William Harper Associates

November 2008 NEWSLETTER

William Harper Associates Newsletter

This newsletter is a free service to the North American not-for-profit community from William Harper Associates. Its focus, like everything we do, is on helping organizations that do good, do better!

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In this issue:



FEATURE ARTICLE: The Importance of Engaging Stakeholders

Collaboration and consultation are two truisms in our sector - supposedly we do them well, and are stronger for doing so. One of these - consultation - in the context of engaging our stakeholders is the topic of this article.

Two recent client situations clearly reminded me of the need to consult, engage - and listen to - our diverse stakeholders on major initiatives and activities. These suitably modified examples will illustrate the risk of not doing so, and the value of doing so well:

The first was a branding exercise, with a focus on developing a new logo for this growing association. While the designer came up with design after design - some good, some not so good - the client's staff, Board and partners sat on the sidelines. These designs never failed to fail: too complex, off mission, not easily reproducible: you name it, they saw it. But the real crime was that these stakeholders became increasingly disengaged from the process, to the point where they viewed each round of designs more passively and disinterestedly - even skeptically - each time. By about the fifth set of designs, it was obvious that no brilliant design could save the day - any logo would be stillborn, with no loving, nurturing stakeholders to bring it to life.

The second example is quite different. A strategic planning exercise started off by engaging a wide range of stakeholders in this larger charitable organization. These ranged from avid supporters to skeptics, to the occasional 'blocker'. All were consulted. And all were listened to, really listened to. All were fully involved in the process, with regular, honest communications throughout. Some suggestions from these stakeholders were embraced, some held in reserve, others rejected outright, but always with clear explanations and sound reasoning. The result was a strategic plan that was, of course, stronger for having been exposed to a range of views and opinions, but this was not the real success. What was astounding was the level of support for the plan, from all corners. True, some supporters were still muted in their support, but nobody undermined, blocked or sabotaged the plan. A better plan, with half as much support, could never have achieved what this plan did for the organization.

The essential element in both these scenarios is recognizing the interdependence within and beyond our organizations' walls. No initiative can succeed simply by being logical and sound. We need people to bring it to life, to help move mountains. And, people, being human, will support logical, sound initiatives that they have helped to shape far more than they will one that is simply thrust at them after it is developed.

The lesson: If you want a major initiative to succeed, to really make change, you need to engage those around your organization - both inside and outside its four walls - in its development, its very creation.


DID YOU SEE: Our October 2008 Newsletter Line Up

Last month's Newsletter included the following items. If you missed any of them, click here:

  • Dealing with Boardroom Drama
  • 5 More risks to watch
  • Reduce Your Software Costs

NEWS AND RESOURCES: Social Enterprise Ontario

Social Enterprise Ontario is a burgeoning network to connect social entrepreneurs, social enterprise staff, business leaders and social enterprise advocates and enthusiasts. You can join their mailing list to stay on top of this growing trend.


FOCUS ON RISK: The Final Five Risks

Over the past several issues, we've reviewed Ernst & Young's top 10 strategic risks for business globally . In addition to the top ten, that report identified five additional risk areas that E&Y thought may become top ten items in the future and which, regardless of their ranking, merited serious consideration. Once again, we offer the usual caveat that our sector is enormously diverse – more so than most – and no brief article can hope to capture all the possible implications of these global trends. Our focus here is simply to elaborate on the identified risks enough to allow you to consider them in your own circumstances. This month's final five risks identified in the E&Y survey, then, are as follows:

  • War for Talent – We've focused before on demographic changes and the unique approach to work of the new generation of employee. Add to this an absolute decline in the number of people projected to be in the workforce, and organizations have a serious human resource challenge to address. Fortunately, our sector is used to the challenges of managing volunteers, and we offer employees the opportunity to make a meaningful difference in the world around them - something that will appeal to many new entrants into the workplace. But, organizations will still have to adapt to this new reality.
  • Pandemic – An avian flu or other pandemic could have significant impacts on the broad economy and markets, as well as on organizations' operations. The resulting impact on the services our sector offers could also be dramatic.
  • Private Equity's Rise – A consequence of the greater-than-ever divide between rich and poor, private capital in record amounts can dramatically impact markets and industries. While we in our sector might only hope to attract a piece of this capital, dramatic structural changes arising from private takeovers, reorganizations, and so on - outside of all or some market regulation - are more likely to impact the demand for our services, than our ability to provide them.
  • Inability to Innovate – The not-for-profit sector has actually been one of the more innovative sectors of our economy for some time. And, the need for innovation has never been greater, as we continue to be called upon to do more with less, and also to do new things in new ways to meet 21st century problems. In my view, however, the sector needs to do a much better job of innovating with information technology.
  • China Setback – We have never been more globally interdependent. And, while I would argue that this is a good thing in the long-term, even small, local organizations must be attuned to global trends and developments. While dramatic change in China or other countries may not directly impact our operations, we can be sure that it will impact others in our communities.

