Cooking the Books
We have all heard the term ‘cooking the books’ and when we do, it almost always has a negative connotation. However, there may be times where this practice has its place.
Many nonprofit organizations operate multiple programs and programs within programs. Sometimes similar programs are funded by the same organization, where others although similar, have different funders. Where it starts to become grey is when one program is over running its budget while the other has a surplus, which leads to the temptation to play with the expenditure coding in order to balance the bottom lines. Although funders may frown on such practices, I can tell you there is some legitimacy to this.
For funders who are now jumping up and down, please hear me out as I provide some examples.
We had two similar programs each with their own contract and each funded the same amount. Carrying out the services were a full time program coordinator and a full time program delivery officer each working somewhat equally in each of the two programs, which is common when nonprofit organizations attempt to gain efficiencies in their program delivery.
The problem was the coordinator, who had administrative responsibilities as well as program delivery, was paid $32 per hour where the program delivery officer was paid $25 per hour, and each were coded to one of the two programs causing an inbalance in the financial bottom lines. The fix was simple - charge 50% of each employee to each program thereby normalizing the salaries. Regarding legitimizing this coding manipulation, both contracts allowed for both program delivery and supervision, but the combination of these two lines only added to one full FTE per program.
Now that we have layed the foundation to this with a simple example, and I hope the funders have calmed down a little, let’s make it more complex.
There are occasions where you anticipate receiving additional revenue from a funder even though it is not confirmed in your current contracts; under certain circumstances, it may be appropriate to estimate this revenue and record it as a receivable. An example includes, our employees were members of the provincial government employees union, the province negotiated pay raises, then articulated that for organizations who had provincial government contracts, they would assist the nonprofit organization in paying these salaries by amending the contracts accordingly. In one case it took four months to settle the agreements between the nonprofit organizations and the government entities who were the program funders, in another case five months, and one situation over six months. In the meantime the programs were running major deficits which made the Board of Directors nervous which led to them requesting the calculation and accrual of anticipated receivables. For those who missed that chapter, this is where we record an estimated additional revenue, with the other side of the entry being accounts receivable on the assets side of the balance sheet.
One of the principles of accounting is ‘Conservatism’ where any such estimates, either revenue or expenses, must made conservatively. This means for revenue you estimate low, and for expenses you estimate high. While this may sound like it should be the opposite, that would be true for a commercial enterprise where you are trying to look like you have a stronger bottom line then you might otherwise have, but it is not how accountants are to behave according to the rules for financial statement preparation, which both forprofit and nonprofit entities are to live by.
Other examples of ‘Cooking the Books’ include allocations of common services such as occupancy and administrative charges; when doing this it is important to truly understand what is called the ‘cost driver’ which leads to the allocation base. For example, how many square feet of office space does your program use, and what is your usage of common areas such as reception and waiting rooms? Also, are you a power user of services such as Information Technology, or printing… especially colour?
There are many other examples of revenue and expense adjustments which some could consider as ‘Cooking the Books.’ In allocating food preparation costs from our central kitchen to the user departments being residential facilities as well as our Meals on Wheels program, at the mid year mark we finally decided to adjust the allocation base per meal as we were charging sites more than we spent causing a cost recovery program to show a positive bottom line. Of course the first question was ‘why are you not spending the money you are given thereby ensuring a high quality meal offering?’
This leads us to a manufacturing type cost analysis under what is called Standard Costing, where before we make a random adjustment, we determine why we have the variance in the first place. The two factors we analyze are what are called purchasing price versus efficiency variances; in other words, did you pay more or less than expected per unit of product, or, did you use more or less units of product than expected. This type of analysis would work well if you were sticking to your menu plan; but if you were serving macaroni and cheese versus steak and potatoes, that would be a different conversation.
In closing, the next time you hear someone reference ‘Cooking the Books’ or hear an accountant say ‘how much do you want it to be’ hear them out, because what they are doing may be legitimate.