Capital City Arts Centre (CCAC) is an Ottawa-based not-for-profit organization that aims to promote community awareness of the visual and performing arts. For the past 10 years, Gaelan Lustman has been leading the organization as its executive director.

You, CPA, joined CCAC's board of directors on June 30, 2021. It is now July 29, 2021, and last night was your first board meeting since joining the board. At the meeting, board members expressed concerns about CCAC's financial state (Appendix I). In particular, the board was concerned that budgetary projections may be too optimistic, as CCAC never meets its targets and has been running a deficit for a number of years. Further, CCAC's contributions are at risk, as the federal government has been cutting its funding. This is particularly concerning because the federal government has historically funded almost 50% of CCAC's operations, and this directly impacts the programming that CCAC can offer.

Program managers have put together two proposals aimed at solving CCAC's financial problems (Appendix II). These were presented at the last management meeting, and Gaelan would like your help in analyzing them before presenting them at the next board meeting. CCAC has funds to pursue only one of the proposals.

Also, at last night's meeting, Gaelan informed the board that he recently discovered that the finance manager, Sally Hendersen, appeared to be committing fraud. Gaelan found two names on CCAC's payroll that seemed fictitious. After looking into the issue, he found that the cheques were actually made out to Sally. Upon finding this, Gaelan fired Sally. The board wants to ensure fraud doesn't happen again, so you have agreed to provide a summary of how the fraud occurred and how to prevent it from happening again.

A board member expressed concern that CCAC's financial problems and the recent fraud were the result of an outdated process. The board asked you to identify opportunities to implement automated processes. To assist you, Gaelan provided notes on CCAC's operations (Appendix III) as well as a summary of the financial process prepared by Sally (Appendix IV).

Lastly, the board also discussed its concern that CCAC's board's terms of reference were outdated (Appendix V). You agreed to provide suggestions for improving the governance structures.

Appendix I - Excerpts from last night's board of directors meeting

Board members:

Francine Pellerin, Board chair, 59, Executive director of another non-profit organization

Cindi O'Rourke, 47, Social worker

Jason Wells, 51, Retired lawyer

Hillary Bradwell, 56, University professor of psychology

Gaelan Lustman, 58, Executive director of CCAC

You, CPA

Gaelan: "I will call the meeting to order. I did not get a chance to write up minutes from our last meeting from August. Aside from our new board member, CPA, you were all there so I am pretty sure you know what we discussed."

Francine: "Thank you for running the meeting, Gaelan you know CCAC best, so it is useful to hear from you."

Gaelan: "No problem. Given the most recent round of federal funding cuts, which will take effect next year, I revised our budget projections. As a result, the projected deficit for the year ended December 31, 2022, is estimated to be $140,000, and for the year ended December 31, 2023, is estimated to be $125,000."

Appendix II - Alternative funding opportunities

CCAC has a policy of calculating the annual return on investment when evaluating potential projects of this nature.

Proposal 1: Increase rental opportunities

Currently, CCAC's building has one large event space that it uses for performances and other events. It also rents the space out occasionally, generating $75,000 average rental revenue each year.

However, many groups looking to rent the space often ask if it is possible to rent only a portion of the space. This hasn't been possible previously as there was no way to partition off part of the room.

To address this and generate additional rental revenue, CCAC would renovate the event space and add movable walls which would allow the space to be split into four separate halls. The upfront costs to do so are estimated to be:

Building retrofit $720,000

Audiovisual and IT infrastructure $180,000

For each rental, CCAC would need to provide three custodial staff per hall used. Custodians earn $16 per hour and would work an eight-hour day for each rental. The expected increase in utilities is $4,800 per month. There are no planned restrictions on use of the rental space, meaning the halls could be used for a variety of events, such as business meetings, birthdays, and dance recitals.

The proposed booking rate is $2,700 per day per hall. Most venues charge $3,500 for a similar facility; therefore, the price is considered competitive. The industry has excess demand, and CCAC expects to rent out each hall at least once per week, including holidays. The annual rental revenue currently earned per year would be replaced with this new booking rate per hall.

