Balancing the Mission Checkbook

I was explaining audits to a group the other day and one person asked if audits were really worth anything. After all, he said, the big financial companies that are in trouble all have “clean” audits. So what’s an audit really worth  -  beyond meeting a legal requirement?  First, you have to understand what an audit is, and what it isn’t. An audited financial report contains standard financial information, supplemental footnotes, and the all-important opinion letter. The letter expresses a professional opinion on the accuracy of the financial information. The opinion is not an assessment of the financial condition or future prospects of the organization.

To answer the person who doubts the value of an audit, it’s helpful to understand how the auditor forms the opinion that the information is accurate.  In the process of conducting the audit, financial information provided by the organization is scrutinized and verified. Verification relies heavily on the auditor’s ability to determine the value of the assets and liabilities. It’s pretty easy to verify the value of the asset called “checking account balance” or even the asset called “foundation grant receivable.” Consider, though, how the auditor values an asset without such a concrete answer. If the organization owns 100 shares of Target Corp. stock, the value can be checked against the market, but what about assets that don’t have a simple or ready market? This includes assets like privately held companies, real estate projects, and investments in hedge funds. All the auditors can do is use whatever information sources are available. Clearly, the values of mortgage-related assets were based on faulty information and assumptions. Auditors use a lot of judgment and research  -  it’s not absolute. Audits are worthwhile and they are worth the paper they’re printed on, but be aware of their limitations and use them with caution.

If you are interested in understanding the crazy assets that got us here  -  CDOs, CMOs, and credit defaults  -  invest $1 for the podcast of This American Life’s radio show on the topic, “The Giant Pool of Money” from May 2008. Jointly produced with NPR News, the 60 minute report explains how the mortgage business changed with subprime loans, new capital sources, and new, indecipherable investments. Well told through stories and understandable questions, it’s illuminating for all.

The topic of social enterprise comes up often in discussions and meetings that I have with nonprofits, businesspeople interested in nonprofits, and foundations. I keep tripping over the lexicon, though, because I don’t think that the commonly used terms are certain, universal, or completely clear. It seems that the “field” encompasses a number of different types of organizations with different definitions and identifiers. Because I dance around these phrases so often, I looked around the other day to compile definitions for these terms in regular use.

Social enterprise is defined by Social Enterprise Alliance as “an organization or venture (within an organization) that advances a social mission through entrepreneurial, earned income strategies.” This often reflects a market-based effort to receive earned income in direct exchange for a product or service. Examples of social enterprise from SEA include:

• A substance abuse treatment facility operating a moving company
• An organization promoting college enrollment that provides workshops to educators
• A youth services organization opening a pretzel shop or ice cream shop franchise
• Goodwill thrift stores

Social entrepreneurs are defined by Ashoka as those who “act as the change agents for society, seizing opportunities others miss and improving systems, inventing new approaches, and creating solutions to change society for the better. While a business entrepreneur might create entirely new industries, a social entrepreneur comes up with new solutions to social problems and then implements them on a large scale.” Examples include:

• Jim McCorkell, founder of Admission Possible (an Ashoka Fellow)
• Muhammad Yunus, founder of Grameen Bank

A socially responsible business is defined as a venture (generally for-profit) that seeks to “leverage business for a more just and sustainable world” (Social Venture Network) or “help create a better world by building healthy communities, promoting economic equity, and fostering a clean environment” (Social Investment Forum). In addition to generating a profit for shareholders, these businesses have goals in the areas of economic development, employment, environmental practices, or ethical business practices.

For me, the key distinctions between these terms are the following:

• Social enterprises are defined by revenue source
• Social entrepreneurs are defined by innovative vision and strategy
• Socially responsible businesses are defined by the intention and goals of a for-profit business
  

It may seem to some people that the definitions are just semantics, but I think they’re important if we want to create resources, find capital, and develop a knowledge base. The needs and demands are probably different if your focus is on revenue sources rather than a game changing strategy.What do you think - do these definitions matter? Are the three listed here on the right track, or would you offer some others?