ICA - Expediency of Decisions Taken by the Organisation - Essay Example

Finance and accounting Table of Contents Table of Contents 2 Introduction 3 Institute of Contemporary Arts (ICA) Limited 3 2. Issues from accounts of ICA 3 3. Discussion 5 Solving the problem 5 4. Wider perspectives 6 Financial position in 2010 and 2013 6 Accounts in relation to accounting policies 8 Bigger picture of arts finance in UK 9 Auditor change 9 Research on directors of the company 9 Recommendations 9 5. Conclusion 10 10 Reference List 11 1. Introduction Institute of Contemporary Arts (ICA) Limited has served the mass of United Kingdom (U.K.) for 75 years with inspiration and imagination regarding contemporary arts by offering them access to the artists and creative processes. The non-profit organisation relies on a number of sources of finance for its programmes that are conducted at regular intervals. The sources of funds come from membership, donations, grants, admissions and sales of tickets and stores (The Institute of Contemporary Arts, 2014a). The organisation has put in remarkable effort by providing the residents of United Kingdom with perfect experience of contemporary arts. However, in January 2010, ICA reported to the employees that there had been a financial deficit of £ 6, 00,000. It was also communicated to them that the deficit may rise to £ 1.2 million (Charlesworth, 2010) if radical changes were not undertaken then. The situation was such that even the management contemplated closing down the organisation by May 2010 if the deficit was not covered up. Thus, with rise in crisis in ICA, the management found it difficult to cope up with the situation. They had taken measures as well as reviewed and altered the financial plan of ICA for controlling the crisis. The paper highlights the financial issues that were encountered by ICA during 2010 and how the organisation made effort to recover its position in 2013. The issues and changes relating to accounts are elaborated in details for the two year. The paper also gives emphasis on strategies undertaken by the management to re-position its finance and combat against the crisis. Lastly, recommendations for the organisation are provided in the paper. Institute of Contemporary Arts (ICA) Limited ICA is a well-known cultural and artistic centre in The Mall in London. It is situated within the Nash House, which is a part of Carlton House Terrace. It is a non-profit organisation, which is set up to promote education in the society by making people perceive the development in contemporary art. ICA fulfils its objectives by producing, arranging and presenting exhibitions, lectures, performances, events and other activities. Its mission is to target major portion of the audience in United Kingdom and develop within them a sense of advanced arts. It teaches the mass new ways to articulate and makes them experience different types of culture. To finance the operating cost, the organisation receives funds from different sources in form of grants. It also collects revenues from a number of activities related to box office income like, sales of tickets for the shows and events. The organisation takes into account the high level of accessibility for setting prices for tickets (Mirabelli, 2010). 2. Issues from accounts of ICA On January 20, 2010, ICA had reported that financial crisis that had started with the recession has been increasing at an alarming rate. The situation worsened to an extent where ICA feared that it had to be closed down in May, 2010. The series of issues, however, commenced with the recession and continued till 2013, when the organisation was observed to encounter a stable position. The list of issues that were faced by the organisation during the four years is elaborated below: 1) The economic recession prompted the organisation to review activities of the organisation and the review started in June 2009. Few changes were brought along like, alteration in the financial plan of ICA (Edimariam, 2010). 2) The resignation of artistic director, Ekow Eshun, added more difficulties to the organisation in 2010 since he was handling activities of ICA with much ease and added funds to the organisational welfare from sponsorships in 2009. He was an efficient director and a good supervisor according to his employees. Under his supervision, the attendance figure rose by 38% to 470000 from 350000. He drove the organisation from the point when the previous director had resigned and debt for the same was £ 7500000. So, his presence and governance made the organisation strong enough to sustain in the society (Edimariam, 2010). 3) It has been observed that financial decisions, which relied mainly on the short-term sponsorship, had played an important role in financial crisis of the organisation. The collapse of Lehman Brothers and Sotheby drove away the two most powerful sponsors, which alarmed the fund rising of ICA. Thus, over-reliance on sponsorships made the organisation confident of their fund reserves, but sudden collapse of the two was a huge blow to their finance. 