Proposal 2: Paid public parking

CCAC offers free parking to patrons during events. The events occur primarily on evenings and weekends. During regular business hours, parking is restricted to CCAC's staff and patrons.

There is an opportunity to open the parking lot to the public, by partnering with a local company that would administer the lot on CCAC's behalf. CCAC would lease out the lot to the company for an annual fee of $150,000 for five years, at which time the lease could be renegotiated.

The agreement requires CCAC to acquire an adjacent lot for $500,000 and to include this lot in the parking area. This lot is for sale by the City and currently is used as free public parking. It will be necessary to repave the parking area and install lights, which would cost $200,000.

Both the existing lot and the adjacent lot would become public parking with hourly rates. CCAC staff and patrons would have to pay for parking.

Gaelan is excited about this option as he feels it is lower risk and allows CCAC to generate additional income while focusing on its core activities.

Appendix III - CCAC budget processes

(Prepared by Gaelan Lustman)

The government has reduced our funding, which now gives us just enough funds to maintain the building. Funds for programs have to come from other sources. There is a total of 26 staff this year, down from 37 in 2019; 11 staff were laid off last year due to funding constraints. As things begin to improve, we hope to hire them back.

There are seven managerial staff one for each area of the arts we support (music, painting, sculpture, drama, and dance), as well as finance and operations managers.

Budgeting is based on last year's spending, plus whatever I feel needs to be changed or improved. Once we know the costs, we figure out how much we need in contributions. Each fall, I ask the department heads to present to me new programs they would like to initiate. We currently have no formal mechanism for evaluating which programs should be funded. I use my experience to select programs that seem interesting and allocate the money I feel is sufficient. Unfortunately, sometimes funding new programs requires making cuts to old programs. A good example is the Art and Music Appreciation Initiative, a program to introduce younger adults to the arts, which has been discontinued in favour of a new program aimed at promoting avant-garde art installations.

To replace the finance manager, Sally, I am in the process of hiring John O'Rourke. He is married to Cindi O'Rourke, who sits on our board.

Appendix IV - CCAC financial processes

(Prepared by Sally Hendersen)

I am responsible for the budget and for recording all our financial transactions.

My main tasks are reviewing and approving transactions to ensure all expenses are aligned to the budget. I process payroll biweekly and track the information in a spreadsheet, which I use to prepare paycheques manually.

Most of our expenses are paid by cheque. All cheques require two signatures. The two signatories are me, the finance manager, and the board chair. The chair usually comes to the centre every two weeks. If she is away, to ensure that bills are paid on time, she will pre-sign a bunch of cheques in advance.

About half of the event ticket fees are paid by cash and half by credit card. The morning after an event, I collect and record the event ticket fees received in a spreadsheet.

I am responsible for making the bank deposits. Every few months, I reconcile the bank account.

I am also responsible for opening the mail. I leave Gaelan a note if any donations come in through the mail so he can update his donor list.

I collect all donations. At the end of the year, I prepare tax receipts from Gaelan's donor list, when requested by the donor, for every donation that is more than $20. Currently, there is no way donors can contribute online, so we direct them to mail a cheque or visit the facility to donate.

Appendix V - CCAC governance terms of reference

1. Board mandate: The board of directors is responsible for overseeing the vision, mission, strategy, and operational plans for the centre.

2. Frequency of meetings and meeting preparation: The board should meet at least four times a year.

3. Composition of the board: For the board to be effective, there must be members with business knowledge. This is to ensure that sound business decisions are made.

4. Separation between board and management: There should be separation of powers between the board and senior management.

5. Risk management: Effective risk management, like other aspects of governance, begins at the top. The board has to have the knowledge and ability to approve risk policies and oversee their implementation.

REQUIREDS:

1. Calculate ROI on alternative funding opportunities: Calculate ROI for rental opportunity option & public parking option
2. Conclude on ROI for each option and discuss significance of initial investments of both options, considering CCAC's current financial position.
3. Benefits and risks of alternative funding opportunities
4. Analyze processes for efficiencies