Hockey Canada - the Cromwell report Part 1
Honourable Thomas Cromwell released Part 1 of his independent review of Hockey Canada. Skeptics who thought this might be a rubber stamp whitewash were wrong. Part 1 covers great background on Hockey Canada, its legal status, and the best practices of sports organizations along with a detailed report on governance and directors’ responsibilities.
But most news reports haven't dived into what is perhaps the most interesting part of Cromwell's report, Hockey Canada's financial handling of the National Equity Fund. Perhaps financial accounting is dull and complex. But Cromwell's investigation uncovered deeply disturbing new information. For non-financial analysts, here’s our walk-through of Cromwell’s findings on Hockey Canada’s accountings.
Cromwell's investigation into Hockey Canada’s National Equity Fund, the now notorious Reserve Fund #1 to pay out uninsured sexual claims, shows a lack of financial records that don’t support Hockey Canada’s public statements and an intent to obscure its financial position.
Cromwell’s report finds a third reserve fund. Now there are three funds known to date: the National Equity Fund, the Participants Legacy Fund, and an undisclosed sub-part of the Insurance Rate Stabilization Fund. At June 2021 the Insurance Rate Stabilization (IRS) Fund had $32 million. This third fund is part of Hockey Canada’s complex matrix of risk management.
As it did with its other funds, Cromwell finds that Hockey Canada hid the purpose of the Insurance Rate Stabilization Fund.
Hockey Canada hired Cromwell to specifically report on how it used its National Equity Fund. The National Equity Fund is a very small part of Hockey Canada’s overall operations. Last year, it had $4.8 million that accounted for only 3% of Hockey Canada’s funds and NEF annual payments from members accounted for 5% of Hockey Canada’s revenues. Despite the restrictive guidelines to look at a small part of Hockey Canada, Cromwell uncovered multiple red flags.
“Both the National Equity Fund and the Insurance Rate Stabilization Fund are used for purposes that are not fully disclosed in the financial statements.”
Justice Cromwell p. 95
No financial records found for NEF's wellness initiatives
Hockey Canada told its Members and the Heritage Committee in Parliamentary hearings that the National Equity Fund, in addition to insurance premiums and claims, also pays for a wide range of safety and wellbeing and wellness initiatives. Hockey Canada said the NEF also paid for player counselling and treatment, such as for injuries and post-traumatic stress disorder.
Cromwell’s review of Hockey Canada’s financial statements and its general ledger does not clearly show that the National Equity Fund paid for counselling or treatments for players. Cromwell is concerned that these expenses were not recorded.
Not wanting to get into a defamation suit, please re-read the above paragraph. In effect, it means that what Hockey Canada said could not be verified. The expenses for the good things Hockey Canada claims to have spent NEF money on, its players' treatment and counselling, Cromwell couldn’t find in its financial records.
The NEF paid more for staff salaries, travel and meals than it paid out in claims
In going through the NEF spending, Cromwell did find that Hockey Canada allocates other costs to the NEF insurance fund. “It is clear that the NEF does not operate purely as a reserve fund for uninsured or underinsured claims”. Cromwell’s report gives granular details into the other items expensed as NEF “insurance premiums”.
Between F2014 and F2021 Hockey Canada spent $5.4 million on insurance claims and deductibles with another $47.9 million in spending that it reports as “insurance premiums”.
Cromwell’s report provides spending ranges for different costs between F2014 and F2022. These ranges show that Hockey Canada spent as much of NEF funds on its staff salaries, travel, meals and grants as it did on insurance claims.
As investors know well, when there’s “financial juggling”, it’s not likely in just one instance, it’s likely in many.
“What you find is there’s never just one cockroach in the kitchen when you start looking around.”
Cromwell’s report focused on just the NEF spending. Sports Canada’s full audit of Hockey Canada’s operations will likely reveal other details of its spending.
Discovering Fund #3: The Insurance Rate Stabilization Fund and what you need to know
Hockey Canada’s moving money around was brought to light in F2016. That year Hockey Canada’s auditors required better disclosure in Hockey Canada’s audited financial statements. Previously Hockey Canada had reserved $10 million for potential settlements and costs. It reported these reserves as general liabilities outside the NEF. With the accounting change, these reserves were reported inside the NEF. Hockey Canada’s audited financial statements show the NEF’s true balance of $15.7 million. This compares to $5.2 million reported the previous year. The NEF’s funds are the accumulation of annual registration fees collected in excess of claims.
A little aside on these reserve estimates; Hockey Canada’s auditors shared with Cromwell that, in their view, Hockey Canada had over-provisioned for its reserves. Hockey Canada told Cromwell that its reserves were based on past claims, but it is not clear to him how it estimates these potential claims.
This F2016 accounting change now showed the true position of the National Equity Fund at $15.7 million. And Hockey Canada was worried. Hockey Canada thought this might attract more or higher sexual claims. So, in November 2016 its directors approved moving the money into the Insurance Rate Stabilization Fund. This created a third reserve fund to cover uninsured injuries including sexual claims.
“Hockey Canada became concerned that this change in the financial statements inflated the NEF artificially which might signal a large pool of funds set aside for potential claimants and this might increase the likelihood of additional claims"
Cromwell interview with Brian Cairo, Hockey Canada Chief Financial Officer p. 89.
