Last week, this Nerd’s Eye View blog highlighted a series of discrepancies between the published Audited Financial Statements of the Financial Planning Association (FPA), and an alternative version of FPA’s finances that were presented to chapter leaders in its recent “Overview of National Finances” webinar. With a gap of nearly $8M between what FPA’s Audited Financials reported in the past, and what the FPA was currently reporting, the discrepancy raised concerns about both where the “missing” dollars actually were, as well as why the FPA would be reporting financials to members that differed from the organization’s already-published Audited Financial Statements.
In a response to members, the FPA has clarified that (as predicted in the prior blog post itself) the financial reporting gap can be largely explained by a change in FPA’s method of accounting with respect to how the chapter portion of annual dues are collected and remitted to chapters, which led to a previously undisclosed and unpublished restatement of FPA’s financials for 2007 to 2012. Such that, fortunately, it appears there is no “missing” money.
However, rather than following up by proposing changes to adjust FPA’s financial and audit controls to ensure that, in the future, members do have access to all relevant financial information about FPA’s financial health, the FPA leadership chose instead to personally attack this blog, questioning the accuracy of our numbers (even though all the numbers were quoted directly from FPA’s own Audited Financial Statements!) and our integrity for not “fact-checking” those Audited Financial Statements. Apparently forgetting that the organization’s Audited Financial Statements are supposed to be the factually accurate statement of record in the first place, such that “fact-checking” them should never be necessary, and that it is not a best practice – nor consistent with FPA’s own Information and Transparency Policy for members – to keep a second, unpublished, undisclosed set of restated books for prior financial years. Even if those books are otherwise financially accurate.
The FPA also objected to the fact that our prior article pointed out how non-standard and non-transparent financial reporting practices can also lead to, or be associated, with fraud, and in turn interpreted the article as an accusation of fraud. Yet the reality is that the article was not an accusation of fraud – thus why it correctly posited an alternative explanation about the financial discrepancy in the first place – but nonetheless, engaging in non-standard and non-transparent financial reporting is a fraud risk for the organization. Which is why it is standard practice (and indeed, part of FPA’s own Information and Transparency Policy) to procure and publish Audited Financial Statements to members to begin with. In other words, pointing out that poor accounting practices can lead to fraud isn’t an accusation of fraud; it’s an explanation of why adopting best practices in accounting standards is so important to maintain the financial integrity of the organization in the first place. The entire foundation of an organization having its own financial statements audited is to trust… but also verify.
Accordingly, in today’s blog post, we have published a “hypothetical” response – that I would have hoped to see from the FPA leadership to acknowledge the changes that it still needs to make with respect to its financial and audit oversight controls to ensure better financial transparency to members – along with the FPA’s actual response to our previous article (for those FPA members who wish to understand the finer details). Because in the end, I am still first and foremost a dues-paying member of the FPA, and the only reason I take the time to raise concerns about the organization is that I believe it’s crucial for the profession for the FPA to succeed as an organization. Which starts with being financially transparent and accountable to its members in the first place, in accordance with accounting and audit best practices, and FPA’s own Core Value of Stewardship.
A HYPOTHETICAL RESPONSE FROM FPA LEADERSHIP TO AFFIRM CORE VALUES IN FINANCIAL ACCOUNTING
Some of you may have seen the latest post from Michael Kitces raising concerns about FPA’s financial revenue and accounting methods over the past 10 years. Kitces based his analysis on FPA’s historical audited financials, as compared to the materials we provided in the “Overview of National Finances” webinar for chapter leaders this past January, and identified a nearly $8M discrepancy in revenue between the two. This is a serious concern, and we at FPA take our financial reporting responsibility to members seriously. Consequently, we are responding here to all members to address the issue.
Fortunately, the reality for any concerned members is that there is no money “missing”; as Michael highlighted in his article, “the reality is that accounting standards of what revenue is categorized where… can change over time, and it’s possible that this discrepancy in membership revenue trends is simply a function of certain types of membership arrangements changing how they’re categorized over the past 10 years.” That is exactly the case here. During our 2013-2014 audit, CapinCrouse – the external (and independent) audit and tax firm we use, recommended changing how the FPA accounts for the portion of annual members dues that are collected by National but remitted to its chapters. The gaps Michael identified were nothing more than a restatement of our prior years’ financials to accommodate this recommended change in method of accounting from CapinCrouse.
Nonetheless, we apologize for and sincerely regret the confusion that was caused by our error in failing to clearly state that FPA had changed its method of accounting with respect to chapter dues and provide updated financials to members with this information. And Michael’s article did highlight a broader concern that we wanted to address: the manner in which the FPA makes itself transparent and accountable to members regarding its finances.
