Keeping your not-for-profit afloat is no easy task. Trading solvent weighs heavily on some boards, especially those who take board member responsibilities seriously. This means a board member needs to not only have the skill to quickly grasp where the organisation is at but to also identify the integrity of the information before them.
Identifying when things are bit on the nose requires skill and quite a bit of practice and expertise. It’s the kind of stuff auditors do, hence the term ‘auditor discomfort’. We stumbled across this recent article on how experienced auditors detect fraud better than a computer. While the focus here is more on vocal cognition during conversation with CEOs to recognise their disregard to personal beliefs and values,it does support the view that some regular exposure and learning can build skills over time to know when things aren’t what they should be.
Auditor discomfort isn’t something that applies just to formal auditors. As board members, as senior management we all have a responsibility to be the auditors on the ground day to day, month to month.
The essence really is to follow processes that help identify the good from the bad, quickly. This article published by Better Boards a while back is still relevant today. It drills into some great examples of how to detect when things may not be as they seem. The article concentrates on two key steps that are important to follow.
Data Integrity Warning Signs
Look for warning signs that could be indicative of some wrong-doing:
- Follow your instinctive ‘auditor discomfort’ and know when to ask more questions
- Be alert to more than usual adjustments and corrections after the end-of-month
- Take notice of finance staff turnover as this can reduce departmental skill level
Reading Balance Sheets
- Compare Current Assets to Expenses – Current Assets should cover the organisations operating expenses for 3-24 months. See our recent webinar on Reporting for Sustainability on some good examples of how to do this.
- Look at the ratio Current Assets / Current Liabilities. This value should always be more than 1.
- Follow the Cash! Always insist on a cashflow forecast – best for 12 months ahead. Remember that in most states, and depending on organisational structures, directors and board members can be legally held accountable for trading while insolvent.
Other Board Member Responsibilities
There are some additional areas you should always have information on:
- Are service activities returning a profit? This can be tracked with specific KPIs like the ratio between an events income compared to its direct expenses. If a service isn’t operated profitably, that should be because the board has taken a strategic decision that other funding sources are cross-subsidising this.
- Keep track of unspent components of grant programs. This is particularly important around staff expenses.
While this article provides advice on how to deal with suspect situations, following any of these points are good practice month-in month-out. It will help to ensure early detection of problems and provide you with peace of mind – making your contribution as a director or board member invaluable.