Imaginary Fiscal Distress Syndrome or “How Pollyanna looks at Orchestra Management”
Some months ago I read Karen Berman, Joe Knight, and John Case’s, Financial Intelligence for Entrepreneurs: What You Really Need to Know About the Numbers, which is a wonderfully concise intro to finance basics that any entrepreneur should know. The book also gives some insider advice and tips on the art of finance (yes, that’s the art of finance–not the science of finance). Anyone who has run his or her own business has probably already gleaned some of this insight–especially those have done their own accounting.
Even if you do have an accountant, this book is particularly useful for you to understand the types of assumptions and guesswork that your accountant might be doing by necessity. In light of the investigation of the Minnesota Orchestra (see also Robert Levine’s piece, Cooking the books, and a series of pieces posted at Song of the Lark) as well as many folks who just make the assumption that the numbers in the books are an accurate reflection of the financial reality of an organization, it might be good to quell the myths or at least give a more realistic image of what is for all intents and purposes a highly developed art form.
Understanding the Art of Finance
In the first chapter of the book on page 6 (under the heading of “Understanding the Art of Finance”) we have this opening paragraph:
A second aspect of financial intelligence is understanding what might be called the art of finance. In the preface we referred to it as the finance profession’s little secret, but it isn’t really a secret; it’s a widely acknowledged truth that everyone who has studied finance knows. Trouble is, the rest of us tend to forget it. We think that if a number shows up on a financial statement or on your accountants’ reports, it must accurately represent reality.
the implication of that last statement being that the number on a financial statement or on an accountants’ report just might not accurately represent reality. The authors continue with:
Of course, that can’t always be true, if only because bookkeepers and accountants can’t know everything. They can’t know exactly what everyone in the company does everyday, so they don’t know exactly how to allocate costs.
After giving a couple of concrete examples to illustrate that last statement, they continue:
The art of accounting and finance is the art of using limited data to come as close as possible to an accurate description of how well a company is performing. Accounting and finance are not reality; they are a reflection of reality, and the accuracy of that reflection depends on the ability of bookkeepers, accountants, and finance professionals to make reasonable assumptions and to calculate reasonable estimates.
What does that mean, anyway? Bias. And here bias is simply used in its neutral connotation. As the authors state:
The result of these assumptions and estimates is, typically, a bias in the numbers…Where financial results are concerned, bias means only that the numbers might be skewed in one direction or another. It means only that bookkeepers, accountants, and finance professionals have used certain assumptions and estimates rather than others when they put their reports together. Enabling you to understand this bias, to correct for it where necessary, and even to use it to your company’s advantage is one objective of this book.
The emphasis is mine.
Using bias in numbers to your company’s advantage
Financial Intelligence for Entrepreneurs gives a wonderfully concise overview of finance, and one of the ways it does this is by showing how some publicly traded companies have “Cooked the books” even well beyond what would be considered legal, if not ethical. But I think it’s the ethical side that Levine is looking at in the piece above, and despite some who feel as if management of classical music institutions always report the financial situation of their organizations accurately, there are others who feel otherwise.
Baumol (yes, the Baumol of the Baumol Cost Disease) and Bowen in the introduction (page 3) to their seminal work on Cultural Economics, Performing Arts, the Economic Dilemma, state in their intro describing the crises that are “apparently a way of life” for Performing Arts organizations that:
Doubtless, some alleged crises represent a tactical stance — cries of woe intended to help in raising funds or in negotiation with unions.
or, in other words, what Drew McManus calls the Imaginary Fiscal Distress Syndrome is simply a normal tactic used in business and seems to be the case with the Minnesota Organization. Sure, regular independent audits might help to curtail the usage of the tactic, but as the Philadelphia Orchestra has shown, you can always just file for bankruptcy to get out of financial commitments.
The question here though is how easy is it to Cook the books legally to show your organization’s financial situation is precarious thus necessitating a rally call for fundraising or as a call for cuts from the unions? Well, it’s not particularly difficult–and you don’t even have to Cook the books if you just want to hide behind the rhetoric of refusing an independent audit for the sake of protecting the anonymity of your endowment donors.
And as Drew McManus pointed out in a piece by Woods Bowman in the Nonprofit Quarterly, Nonprofits seem to have shifted from performance or artistic excellence driven missions to “strategic commitments (and even some formal mission statements)” that “have moved more toward including language highlighting fiscal responsibility.” Bowman opens his piece with even uglier behavior which has made some headlines recently:
An article earlier this year and many newswires published by the Nonprofit Quarterly have reported stakeholder rebellions in response to nonprofits ignoring their responsibility to stakeholders. Does Susan G. Komen for the Cure sound familiar? These responsibilities extend well beyond checks and balances in the financial system or misreporting performance statistics—they extend to governance. Do nonprofits listen to stakeholders? Are they in the habit of taking money from them—and in their name—and then ignoring them until they shout?
I don’t think the question is “does this happen?” but rather, “how often does this happen?” and “what are the conditions under which this happens?”
Of course, the biggest irony is that for all the complaints by the Chicken Little Think Tank against those who see no problems with the Classical Music Industry they sure do have a Pollyannistic picture of management and caretakers of the organizations that are purportedly in crisis! This is not to say that there aren’t managers and/or boards that don’t overemphasize financial crises–but as I’ve mentioned in my piece about biases such mundane claims just don’t make good copy and neither do they do much to help raise funds or cut salaries.
Couple that with the art of finance and you have all the flexibility you need to make a claim that, at best, isn’t exactly a lie and, at worst, is at least legal. It’s in the gray area between where we find what’s ethical.