As while Michael’s concerns about FPA’s prior-year finances were ultimately unfounded, they still highlighted the fact that the FPA never made the necessary financial information available to members in the first place, making it impossible for Michael or any member to have a clear understanding of FPA’s financial health. Which is not only inconsistent with best practices in financial and audit controls as an association, and a lapse in our own Information and Transparency Policy, but a failure of FPA’s own Core Value of Stewardship. Simply put, no member should ever have to fact-check the FPA’s Audited Financial Statements, which are intended to be the FPA’s financial facts of record in the first place.
Accordingly, we will be taking immediate steps to remedy this situation, and implementing new policies and procedures to ensure that these gaps in financial accountability do not occur in the future, to bring FPA’s financial and audit controls in line with Best Practices, our own Bylaws and policies, and our Core Value of Stewardship.
As a starting point, the following 6 changes will be implemented as soon as possible:
1) All Audited Financials for prior years will be posted within 1 week to the Governing Documents section of our website for all members to access, consistent with our Information and Transparency Policy
2) All Restated Audited Financials for prior years will be posted as soon as possible to the Governing Documents section of our website, pending verification of the updated numbers with our external auditor
3) Our Information and Transparency Policy will be amended to stipulate that notification must be provided to all members whenever there are material restatements of FPA’s prior financials in the future, in addition to a requirement that those updated financials will be made available to members in the aforementioned location on the FPA website
4) Future Audited Financials will immediately be posted to the aforementioned website location as soon as they’re approved by our external Auditor each year, and FPA will provide notification to members in the event that there is ever a delay in our Audited Financials regarding a material issue of concern to the membership.
5) The publishing cycle of our Annual Report will be shifted in the future, to better coincide with our recently changed Fiscal Year, so that a summary of FPA’s financial reporting will always be included in our Annual Report to Members
6) The Audit Committee of the National Board will take oversight responsibility to ensure that the FPA’s Information and Transparency Policy is being properly implemented on an annual basis in the future.
The bottom line is that, while there have been absolutely no financial improprieties at the FPA, we recognize – as Michael highlighted in his own article – that strong financial and audit controls and clear financial transparency to members is crucial to ensure that the dues entrusted to FPA by its members are both used and accounted for properly. And we sincerely apologize to all members for failing to honor best practices and our own Core Value of stewardship in our previous financial reporting to members.
Going forward, the FPA is committed to doing a better job maintaining financial transparency to our members, because we believe that is crucial for good governance and accountability, and our shared success as a membership organization.
In the meantime, for any members who wish to further understand the details of how FPA’s financials were restated in prior years, please see the appendix at the end of this message.
Michael Kitces on behalf of the 2019 FPA Board of Directors
Appendix: A Note On FPA’s Methods of Accounting for Membership Dues
From the inception of FPA, individual membership dues paid to FPA National included a rebate that varied based on member type (up to $75 per CFP® Professional member), that was remitted monthly to chapters. The gross receipts collected were recognized as revenue, and the rebates to chapters were expensed as they were paid.
During the fiscal year 2013-2014 audit, CapinCrouse, our external (and independent) audit and tax firm, recommended changing how these membership dues and chapter rebates were reported. The basis for the recommendation was that FPA National was serving as an agent (from an accounting standpoint) for the chapters, and as such, the rebate should neither be recognized as revenue nor as an expense – in essence, this should have been recognized as a pass-through transaction.
Based on this recommendation, revenues were recognized on a net basis (total membership cash receipts less the rebate amount paid to chapters), which reduces the membership revenue line, and concomitantly reduces the chapter rebate expense line as well. Notably, this change results in no effect on the operating margin for the organization. It is simply intended as a more accurate reflection of the FPA National’s portion of membership dues, to better track the trending financial health of the organization.
With respect to the financials presented in FPA’s webinar to members in particular, it is also important to point out that while FPA’s audited financial statements have historically included all membership related revenues (individual and institutional), in the webinar membership revenues only included the individual membership category (as the webinar intended specifically to highlight trends in the individual membership revenue driver).
Unfortunately, though, the letter above is merely a hypothetical example of how FPA might have handled the situation.
