SECTION: FINANCE

Ten Signs of Financial Trouble for Board Members Ten Signs of Financial Trouble for Board Members

Published: 02.10.2015 |
Last Updated: 02.10.2015
carmichael
carmichael
Paul Konigstein

Senior Consultant of Accounting Management Solutions, Inc. (AMS) Boston USA. 

Ten Signs of Financial Trouble for Board Members

A key governance role for board members is providing effective financial oversight. Here are ten signs the information you receive may not be of sufficient quality for you to take proper actions.

1. FINANCIAL INFORMATION IS LATE

The benchmark time to prepare financial reports is one month for the most complicated nonprofits. For example, the Board should expect a report for the period ended September 30 by the end of October. A longer turnaround time is an indication that either the finance function is understaffed, financial processes are inefficient, or finance is not a high leadership priority, or all of these.

2. FINANCIAL INFORMATION IS INCONSISTENT FROM REPORT TO REPORT  

I consulted with an organisation whose cash flow projections swung dramatically from report to report. One month the cash projection would show months of cash on hand. The next month the same report would indicate an urgent need to borrow. This sort of inconsistency is a sign that the report preparation process is broken, and the Board cannot rely on the financial information it receives from the finance team. In this case, the Board should consider an independent assessment of the reporting process.

3. FINANCIAL REPORTS CANNOT BE UNDERSTOOD

Financial reports should clearly show the financial capacity of the organisation and how the organisation is doing compared to plan and compared to prior years. If these key performance indicators cannot be seen at a glance, Board reports are too detailed and need to be simplified or summarised.

4. VARIANCES FROM BUDGET CANNOT BE REASONABLY EXPLAINED

There are many reasons why financial performance may differ from plan. Reasons include program expansion or contraction, changes in funding levels, and environmental changes. If the staff cannot provide a logical reason for a significant variance from budget, this is a sign of either accounting errors or misuse of funds.

5. THE CHIEF EXECUTIVE DOES NOT PERMIT BOARD CONTACT WITH OTHER STAFF

Senior staff should have direct lines of communication with their associated committee chair to discuss critical issues in their function. For example, the Financial Controller/Head of Finance should meet regularly with the chair of the Finance Committee to discuss goals, performance, and Board reports. CEOs who act as a single point of contact with the Board may be preventing critical governance issues from reaching the very individuals charged with governance. However, the type of communication senior staff has with the Board should be clearly defined to avoid overloading Board members.

6. FINANCIAL STAFF NEVER TAKES ANNUAL LEAVE  

Who doesn’t like to take a vacation? Only people who are afraid that the wheels will come off the bus while they are away. If the finance department cannot continue to function in the absence of a key staff member, this is a sign of poorly designed financial processes and poor staff training. It may also be a sign that the vacation avoider is afraid something that has been hidden will come into the open while they are away.

7. FINANCIAL STAFF CHOOSES THE AUDITOR

An inherent conflict of interest exists when the Chief Financial Officer or CEO chooses the auditor. Human nature makes us all crave positive evaluation of our work. A CFO or CEO may be inclined to choose an auditor who is more likely to overlook financial shortcomings. Staff may recommend an auditor, but the Finance or Audit Committee of the Board should direct the selection process.

8. AUDITOR DOES NOT MEET WITH BOARD

Many nonprofits required to have an annual audit, the Governance Code for Community, Voluntary Charitable organisations requires that the Board meet with the auditor. For nonprofits anywhere, failure to have this meeting leaves the Board without the knowledge required to exercise its fiduciary duty to safeguard the organisation’s assets.

9. BOARD DOES NOT REVIEW THE ANNUAL REPORT AND FINANCIAL STATEMENTS

To many, reviewing a statutory government filing is about as enticing as a root canal. Indeed, parts of the form are deathly dull. However, the annual return to the Companies Registration Office (CRO) and the Charities Regulator also contains information critical to Board governance.

10. THE CEO CHOOSES BOARD MEMBERS

 

To effectively perform its fiduciary duty, the Board must be independent from the staff. If the CEO chooses the Board members, the Board is dependent on the staff. Potential Board members should be identified, recruited, and recommended to the full Board for approval by a nominating or governance committee of the Board. Staff may recommend candidates to the Board, but the Board should control the process.

 

This article was originally posted on BoardAssist by Paul Konigstein, Senior Consultant of Accounting Management Solutions, Inc. (AMS) Boston USA. This article has been adapted from the original article to be consistent with Irish law.”

