Absence of Malice: How to be Both Accurate and True with your Financial Reports

1 Sep

September 1, 2012

Suppose you picked up this morning’s newspaper and your life was a front page headline… And everything they said was accurate… But none of it was true.   (Tagline courtesy of http://www.imdb.com/title/tt0081974/.)

In the 1981 movie “Absence of Malice,” Sally Field plays a newspaper reporter trying to solve a murder mystery.  Well meaning, she writes a series of stories that are “accurate” but at the same time “untrue.”  There follows a series of unfortunate consequences for the movie’s main characters.

The film presents an interesting paradox:  if something is accurate, shouldn’t it also be true?

(Paul Newman plays one of the characters whose life is turned upside down by the newspaper’s revelations.  If you have not seen this film I highly recommend it.)

What does this have to do with nonprofit financial management?

Consider this situation that occurred recently at one of our clients.  Our client, a wonderful organization, is, like many nonprofits, stretched financially.  Their budget is tight and the executive director, a person I respect and admire, is trying to impress upon his board the seriousness of the financial situation.  Most executive directors can relate to this.

This organization happens to be blessed by having a nice-sized endowment which provides a large portion of their operating funds.  The endowment plays an important part in this story.

As we do for many of our clients, we prepare this organization’s internal month-end financial reports.  In a recent month the stock market did particularly well, resulting in a large unrealized gain in their endowment that month.  After we prepared the reports the executive director decided that the stock market gain made the financial picture look too good that month and year-to-date.  He was afraid that the actual results painted too rosy a picture and might lull the board into a sense of complacency that their financial difficulties have been solved.  In short, the executive director felt the reports did not present a true portrayal of their financial situation.

He then made a fateful decision: he changed the numbers.

He reduced the unrealized gain in the financial reports to something he felt was more appropriate.  Fortunately, we caught this change before the reports went to the board.  We explained this was not the right way to handle this situation and the executive director, to his credit, agreed that we should change the reports back to the original numbers.

In short, the system of internal controls worked:  we provided expert advice, our client considered our advice, and followed our recommendation.  No harm done.

But the situation created a very interesting paradox that readers of financial reports, and those that produce these reports, often face:  accounting numbers that are accurate don’t always paint a true picture of an organization’s financial health.

Since this is a blog where I try to keep posts under 500 words, I can’t go into the details of how we solved this.  But I can tell you this:  it is possible to be both accurate and true.

An organization has certain freedoms when generating financial reports, intended for internal use only, to portray information in various formats, groupings, levels of detail, etc., such that the information tells both an accurate and a true story.  Financial reports properly prepared become a useful tool for the management of the organization and the board.  Financial reports can be supplemented by narratives, memos, charts, graphs, dashboards, and additional schedules and details, which further flesh out the narrative.  My future blogs will address these techniques.

What’s the moral of this story?  Don’t despair: accurate and true financial reports are within your grasp!

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

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