In the meantime, the actual response sent last Friday to the FPA chapter leaders, which does not address any of the issues highlighted regarding FPA’s non-transparent financial reporting, is as follows:
FPA’S ACTUAL LEADERSHIP RESPONSE REGARDING CONCERNS RAISED ABOUT FPA’S FINANCIAL ACCOUNTING
Dear <Chapter Leader>,
Some of you may have seen the latest post from Michael Kitces attacking Financial Planning Association® (FPA®) volunteer leaders and staff for alleged financial mismanagement of FPA’s resources going so far as to imply the possibility of fraud and embezzlement. Kitces based his ‘analysis’ on FPA’s historical audited financials, and on the materials we provided in the financial overview for chapter leaders this past January. Regrettably, his post not only makes false assumptions, but his statements are also based on incomplete data. We offered to clarify and correct his assertions to ensure his post was accurate, as a professional journalist would have wanted, but were told that he could not wait for a clarifying response from FPA due to “publishing deadlines.” More disappointing than his lack of professional courtesy (he informed us of this post yesterday afternoon), is, in fact, that the entire basis of the post is inaccurate.
The following provides important clarifications to some of the more off-base statements Kitces offered in his post. Most of the issues that Kitces raises has to do with accounting adjustments recommended by FPA’s external auditors, CapinCrouse, that the FPA Board implemented in its capacity as fiduciaries for our organization.
“The problem, however, is that FPA’s own Audited Financials from 2008 show that membership revenue was $7.7M in 2008 and rose to $8.5M in 2009, before falling to $7.0M in its 2017 Annual Report. In other words, FPA’s own published financials don’t show membership revenue was up since its 2009 peak, but down $1.5M.”
In looking at the Kitces’ graph titled FPA Historical Financial Trends: Audited Financials vs Webinar, he has indicated that there is a missing revenue gap from 2007 through 2012.
During this period (and back to the inception of FPA), individual membership dues paid to FPA national included a rebate that varied based on member type (up to $75 per CFP® Professional member) that was remitted monthly to chapters. The gross receipts collected were recognized as revenue and the rebates to chapters were expensed as they were paid.
During the fiscal year 2013-2014 audit, CapinCrouse, our external (and independent) audit and tax firm, recommended changing how these membership dues and chapter rebates were reported. The basis for the recommendation was that FPA National was serving as an agent (from an accounting standpoint) for the chapters, and as such, the rebate should neither be recognized as revenue nor as an expense—in essence, this should have been recognized as a pass-through transaction.
Based on this recommendation, revenues were recognized on a net basis (total membership cash receipts less the rebate amount paid to chapters), which obviously reduced the membership revenue line. Accordingly, the chapter rebate expense line was also reduced, which results in no effect on the operating margin for the organization.
Additionally, audited statements have historically included all membership related revenues (individual and institutional). In FPA’s presentation to chapter leaders, membership revenues only included the individual membership category as this was intended specifically to look at the individual membership revenue driver.
“Of greater concern, though, is that FPA’s total operating revenue as an organization in its recent webinar presentation doesn’t match its historical Audited Financials either. Instead, while FPA showed in its webinar that its 2009 revenue peaked around $15M in 2009, its own Audited Financials show that revenue actually peaked at $16.6M in 2009! Which means part of why FPA’s decline doesn’t look as severe in its recent webinar as previously reported is that FPA appears to be excluding $1.5M of its own missing revenue from a decade ago!”
The difference above is related to the same chapter rebate change noted in the preceding answer. As stated, individual membership dues were reported on a gross basis. Meaning that national member dues plus chapter rebates (total incoming cash receipts) were recorded and recognized as revenue. When the rebate was paid to chapters, we recognized the corresponding expense. Membership dues are reported gross in the 2008-2009 audited statements.
“Hopefully, there are no fraud or serious financial improprieties happening at FPA—although restating historical revenue lower after the fact is one way that embezzlement occurs so no one misses the money! – and it is entirely possible that the FPA did not include some other major slice of revenue, such as from its Financial Services Information Company—i.e., the Journal of Financial Planning.”
Whether veiled or direct, accusing FPA volunteer leaders or staff of such fraud is an affront to the dozens of past and present FPA volunteer leaders and professional staff who, over the years, have worked diligently, professionally and with the utmost integrity to oversee the association. While we welcome differing viewpoints and even criticism, this just went too far and does not represent our core values.
In closing, we are disappointed that Kitces would publish an article without fact-checking to ensure what he was publishing was accurate, but are even more alarmed by any insinuation that wrong-doing was potentially taking place. As volunteer leaders of the association who proudly act in a fiduciary capacity and with integrity, we cannot and will not stand by and allow someone to call into question our integrity or the integrity of our outstanding volunteers and professional staff.
The 2019 FPA Board of Directors
So what do you think? Has FPA made the appropriate response in this situation? Do you believe there are still outstanding concerns that need to be addressed about FPA’s financial transparency with members? What do you believe FPA’s next steps should be (if any)?