Given all the information, rumors, and opinions
floating around about the current state of the Watchtower’s finances, I thought
it might be useful to discuss financial reporting practices and methods. For
those that don’t know, I’m a retired accountant with about thirty years of
experience, mostly in real estate investment. My experience is in the United
States, I based this article on US accounting practices.
To properly understand the financial state of any
company, you need at least four reports: the Balance Sheet, Statement of Income
and Expense, Statement of Changes in Financial Position (also called Sources
and Uses of Cash) and the footnotes. In dealing with an organization as big as
the Watchtower, you also need “consolidated statements” that total the results
for all subsidiary companies. The Watchtower may not produce one, nor is public
disclosure of any financial information required. In other words, we may never
fully know the Watchtower’s financial state.
After verifying compliance with Generally Accepted
Accounting Practices (GAAP), and the accuracy of the information, and
independent accounting firm will attach a statement judging the accuracy of the
financials. There are two critical factors in this statement. First, if the
auditor says he has reservations about the information, be careful. Secondly,
look to see who the auditor is, if it’s the CEO’s brother-in-law, take it with
a grain of salt.
The Balance Sheet is a snapshot of the company’s
financial position at a particular time i.e. “December 31, 2014.” It takes its
name from the fundamental accounting equation Assets = Liabilities + Owner’s
Equity. The two sides must be equal, or
balance. A balance sheet that is not in balance is wrong. Without a correct
balance sheet, it is impossible to know if the income statement is accurate.
The balance sheet provides an important look at a
company’s financial health. If liabilities exceed assets, the company may be in
trouble. If current liabilities (bills due now) exceed current assets (cash in
the bank) it may have a short-term problem, even if overall health is good.
The Statement of Income and Expense is straightforward,
it shows revenues and expenses; for a period of time, and the resulting profit
or loss. Again some of analysis is needed. What is the source of revenue? How
has profitability changed over time? This would, for example, highlight the
Watchtower’s revenue problem following the changes in collecting money from
literature sales. What are expenses? Where is the money going?
The Statement of Changes provides related and
critical information. This statement will reveal, for example, sales of assets
to maintain cash flow.
Proper understanding of the financial statements
depends on the footnotes. Accountants will want to know such matters as cash vs
accrual accounting, depreciation methods, changes in accounting methods, and
one time recognition of extraordinary losses (such as lawsuits). Without this
information, we cannot understand the financial reports.
For example, the WTBS may take a onetime charge on
its income statement to cover future losses from lawsuits. This information
will appear in footnotes. Or the legal department may note the suits are
frivolous and without merit, and no contingent liability exists; in their
opinion. This sort of information tells
us a lot about the financial management of a company.
As I mentioned, consolidated statements are important,
as they present a complete financial picture, adding the assets, liabilities
and profits of all subisiaries. It is very possible, in fact probable, that
some parts of the WTBS are losing money, while other parts are making money. We
won’t know this without full financial disclosure.
If anybody has specific questions, fire away. I will answer any I can.
