July 31, 2002
Financial matters are not as clear cut as many think they are.
There has been a lot of discussion this summer about large corporations misrepresenting their actual status in financial reports. An accounting firm has been found guilty of malfeasance and the government is looking for corporate executives to put in jail. On August 14, 2002 many large corporation CEO's will have to certify their financial statements as accurate under threat of imprisonment. Much of what is heard in the media reports implies that profit - loss and income - revenue should be clear cut. Anyone who does their own taxes, is paying a mortgage, and has a few investments knows that 'clear cut' and 'financial report' do not necessarily go together. Even the IRS cannot answer tax questions reliably.
For corporations, financial status reports are a means to attract investors or people who will help capitalize the corporate operations. Your tax return is a financial report that the government uses to determine your contribution to its operations. The financial reports of the organizations you lead are used to assure members and grantors of the proper utilization of the funds they contribute. In all of these cases, the purpose of financial reports is to provide an accurate and fair picture of the financial health - past, present, and future- of the organization or individual.
The easiest way to know what you have is to count your money. This is called the 'cash' method. The cash method suffers in that it does not represent things you have that are not money such as promises or property. The accounting method that evaluates promises and property as well as money and also considers time factors is called the 'accrual' method. The problems with the accrual method concern how to figure the value of a promise or piece of property at a particular point in time. Look at the IRS instructions for calculating depreciation values of property to see how interesting this problem can be.
Another issue that puts judgment into financial matters is that of classification and categorization - the process called analyzing a transaction. All financial transactions involve something of value that transfers that value from one place to another. A proper accounting will 'credit' one account and 'debit' another in your books so that the fundamental accounting equation relating assets, liabilities, and equity remains balanced. For the income and expense subdivisions of equity, this isn't too much of a problem. But for transactions that influence non-monetary assets or liabilities, it can be difficult. What is the value of your membership? What does your organization owe its members? Do you have other obligations or even loans to consider? The special skills of your organization's volunteers and the mission of your organization have values that you use to attract members, donations, and grants. How are these represented in your efforts to raise funds?
We can all learn lessons from the corporate finance brouhaha of 2002. If we learn these lessons well, we will not suffer the fate of Enron, WorldComm, Global Crossing, Xerox, and the others. We will keep the reputation of our organization and its leaders untarnished. But it means active leadership!
- - from others - -
L.W. Brandeis: "In determining the value of a business, as between buyer and seller, the good will and earning power due to effective organization are often more important elements than tangible property."
Confucius: "The wise man understands equity, the small man understands only profits."
B. Disraeli: "Debt is a prolific mother of folly and of crime."
J.L. Hayes: "Those who try to paint a management picture 'by the numbers' will always be amateurs."
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