reading and understanding financials is key.
by ed mendlowitz
77 ways to wow!
hardly a week goes by that i do not read about a theft, fraud, misappropriation, defalcation or egregious wasteful spending at some charitable organization. some are perpetuated over many years – perhaps as many as seven years.
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lack of controls, oversight, disinterest or lackadaisical care creates an atmosphere where an already weak person can spot an opportunity, or perhaps an uncaught or unguarded careless mistake gives birth to a pattern of ongoing criminal action by someone who never had an unlawful thought.
who is to blame? management, the board of directors, large donors and any other stakeholder involved with the organization. thieves spot areas where there is a lack of accountability or managers without an understanding of the financial information that is provided or should be provided on a regular basis.
establishing and implementing controls is not that difficult. wasteful spending and stealing appears on financial statements in categories of expenses that are out of sync with what they should be or larger than usual. it just needs the recipients to look at what they get and question illogical, unexpected or unexplained amounts that stick out as not being typical. balance sheet changes should also be reviewed regularly with reasons for differences clearly understood. part of a sound system is quick and reasonably accurate financial statements and supporting documentation that are reviewed by those in charge or involved stakeholders including substantial supporters.
there are generic controls that can be implemented, if not already in place. further, almost every organization has its peculiarities requiring special attention and controls should be adapted for this. establishing many of these controls is not costly and can usually be done quickly.
however, in my opinion, a major impediment to effective controls is neglect by those trusted with the administration and oversight of the organization. doing it right only takes a few minutes a month. start today to get it right. do not place yourself in the position of having to explain why there was a theft or extreme waste under your watch.
serving is not an honorary entitlement
many people serving on charity and public agency boards of directors assume huge responsibilities, yet many act as if they are entitled and accept it for the “honor.” they are foolish and are cheating those entrusting them to oversee the organization they are supposed to be serving.
recently a very large ny agency “discovered” that some employees were making annual salaries of upward of $350,000 because of overtime payments. and it isn’t one or two people – it is of epidemic proportions. as i said, a week doesn’t pass without a news story about a major embezzlement or theft in a local charity or governmental body. my question is simple: who is responsible and why weren’t they watching what was going on?
when these are discovered, the directors all profess ignorance of the egregious shortages, saying that management let them down. bull doody! they are the ones who let management, the public and all stakeholders down. and if they took their responsibility with the least seriousness, it is highly likely these defalcations, overcharges or immoral payments would not have continued for as long as they have.
here is what they could have done to possibly have prevented the continuance of these misuses of public funds:
- they could have looked at the financial statements that were available to them.
noticed that i said looked – not studied. if they received the right reports and spent three minutes each time reviewing them, there is a high likelihood they would have noticed something they would have questioned. i know about this stuff. i work with it all the time and teach it to mba students. directors regularly receive, or should receive, adequate financial data. the problem as i see it is that they are not looked at. usually they are “too busy,” don’t understand them or do not believe it as being part of their job. none of these reasons is valid and, in my opinion, this makes them negligent in the performance of their responsibilities. either way we should all resent their inaction and dereliction of their duties.
- it may be too late to stop what has happened, but not too late to start anew if you are on a board.
when you get the financial reports, at least quarterly, look them over and if you do not understand them, ask the person who prepared them to explain them to you. if you still don’t understand them, ask for reports that you do.
also, i have a simple rule for you to follow: if the preparer cannot explain it so you understand it, assume they are wrong or don’t know what they are doing, and find someone who could help you.
- if you are a member of a board of directors you have a trusted responsibility to review the financial data and to understand it as it relates to the organization’s mission, funding and financial controls. you need to either meet that trusted responsibility or resign.