A final note about these many seemingly unmanageable risks: while it is easy to feel overwhelmed and out-of-control in light of these, take heart. Our sector excels at rolling with the punches and persevering. Understanding and planning in this environment of continued turmoil is half the battle. And, where risks abound, opportunities also lurk - do not miss out on them by focusing exclusively on the downside.


VIEWPOINTS: The Financial Crisis and Foundation Giving

No newsletter today would be complete without a comment on the current financial crisis. Here, then, are a couple of notable viewpoints on the situation:

  1. The U.S. Council of Foundations (COF) , in a letter to its members, encouraged them to reach out, actively help the sector figure out the scope of the problem, and be particularly considerate of the impact of reducing financial support to grantees. Well and good, but even within that letter, its authors acknowledged the incompleteness of this response.
  2. The Nonprofit Quarterly (COF) hoped for a far bolder position, one that increased grants and their flexibility, and generally stepped up to plate in these difficult times. The letter they wish COF had written can be read here.

NEWS AND RESOURCES: Altruvest's BoardMatch Leaders' Program

The next offering of Altruvest's BoardMatch Leaders' Program is coming up on January 20/21, 2009. This intensive program is unrivalled in helping tomorrow's leaders develop their leadership skills and learn current thinking on governance and leadership. The program has been used as a strategic people development tool by a number of leading corporations. Program and registration details are here.


FROM THE ARCHIVE: Materiality (from August 2007)

The concept of materiality is one of the underlying principles of accounting. It is often referred to, but rarely defined. So, just what does it mean?

Materiality has slightly different meanings in different contexts.

Bookkeeping

At a basic bookkeeping or transactional level, materiality refers to activities - transactions - that have a financial or monetary impact and that therefore merit recording. Since this is so fundamental a principle, it is rarely referred to, except in basic bookkeeping classes.

Accounting and Reporting

Materiality is a more complex subject, however, in the context of financial accounting and reporting. Essentially ...

information is considered material if its inclusion or disclosure in a financial report would change, impact or influence the decision of a user of that report.

Note that this is a user-focused test. Materiality is in the eye of the user, so to speak. As a result, what is material to one user may not be to another. A Board member may have different needs and interests from a donor, who may have different needs again from the Canada Revenue Agency. Materiality has to be considered, not in the context of one of these users, but in the context of all of them. If a piece of information would influence any one of them, it may be a material item.

So, the users of the financial statements matter here, not the preparer. And, yet, it is the preparer who must decide what information to include or exclude, and how to present it. Obviously, the preparer has to understand who the users are, and what is important to them.

There are various ways in which a piece of information can be material (or not). For example, if a transaction is simply not recorded, its omission may be material. Or, if a transaction is recorded, but in the incorrect place, its placement may be material. Finally, if information isn't strictly the result of a transaction (i.e. it isn't material in a bookkeeping sense), it wouldn't be recorded in the organization's accounts. But, perhaps it should be shown in a note to the financial statements.

Here's an example. Let's consider a large payment made by an organization for consulting services:

  • If this transaction is not recorded, the organization's cash will be overstated, and its expenses will be understated. Users will be misled as to the financial position and results of operations of the organization.
  • Now, let's assume this transaction was recorded, but the amount was shown as salaries instead of consulting expense. This misplacement, or misclassification, could cause a reader of the financial statements to make incorrect judgements about how the organization was being run, what its employees were being paid, and what it was spending on outside consultants.
  • Finally, let's assume the transaction was correctly recorded as a consulting expense. However, let's also assume that the sizeable fee paid was well in excess of market rates, and this fee was paid to the Board chair's husband. Some additional disclosure (at a minimum!) is clearly called for, even though the transaction was correctly recorded in the accounts. This information is clearly material!

This latter issue - that of a related party or non-arms-length payment - illustrates one of the difficulties of preparing materially correct statements. It is not just a matter of good bookkeeping, of getting the numbers recorded in the right accounts (though that is a basic first step). It is also a matter of understanding and evaluating the many qualitative aspects of the organization's financial activities, and seeing that these are fairly presented in the statements.

In this sense, accounting is too important to be left (entirely) to the accountants!

Audit

Materiality is also a term often used in the context of the audit. Since the auditor needs to form an opinion on whether the statements are fair, he or she needs to consider what is material to those statements. In fact, much of the auditor's work relates to materiality.

Often, the auditor will determine and work with a numerical figure for materiality. This figure will form the basis for determining the nature and extent of testing that he or she needs to do as part of the audit. This figure will help establish how much detailed work needs to be done in checking the bookkeeping and the other basic recording and classification activities of accounting.

Materiality, as we've seen above, however, is not so simple as a single number, and the auditor will temper the use of this single materiality figure in his or her work with professional knowledge and experience. The auditor will likely pay close attention to areas that are of particular interest to known or expected financial statement users, such as the related party disclosures called for under the third bullet above.

William Harper is a Chartered Accountant, and has broad experience in accounting, auditing and financial reporting. Contact us for help.


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