4) The staffs were alarmed regarding their salary cut and many of them lost their jobs since the total salary was reduced to £ 2.5 million. 5) In the fund raising auctions, the artists displayed their works and raised funds through it. It was part of the fund raising mechanism for the organisation. However, ICA failed to raise its estimated amount of £ 1.3 million in October 2008; instead, they realised £673,300. This added to the fund crisis, which later affected the financial base of the organisation (Edimariam, 2010). 6) In 2008- 2009, ICA were able to raise an amount of £200,000 only, which is equal to the half of the projected revenue, coming from the rent that they received from The Mall in London. The Mall had hired ICA’s premises for their commercial use. During the recession, the Mall had also suffered from low purchasing power of customers and could not pay the real amount of rent to the organisation. As a result, ICA encountered huge difficulties. 7) Other streams of income for the organisation also suffered due to the recession. These include the bookshop and film distribution arm of ICA (Edimariam, 2010). 8) According to Eshun, the financial crisis had emerged long before 2008. He had reported that a consultancy firm had instructed ICA to re-organise their structure and eliminate the problems of finance as soon as possible. Nonetheless, it was not followed by the organisation and the financial crisis deepened as time passed by. 9) Eshun, in interview with Guardian in August 2010, regretted the fact that some of the restructuring programs could have been executed long before. However, he also added that dealing with the organisational activities was not quite simple in those days; since if any decision was taken in a hurry, then it would affect productivity of the same, thereby creating a bad image of ICA. The director encountered several uprisings within the organisation, which revolted against the retrenchment plan that was decided by ICA. The employees as well as the executives had feared losing their jobs if a new financial plan was formed. So, when Eshun resigned from his job in 2010, he claimed to have left the organisation in a much stable condition, compared to the situation when he had joined. 10) Along with Eshun, Alan Yentob, the chairman of ICVA, also left in 2010. He was serving the organisation since 2002. Yentob on his resignation reported that he along with Eshun had taken the organisation to a stable position, which they had expected to do in the five years. They both had stuck firmly to their decisions that they had taken to relieve the organisation from the problem and thus, were happy to do so at the time of resignation. Ekow and Yentob wanted to change the process of operation and protect the future of ICA. The demands of Arts Council had been met by the organisation and Eshun had executed his duty very responsibly. So, with resignation of two main decision makers of the organisation, ICA encountered further crisis as the leadership was not replaced wisely. Hence, the situation simply worsened. 3. Discussion Solving the problem The recession affected the income from fund raising and the trading income. Nonetheless, it has been noticed that apart from recession, there are series of issues, which led to the critical situation of ICA. In October, 2009, ICA was awarded £ 1.2 million by Arts Council of England over two years for its Sustain emergency budgets in order to recover from the crisis. This fund was the largest grant from the fund giver. After the fund was despatched, a consultant was hired to review activities of ICA. On December, 2009, a meeting was held where all council members and staffs were present. In that meeting, staffs were informed about the salary slash from £ 2.5 million to £ 1 million. There was also an abrupt decision for reducing the number of cinema programs. Ekow Eshun, the artistic director of ICA, took many wrong decisions during the recession, which were detrimental to a great extent. Under supervision of Eshun, ICA experienced an increase of income from £3.75 million in 2005 to about £5 million in 2008. The grant of Arts Council to ICA could have increased by £ 70, 000 from 2006 to 2008; however, there was huge change in income generation from sponsorships. In 2006, the total income from sponsorship was £3, 06, 000. In 2007, the amount increased to £9, 70, 000; and in 2008, ICA made £756,000 from the same. Nevertheless, this amount declined thereafter with the collapse of two main sponsors (Anderson, 2013). The recession during 2009-2010 affected the operation of ICA to a great extent and an operating deficit was created which depleted the organisation’s reserves and cash balance. The deficit