The objectives are clear, as the section’s intent is to:
- Provide a narrative explanation of the organization’s financial statements, enabling community stakeholders, including taxpayers, to see the organization through the eyes of management;
- Enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and
- Provide information about the quality of, and the potential variability of, a company’s earnings andcash flow so that investors can ascertain the likelihood that past performance is indicative of future performance.
Although the requirement has been around since 1999, it was not until 2003, when I was in my fourth year as a business administrator, that I came to truly appreciate the value of telling our organization’s financial story through the MD&A as we position our budgets, build rapport with community stakeholders, and gain the support of community leaders. Moving from a compliance mindset to one of opportunity, we can use the MD&A to communicate our goals, objectives, and strategies now and for the future.
Case in Point
All districts struggle with changes in enrollment from time to time. Significant fluctuations beyond spikes or bubbles can have a dramatic impact on district management. Implications range from needing to build additional schools due to sustained high growth to closing or merging schools due to enrollments falling to levels that no longer support operational costs or funding.
While district personnel present the challenges of changing enrollments during conversations about referenda or during demographic updates at public board meetings, they have missed an opportunity if those fluctuations were not included in the MD&A. By highlighting these events in the MD&A, districts not only meet their objectives of financial disclosure, they also provide information about the potential variability of resources, including revenue changes as well as lost efficiencies (reduced enrollments) or increased costs (increased enrollments).
Enrollment is just one example of an aspect that affects multiple years or even decades. Items in the MD&A can return to the conversation annually with updates on significant shifts or changes in fund balances, expenditures, or revenue streams. Inclusion in the MD&A could serves as a report of status quo to remind readers that the event is still relevant and may have a material impact in the future. When the time comes, it will not be the first time stakeholders hear about it. Based on the quality of the communication effort, that message can be more impactful.
Information Management
How do we manage all that information in a two- or three-week window? During the fieldwork stage, in which we devote all active hours to the audit, we must be ready to respond when the audit manager asks for our contributions to the MD&A. We need to focus our efforts by incorporating time each day to develop a meaningful Discussion & Analysis. That means compiling significant data points, financial reports, and trend information throughout the year. Once we get to the actual audit, we have that information readily available.
The critical importance the MD&A has on transparency is clear. Paul Lerch, CPA, RMA, PSA, senior partner at Lerch, Vinci & Bliss, LLP, one of the largest accounting firms serving governmental entities in New Jersey, says the MD&A is paramount for the intended reader to comprehend the financial results of the organization during the year in question. According to Lerch, the MD&A “gives perspective to the financial position.”
The MD&A also gives school districts the ability to highlight recognition of financial accomplishments, such as their receipt of ASBO International’s Certificate of Excellence in Financial Reporting. The MD&A lists the achievement, which reflects competency and builds trust and credibility. Districts garner the same benefit from ASBO’s Meritorious Budget Award. Receipt reflects the diligence, effort, and foresight of management to go beyond what is required to excel at managing district resources. Through the program, districts exhibit:
- Skills in developing an effective budget presentation.
- Compliance with clear budget presentation guidelines.
- Commitment to the community through a reader-friendly budget document; and
- Adherence to nationally recognized budget presentation standards.
In Planning for Success: Strategies that Enhance the Process of Goal Attainment, I write about the benefits of financial planning anchored by four advantages:
- Generating Fund Balances – Building or improving account balances in a deliberative process through awareness, action, and focus.
- Improving Budgetary Discipline – Constructing better budgets that are more disciplined and focused on what is vital to our success.
- Strengthening Bond Ratings – Instilling financial planning that incorporates fiscal discipline for the organization that provides for the retirement of debt, allowing for a pay-as-you-go structure for capital needs.
- Allowing Developmental Planning – Achieving healthy balances and lowering operational costs so districts can begin planning for the goals and initiatives with more available resources.
These goals and objectives are ripe for the MD&A and span multiple years where past, present, and future exist simultaneously, as we look to capitalize on the basic premise behind the Management section of our annual report.
Districts are responsible for informing stakeholders of cause and effect as the MD&A discusses both positive and negative aspects to provide a clear and accurate picture of where they are, how they got there, and where they see the organization in the short and long term.