Financial statement and performance audit
The financial statement must be completed within four months of the end of the fiscal period. The Board of the current term of office (in accordance with the signing date) is responsible for the signing, even if the previous Board had been fully in charge of preparing the financial statement. Agree in good time who will be responsible for preparing the financial statement. In most cases, the easiest option is for the Board who was in charge during the fiscal period to take care of preparing the financial statement. However, the current (ongoing fiscal period’s) Board should stay informed about the progress of the financial statement. It is most unfortunate if the current administration needs to suddenly prepare or correct the financial statement several months into the new fiscal period.
The financial statement generally contains at least a profit and loss statement, a balance sheet and its breakdown as well as the required appendices. The association’s rules may require an annual report to be prepared. An official financial annual report is compulsory if the association is obliged to have an audit conducted and its operations are financially notable. In contrast, an annual report describing the operations should be prepared even if this is not stipulated in the association’s rules. This type of annual report is an excellent historical source on the association’s operations and also helps prepare the operational plan. In addition to this, an annual report enables the association’s members to familiarise themselves with the past years’ operations. It is difficult to come up with a single good reason not to do an annual report.
In most cases, a traditional annual report contains a description of the association’s primary operations over the operating period. Generally, in the annual report, it is justified to go through, for example, the execution of the operational plan in terms of each of its sections, in addition to the activities not included in the operational plan. Administrative and financial arrangements for the fiscal period in question and other background work relevant to the operations should also be presented. Remember that the annual report can and must reflect the association’s operations, meaning it would be good to attach to it things like a list of events and photos of the activities.
Please note that associations’ rules often make no difference between the official and unofficial annual report. If, however, in accordance with the Accounting Act, the association’s financial operations call for a statutory financial annual report to be made, also the contents of the annual report must be in accordance with the Accounting Act.
Stages of preparing the financial statement
- Make sure that the debit and credit sides match up in the accounting. This way, you can instantly tell if there are mistakes or omissions in the entries on the part of the accounts.
- If necessary, go through each entry and make sure that the bank account balance matches up. If the association has a petty cash, also make sure that the petty cash matches up with the cash transactions recorded after the opening balance. Inaccuracies often appear in the petty cash, so continuous accounting and, when necessary, balancing are important.
- If necessary, check that the sums have been correctly recorded and compare the entries to the account transactions and cash receipts.
- Record all purchases payable and accrued liabilities.
- Purchases payable: an invoice has been received and belongs to the previous year, but it has only been paid the following year. Accrued liabilities: an invoice has not been received until the following year, but the expense belongs to the previous year.
- Record all receivables. Membership fee receivables: the previous year’s membership fee has been received in January the following year. Sales receivables: the association has sent out an invoice for advert sales, for example, in a magazine published during the invoicing year, but the invoice payment has only been received by the association the following year. Accrued receivables: the association has paid an expense belonging to the following year already the previous year (for example, January’s rent or advance purchases for an event in the early part of the year).
- You can find more information on associations’ financial management and accounting here.
Depreciation and inventory
In accordance with the Accounting Act, associations must make depreciations on certain types of assets listed in their balance sheet. For associations, such assets generally include equipment and machinery or expensive software. Machinery and equipment, for example, are generally depreciated by 25 per cent of their value each year. Software is generally depreciated by a fixed amount over 3–5 years. For example, a programme that cost 3000 euros can be depreciated by a fixed 1000 euros for three years. Items that are productive for the association for at least three years are considered as machinery and equipment. Hence, laptops and mobile phones can be directly recorded in accounting as expenses.
If the association has goods to sell, these must be inventoried, i.e. counted, at the time of preparing the financial statement. The inventory value recorded in the association’s balance sheet must be rectified in the financial statement to match the value of the counted amount of goods. The inventory value is always based on the purchase price of the goods and never the sale price at which the association sells the goods. For example, if the association is selling a book about its history of which a 300-copy edition has been acquired at a purchase cost of 12€/copy, and it has 250 copies remaining, the inventory value is 12€*250. If necessary, the purchase cost of a fixed asset can be estimated for the balance sheet, for example, if the association has received a valuable donation.
A performance audit is compulsory for an association, unless a financial audit is conducted on it.
The financial statement along with the required documents must be delivered to the performance auditors generally at least one month prior to the meeting of the association that decides upon confirming the financial statement. The performance auditors must provide the Board with their written statement generally at least two weeks prior to said meeting of the association. Check the delivery schedule in your own association’s rules.
The required documents are generally the minutes of the meetings of the Board and association, the bank statements, receipts, accounting, financial statement and annual report as well as any other documents relevant to the operations. With the help of these documents, the performance auditor can form a sufficient picture of the association’s finances and administration. In other words, the performance auditor must be given the correct and sufficient information for review, with which the Board is obliged to assist. This means that when necessary, the performance auditor can request additional information, and the Board must do its best to provide this.
The performance auditor may be a layperson, but they must not be incompetent due to likelihood of bias, or unable to perform their task: “The [performance auditor] shall possess financial and legal knowledge to a degree to be deemed necessary in view of the association’s operations in order to carry out the [performance audit].” A community cannot act as a performance auditor. (Section 38a of the Associations Act)
It is important for the treasurer and the whole association that the performance auditor is truly capable of performing their task! A person should not be chosen to act as a performance auditor merely because they used to be an active member of the association a few years back. Good knowledge of the administration and finances of association operations is more important. In other words, you should look for persons with long and versatile experience in preferably different kinds of associations to act as your performance auditor. Thankfully, there is often a decent offering of such persons in student communities.
A financial auditor is required, if two of the following prerequisites have applied to the fiscal period that just ended and the one immediately preceding it:
1) the balance sheet total exceeds 100.000 euros;
2) net sales or comparable revenue exceeds 200.000 euros; or
3) the average number of employees exceeds three. (Auditing Act)
The financial auditor cannot be a layperson. In accordance with the Auditing Act, the financial statement and the accounting materials must always be delivered to the financial auditor at least one month prior to the meeting of the association, and the auditor must provide the Board with their written statement at least two weeks prior to the meeting of the association.
It is possible to have a financial audit conducted at other times, but this is unnecessary and financially costly for small associations.
Freedom from liability
The meeting of the association decides whether to grant the Board and other accountable parties freedom from liability for the previous fiscal period. This means whether the operations during the year in question are considered to have been conducted in accordance with the legislation and the association’s decisions. If something comes to light afterwards that would have changed the assessment, it is possible to return to this matter, but in the main, the decision of freedom from liability is permanent. Freedom from liability does not mean freedom from criminal liability.