Everything You Wanted to Know about Financial Reporting
July is the first month of Q3 and the month when financial reporting is being finalized for many Indigenous communities and organizations.
We thought we’d take the opportunity to answer some of the most common questions we get from clients and others on this topic.
Q: What is financial reporting? What is in a financial report?
A:
a. Financial reporting is a process by which an organization explains its financial performance and position to different users, including ultimate beneficiaries.
b. Financial reports come in many shapes and sizes but the key ones from an organizational perspective are income statement, balance sheet and cashflow statement.
c. Income statement shows revenues and expenses to help determine financial performance.
d. Balance sheet explains the financial position by highlighting assets, liabilities and equity of an organization.
e. Cashflow statements explain the different operating, financing and investing activities, the net of which impacts the cash balance of the organization at the end of a year
Q: What value does a “year end” financial report bring in the context of Indigenous community/organization/nation?
A:
a. Creates transparency for different users of financial reports including but not limited to community members, capital providers, business partners and regulatory bodies
b. Builds confidence for the ultimate beneficiaries of the organization
c. Showcases the strength of internal controls set up by an organization
d. Summarizes the different assets, liabilities, and equity, revenues and expenses
e. Help users, particularly ultimate beneficiaries, understand basic questions about finances such as:
i. How much wealth was created in a given year?
ii. What was the accumulated wealth of the organization in question?
iii. What was the movement of cash?
Q: What does the process involve in preparing financial reports?
A:
a. Ensuring all financial transactions are being captured in a timely manner
b. Checking for recording errors and correcting them on a periodic basis
c. Reconciling bank, cash and cash equivalent accounts on a monthly basis
d. Reviewing financial performance and position on a quarterly basis
e. Engaging with accountants and auditors (where applicable) early on
f. Finalize financial reports and share it with users interested in financial affairs of the organization
Q: What are common mistakes to avoid?
A:
a. Not taking into account the perspectives of ultimate beneficiaries
b. Not training staff at all levels, particularly in smaller organizations
c. Not separating duties of different people involved in the process
d. Not keeping proper records
e. Not instituting internal controls
f. Not conducting bank reconciliations on time
g. Not using accounting systems to its full potential
h. Not planning for crisis, emergencies and contingencies
Q: What are some noteworthy aspects of financial reporting that are unique to Indigenous communities/nations?
A:
a. There are more than 600 First Nations in Canada, each with their own unique history, culture and governance systems, not to mention the Metis and Inuits - So the idea of looking at standardized financial reporting frameworks for all Indigenous communities/nations is a misled path and in itself problematic.
b. That said, accountability is the underlying motivation for financial reporting in all entities.
c. Such accountability exists at three levels between governing bodies and:
i. Community members
ii. Federal and Provincial Governments
iii. Capital providers
d. To be able to understand the type of financial reporting that is appropriate for a First Nation, for example, it is important to understand their current social, political, and economic environment.
e. The current environment cannot be appreciated without an understanding of the history that has established the relationship Indigenous peoples have with Canada.