SECTION 4: FINANCE

Ten Signs of Financial Trouble for Board Members Ten Signs of Financial Trouble for Board Members

Published: 02.10.2015 |
Last Updated: 02.10.2015
carmichael
carmichael
Paul Konigstein

Senior Consultant of Accounting Management Solutions, Inc. (AMS) Boston USA. 

Ten Signs of Financial Trouble for Board Members

A key governance role for board members is providing effective financial oversight. Here are ten signs the information you receive may not be of sufficient quality for you to take proper actions.

1. FINANCIAL INFORMATION IS LATE

The benchmark time to prepare financial reports is one month for the most complicated nonprofits. For example, the Board should expect a report for the period ended September 30 by the end of October. A longer turnaround time is an indication that either the finance function is understaffed, financial processes are inefficient, or finance is not a high leadership priority, or all of these.

2. FINANCIAL INFORMATION IS INCONSISTENT FROM REPORT TO REPORT  

I consulted with an organisation whose cash flow projections swung dramatically from report to report. One month the cash projection would show months of cash on hand. The next month the same report would indicate an urgent need to borrow. This sort of inconsistency is a sign that the report preparation process is broken, and the Board cannot rely on the financial information it receives from the finance team. In this case, the Board should consider an independent assessment of the reporting process.

3. FINANCIAL REPORTS CANNOT BE UNDERSTOOD

Financial reports should clearly show the financial capacity of the organisation and how the organisation is doing compared to plan and compared to prior years. If these key performance indicators cannot be seen at a glance, Board reports are too detailed and need to be simplified or summarised.

4. VARIANCES FROM BUDGET CANNOT BE REASONABLY EXPLAINED

There are many reasons why financial performance may differ from plan. Reasons include program expansion or contraction, changes in funding levels, and environmental changes. If the staff cannot provide a logical reason for a significant variance from budget, this is a sign of either accounting errors or misuse of funds.

5. THE CHIEF EXECUTIVE DOES NOT PERMIT BOARD CONTACT WITH OTHER STAFF

Senior staff should have direct lines of communication with their associated committee chair to discuss critical issues in their function. For example, the Financial Controller/Head of Finance should meet regularly with the chair of the Finance Committee to discuss goals, performance, and Board reports. CEOs who act as a single point of contact with the Board may be preventing critical governance issues from reaching the very individuals charged with governance. However, the type of communication senior staff has with the Board should be clearly defined to avoid overloading Board members.

6. FINANCIAL STAFF NEVER TAKES ANNUAL LEAVE  

Who doesn’t like to take a vacation? Only people who are afraid that the wheels will come off the bus while they are away. If the finance department cannot continue to function in the absence of a key staff member, this is a sign of poorly designed financial processes and poor staff training. It may also be a sign that the vacation avoider is afraid something that has been hidden will come into the open while they are away.

7. FINANCIAL STAFF CHOOSES THE AUDITOR

An inherent conflict of interest exists when the Chief Financial Officer or CEO chooses the auditor. Human nature makes us all crave positive evaluation of our work. A CFO or CEO may be inclined to choose an auditor who is more likely to overlook financial shortcomings. Staff may recommend an auditor, but the Finance or Audit Committee of the Board should direct the selection process.

8. AUDITOR DOES NOT MEET WITH BOARD

Many nonprofits required to have an annual audit, the Governance Code for Community, Voluntary Charitable organisations requires that the Board meet with the auditor. For nonprofits anywhere, failure to have this meeting leaves the Board without the knowledge required to exercise its fiduciary duty to safeguard the organisation’s assets.

9. BOARD DOES NOT REVIEW THE ANNUAL REPORT AND FINANCIAL STATEMENTS

To many, reviewing a statutory government filing is about as enticing as a root canal. Indeed, parts of the form are deathly dull. However, the annual return to the Companies Registration Office (CRO) and the Charities Regulator also contains information critical to Board governance.

10. THE CEO CHOOSES BOARD MEMBERS

 

To effectively perform its fiduciary duty, the Board must be independent from the staff. If the CEO chooses the Board members, the Board is dependent on the staff. Potential Board members should be identified, recruited, and recommended to the full Board for approval by a nominating or governance committee of the Board. Staff may recommend candidates to the Board, but the Board should control the process.

 

This article was originally posted on BoardAssist by Paul Konigstein, Senior Consultant of Accounting Management Solutions, Inc. (AMS) Boston USA. This article has been adapted from the original article to be consistent with Irish law.”