning up an organisation. Those leaders that surround themselves with “Yes Men” tend to fall in their own dug holes as they miss them when they eventually appear. Good Governance is about how organisations are run in achieving their objectives. Decision making is part of this. It therefore matters how these decisions are made using assumptions or assurances. End – Author: Nasir Rafiq is the Founder and Director of Dua Governance Chartered Accountants and Business Advisors, a firm specialising on financial governance. Nasir is a widely experienced Fellow Chartered Accountant (ICAEW) and a Charity Financial Governance Expert. Email: info@duagovernance.com

Accounting & Finance, Governance

Basic Finance for Charity Trustees

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Blood flow in the body is vital for a living and healthy human being. Finance in charities is like blood in the body. There is no charity activity without it. Money buys the goods and services for the most in need and connects the donating hand to the one that receives it. In humans high blood pressure and cholesterol can lead to disease, heart attacks and death. Like humans charities follow the same path. Cashflow problems, banking freeze, fraud, bad accounting and waste of money leads to beneficiaries losing out and in extreme cases a bust charity – unlike local government, charities are not bailed out and die their death. Recent Covid19 crisis has shown this far and wide. To stay healthy humans need to work on their diet, regularly exercise and see the doctor for check-ups. Charities are no different. The political and social environment is constantly changing and the economic conditions are not always favorable. Quality of staff, training, regular performance reviews and checks by internal and external professionals, keeps the finances strong and healthy. To be healthy, we don’t need to be health experts. We just need to know and do the basics. These basics can be life and death in the long term. We have organised a Webinar – Finance Basics for Charity Trustees to discuss the basics of finance that should matter to Trustees of any size charity. As a trustee, you don’t need to be a finance expert. All you need is to ask the right questions at the right time from the right people – our webinar is designed to equip you with just that. Register now @ https://bit.ly/3DGXJSC. All registrants will receive a copy of the recording.

Accounting & Finance, Governance

Preparing budgets for Trustees

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During the 1980s, the Rambo movies were the ultimate action movies. The pinnacle scene in all these movies was when John Rambo prepared for war. The music in the background, the sound of Rambo stripping up his gear, loading guns, marking his face and then tying a red strip over his forehead prepared him for battle. Rambo had infinite bullets, bullet proof skin and luck always on his side, despite all this, he still had to prepare for battle and war. Preparing and planning is a key ingredient for taking on any challenge, mission or objective. Regardless of the size and reach of a charity, they too have to prepare and plan. The work of some charities is too important to fail. Unlike Rambo in movies, charities in real life rescue the vulnerable out of hunger, poverty, desperation and disadvantage. The budget process in a charity should represent preparing and planning process. Trustees with no financial background often are put off by budget presentation and engagement. When this happens then it is not the trustees that have a weakness, it is the budget process itself that is flawed. I professionally grew up in KPMG UK working in the Government and Public Sector division. My work required reviewing how local councils of all sizes utilised their resources, part of this was to review their budget setting and monitoring processes. This gave me a unique insight of how elected councillors with no finance background engaged in this process – I saw where it went well and where it did not go as well. The charity sector has much to learn from local government. Simple communication is important When appointing a CEO and the finance lead, the trustees should not only look for budget setting and monitoring skills, the presentation and communication skills are as important. The CEO and more importantly the finance lead should be able to present finance information in a way that makes sense to the Trustees with no finance background. The role of finance is often misunderstood in charities and this often impacts the type of staff recruited in finance positions. The finance department is not just an accounting and cash transfer function. It has an important role to play in planning and strategy development. Strategy has to mean something Trustees are often most engaged in strategy development. Strategies should be about how the organisation plans to run and achieve its objectives. This process should not be just a feel good marketing ploy that has no reference to underlying charity resources, ability, strengths and weaknesses. I see this too often. This is where the budget process starts to go wrong. Strategy setting and business setting become two different processes – the left hand does not talk to the right hand. The budget process becomes irrelevant to trustees with no finance background. Budgets should be linked to strategy and trustees should be engaged to discuss the below. Staff structure, ability and reward IT and facilities infrastructure required to deliver strategy Marketing strategy and plans New markets and development considerations Modus operandi   Trustees should endorse strategic objectives and budget framework in this context. Only then the budget becomes relevant to trustees with no financial background. The devil is in the detail The finance and accounting profession is technical and regulated. To expect Trustees with no financial background to grasp this in a budget presentation is wrong. The role of trustees is high level scrutiny and strategic direction – this is what should be expected of them. The details should be left for the employed finance professionals, Executive and those trustees that have a financial background. Trustees have a duty of care and thus should seek independent financial advice when required there is no requirement for trustees to form opinions based on their own lack of skills and understanding – The bigger the charity, this becomes a bigger problem. In charities where this happens, this reminds me of Rambo and the reality of it. An actor that acts like an action hero when in real life he is not – This only works well and ends well in movies. Charity finance, accounting and budgets can be complex. Trustees need to ensure all the right bits are in the right places for it to work. Preparing is key – regardless of size, risk and complexity of charity.   Author: Nasir Rafiq is a widely experienced Chartered Accountant and a Financial Governance Expert. He has led and directed large finance function in large and complex charities. He is the founder and director of Dua Governance, a charity finance specialist accountancy and business advisory firm.

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