prompted for full review of activities of the organisation, which in turn identified the need for a new financial plan. The operating cost of ICA was reduced with cutting down of employment costs by £ 1 million per annum (Higgins, 2010). The main objective of the financial plan was to help the organisation generate income and expenditure in a balanced manner from 2010 onwards. The financial plan also created a platform from where ICA could generate increased unrestricted reserves over the next four years. Apart from revision of the financial plan, ICA received £ 1.2 million as grant from the Arts Council England (ACE) in October, 2010 under the Sustain programme, which was initiated by ICA. An amount of £ 600000 was received during the year in form of secured interest free loan. The repayable policy of the loan was such that if ICA ceased to trade or sell its leasehold premises in the Mall, then the loan had to be repaid. It was also decided that the loan was to be repaid on 31 March, 2010, if ACE was not satisfied with the financial plan of the organisation. The condition was, however, formally met with in August 2010. The total turnover of ICA was £ 4.5 million in 2010 and it received an annual grant of £ 1.3 million from ACE. ACE had confirmed to continue funding ICA till the end of agreement on March 31, 2011. The extension of the date of agreement depended on the review that would be done by the government in autumn 2010. The maintenance fund was introduced to keep an annual provision for the cost repair and redecoration of the exterior of 12 Carlton House Terrace. With the help of the above mentioned amendments, the organisation had successfully walked through the bad days and had encountered a stable financial state in 2012. The effective management and commercial opportunities from London Olympic 2012 had helped the organisation to re-establish its position again in the society by strengthening the finance base. The unrestricted fund surplus at the end of March 2013 was £ 19,528 (which was £ 341148 in 2012). Also, the unrestricted reserve balance mounted to £ 491001 at the end of March 2013 (which was £ 471473 in 2012). The organisation was said to be in stable position, but like other charities, it had encountered the same challenges in increasing income and struggled a lot to maintain a robust business model (Higgins, 2011). The main intention of the Council for establishing unrestricted general fund was to provide sufficient working capital for the origination so as to sustain the core programs that were held by them. It was also established to combat against the medium term risks for a period of two to three months, if there was any reduction in the income of ICA. The major unforeseen expenditure also created a lot of problem for ICA and thus, the unrestricted general funds played an important role in recovering position of the organisation. 4. Wider perspectives The wider perspective of the organisation elaborates the accounting policies as well as other attributes like, change in auditor and financial position of 2010 and 2013. Financial position in 2010 and 2013 The financial position of the organisation for the two years can be analysed by elaborating few aspects of the balance sheet of ICA. The description is provided below in the following figure: Figure 1: Balance sheet of ICA (2010) (Source: The Institute of Contemporary Arts, 2014b) From the above figure, it is evident that the company had not been in a stable position in 2010, since its total fund after the operation is observed to be negative. The long-term liabilities increased in 2010 as the organisation took loan to recover from the financial crisis. The assets of the organisation were also observed to be negative, which indicates that ICA was in a state of collapse, given that the assets were depleting and liabilities were increasing. Figure 2: Balance sheet (2013) (Source: The Institute of Contemporary Arts, 2014c) From the above table, it is evident that the organisation had gained a stable position in 2013. The net asset of ICA was observed to be positive and had increased from 2011. So, it can be inferred that the company had recovered from the phase of financial crisis in 2013. Accounts in relation to accounting policies An independent auditor report was published by Sayer Vincent, an audit firm, which audited the financial statement of ICA in 2013. The audit firm had audited financial statements of the organisation in compliance with United Kingdom Accounting Standards. The audit report highlighted the following: 1) The statement provided with true and fair value with regard to the organisation’s position. The accounting principles comply with the United Kingdom’s Generally Accepted Accounting Policies. 2) It was also prepared in accordance with the requirement of Companies Act, 2006 and Charities, 2011. 