A seemingly simple question, especially one to which we think we should know the answer, sometimes starts an adventure in exploration that lands us right back where we started.
The Canada Corporations Act and parallel legislation in most other provinces require the directors to present to the annual meeting of members financial statements for the past fiscal year comprising of a balance sheet, statement of profit and loss, and statement of surplus, along with the report of the auditor. Some of these statutes (including, for example, the Canada Corporations Act, the British Columbia Society Act and the Ontario Corporations Act) also contain an explicit requirement that the auditor appointed by the members express an opinion whether those financial statements present fairly the financial position of the organization and the results of its operations for the fiscal year; in some cases (the Corporations Acts of Canada and Ontario, for example), the statutes also expressly require that those statements be prepared in accordance with generally accepted accounting principles.
The seemingly simple question referred to above was whether an Ontario not-for-profit religious-based organization (the “Prime Organization”), in this case a charity, was obliged to include in its annual audited financial statements the operations of another Ontario not-for-profit organization that provided specialized social and related services not offered by the Prime Organization (the “Second Organization”). Although they operated more or less independently of each other from separate premises, the two organizations shared a common operational strategy, philosophy and approach, and shared also a majority of directors and of senior management. (As it turned out, the two organizations also shared the same auditor.) The operations of the Prime Organization generally resulted in an annual deficit, since it relied almost entirely on gifts from its supporters, whereas the Second Organization operated on a fee-for-service basis and annually had a comfortable excess of receipts over disbursements. It was obvious that there would be quite a different impression created depending upon whether or not the financial statements were consolidated.
Our first impression was that the question should more properly be directed, at least in the first instance, to the auditors of either the Prime Organization or the Second Organization, as the answer was dependent at least in part upon how generally accepted accounting principles applied. Our recommendation was that there needed to be dialogue between the organizations and their auditors before we could offer an opinion.
Subsequent research, reflection and an examination of the Accounting Standards of the Canadian Institute of Chartered Accountants confirmed that the issue is not exclusively a legal issue. The decision to consolidate financial statements between organizations that share some combination of strategies, operations, governance, personnel, philosophies, fundraising and other economic policies, must be made only after there has been adequate dialogue between the organizations and their advisors, including especially their auditors and lawyers. In some cases, notes to the financial statements will be sufficient to clarify what might otherwise be somewhat ambiguous. In other cases, consolidation will be required to ensure that the financial statements are not in fact misleading.
So the bottom line for two or more related organizations is “Dialogue with your auditor and your lawyer” before making a decision on consolidation.