There is nothing inflated or artificial about the $15.7 million that was in the National Equity Fund. It is cold hard cash. But due to its concern about the optics (or transparency), Hockey Canada transferred $9.5 million from the NEF to the IRS Fund on November 17, 2016. Cromwell reports the board approved a transfer of $10.25 million (p.89), but the audited financial statements show a transfer of $9.5 million.
The Insurance Rate Stabilization Fund was established in 2008 with a $2.9 million transfer from the NEF. Its purpose was to buffer members from future insurance rate hikes. But in November 2016 it took on a new purpose as a third reserve fund for uninsured sexual abuse claims. Hockey Canada’s audited financial statements failed to disclose this change in purpose.
Since the board decision in November 2016, over the next five years, Hockey Canada transferred over $17 million from the National Equity Fund to the Insurance Rate Stabilization Fund.
Perhaps not surprisingly, Cromwell reports that the National Equity Fund is now depleted and likely to be in a deficit. At June 30, 2021 the National Equity Fund had a balance of $9.6 million (originally reported as $4.8 million see explanation below). Since then, it has paid out the May 2022 settlement, a claim for $3.55 million, and legal, investigation and other costs.
This gives a new perspective to Hockey Canada’s public statement in July 2022 that it would no longer be using the National Equity Fund to settle sexual assault claims. It had transferred the NEF funds to its third fund, the Insurance Rate Stabilization Fund.
“Merely carving out and labeling a portion of an organization’s net asset balance a “reserve” does not constitute best practices. The reserve policy should clearly describe authorization for the use of the reserve fund and outline requirements for reporting and monitoring. Without a policy or procedure, an organization runs the risk of misusing funds and depleting the reserve gradually to the point that it is no longer available when needed.” p. 100
Financial transparency is critical both for members and the Canadian public
The public doesn’t have access to Hockey Canada’s financials. But its members did. Hockey Canada says its members were free to ask directors or the management any time to get more financial information. Yet Cromwell points out that members need to be informed about ongoing and potential claims and Hockey Canada’s use of funds so they can ask questions.
“Members can only raise issues if they are able to identify them.”
Cromwell calls out Hockey Canada’s lack of public disclosure. His report outlines best practices in financial transparency in national sports organizations, and refers to the Canadian Sport Governance, “the COC Code”, and highlights that Canadian Basketball, Canada Soccer and Curling Canada publish their financial statements on their website.
Cromwell writes that Hockey Canada is not “well suited” to being financially transparent. Hockey Canada told Cromwell that if it publicly provided its audited financial statements, it would be seen as an organization with “deep pockets”. Transparency could create some negative implications. It could affect Hockey Canada’s bargaining power in legal settlements. Or influence the money sponsors will pay. Furthermore, the media could use Hockey Canada’s financial information to depict a negative image.
As Hockey Canada doesn’t want you to know this, perhaps it’s worth stating. It had $143 million in cash and investments as at June 2021. It has no debts.
Cromwell reiterates Hockey Canada’s existence to fulfill a public benefit. Hockey Canada is a public organization, a Registered Canadian Amateur Athletic Association that operates with generous tax benefits, not a private members-only club.
“Stakeholder confidence – that is belief in the powers, trustworthiness and reliability of the organization - is critically important to the organization … This is particularly the case with respect to not-for-profit corporations such as Hockey Canada that have important public interest mandates…. Boards need to consider accountability, transparency and engagement because they provide a foundation for building and maintaining healthy and productive relationships with its stakeholders. The ultimate end of all this is to ensure that the organization is, and is perceived to be, fulfilling its societal purpose in the public interest.”
Cromwell’s memo to Hockey Canada’s directors October 10, 2022
Hockey Canada says that it welcomes Cromwell’s report. It is committed to transparency. As part of its new commitment to transparency, and to rebuild the public’s trust, it has released Cromwell’s interim report. Whether Hockey Canada decides to publicly post its F2022 audited financial statements on December 17, 2022 is another test of its commitment to transparency. We’ll be watching.
Updated October 10: The National Equity Fund's funding reserve balance at June 2021 was $9.6 million rather than $4.8 million as originally reported. From Hockey Canada's F2021 audited financial statements add the NEF's cash $0.9 million and long-term investments $8.7 million less any interest-bearing debts $0 to get its funding reserves. This excludes working capital and funds the NEF "owes" to its other funds.
The Honourable Thomas Cromwell, C.C. Interim Report: Hockey Canada Governance Review, dated September 30, 2022, publicly released October 13, 2022
The Honourable Thomas Cromwell, C.C. Confidential Memorandum to Board Directors of Hockey Canada, October 10, 2022 - a gem well worth reading.
Hockey Canada's audited financial statements 2004-2021 (provided in confidence and I don't have permission to share.
Updated: October 18: permission to share Hockey Canada's 2017-2021 audited financials.
Please demand financial transparency from the Minister of Sport or file an access to information request with the Charities Directorate. I know charities' audited financial statements provide critical information that is in the public interest. I hope they are released soon for all to read.)
Other Charity Intelligence reports:
Hockey Canada: What can we do? A call for our Minister to regulate financial transparency. August 2, 2022
2022's Top 100 Charities Our annual release of the highest-rated charities, October 6, 2022
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