3) The report also elaborates that the parent organisation had not kept sufficient accounting records or mentioned adequate return to the auditors. They had not even approached the auditors to offer the same. 2) There were errors specific to the council laws. The parent charitable organisation had not met agreements of the accounting principles in preparing the accounting records and returns. 3) The audit report also stated that auditors had not received relevant data that was required during the audit. Bigger picture of arts finance in UK United Kingdom (UK) is considered as the leader in culture and art in the world. The exciting features of arts and culture help in improving lives of the people as well as in attracting tourists. The funding for arts and culture had improved over the years and thus, National Lottery Funding had come into existence in 1995 in UK. The government and National Lottery Funding helped organisations in the overall development by providing them with sufficient funding. Auditor change The organisation had not encountered any auditor change during 2010 to 2013. Sayer Vincent had audited their financial statement over the years and provided with valuable opinions to the organisation. They had revealed both the real financial and non-financial situation of the company. Research on directors of the company The organisation in 2013 elected three new directors for the divisions. They were Kenneth Scheve, Sean Hanretta and Pavle Levi. Robert Crews was given the responsibility to serve as the director of Centre for Russian, East European and Eurasian Studies for academic years 2010-13. Nevertheless, in the same year, ICA undertook Sohaib and Sara Abbasi Program in order to teach Islamic Studies (Cushing, 2013). Recommendations ICA had gone through a bad phase due to economic recession. The organisation had faced huge financial deficit, which it could have avoided by undertaking wise decisions regarding financing of the organisation. ICA was wholly dependent on sponsorship and grants; instead, they could have found ways to earn more revenue. One of the avenues to collect revenue is through promotion of their programs so that larger audience are aware of ICA and consequently, rising the footfall in their programs. Through increase in audience, they could collect larger amount of money from sales of tickets. ICA should also concentrate on increasing their asset base since they had depleted cash reserve during the crisis. Hence, the organisation should take a wise step forward to secure a brighter future for staffs as well as the organisation. 5. Conclusion It can be concluded that ICA had encountered financial crisis not only because of the recession, but also for wrong decisions that were taken by the organisation as a whole. The resignation of their efficient director was a big blow to the leadership in ICA. The director that had replaced Eshun was not competent enough to drive the organisation from the point of collapse. The overreliance of the organisation on the fund from sponsorship paved a new path of downfall for ICA. However, the situation was brought under control by reviewing activities of ICA and later, by forming a new set of financial plan that reduced the operating cost of the organisation. The deficit was reduced and the company became stable by 2013. Apart from the financial plan, funds from different charities also helped ICA to revive its position from the point of crisis. ICA had received £ 1.2 million as grant from the Arts Council England (ACE) in October, 2010, under the Sustain programme which was initiated by ICA. An amount of £ 600000 was also received during the same year in the form of secured interest free loan. Reference List Anderson, T., 2013. ICA Welcomes New Directors. [online] Available at: [Accessed 6 March 2014]. Charlesworth, J., 2010. Crisis At The Ica: Ekow Eshuns Experiment In Deinstitutionalisation. [online] Available at: [Accessed 6 March 2014]. Cushing, N., 2013. VCU’s New ICA Director Already Planning RVA’s Next Step. [online] Available at: [Accessed 6 March 2014]. Edimariam, A., 2010. Ekow Eshun and Alan Yentob to quit after ICA survives crisis. [online] Available at: [Accessed 6 March 2014]. Higgins, C., 2010. ICA Warns Staff It Could Close By May. [online] Available at: [Accessed 6 March 2014]. Higgins, C., 2011. Institute Of Contemporary Arts Hit By Staff Turmoil. [online] Available at: [Accessed 6 March 2014]. Mirabelli, A., 2010. Dr. Ydessa Hendeles Makes AGO History with Contemporary Art Donation. [online] Available at: [Accessed 6 March 2014]. The Institute of Contemporary Arts, 2014a. Mission, History and Programming. [online] Available at: [Accessed 6 March 2014]. The Institute of Contemporary Arts, 2014b. Annual Report, 2011. [online] Available at: [Accessed 6 March 2014]. The Institute of Contemporary Arts, 2014c. Annual Report, 2013. [online] Available at: [Accessed 6 March 2014]. Read More