The Rest of the Story: What Hockey Canada's 2022 annual report fails to disclose but is reported in its audited financials

The Rest of the Story: What Hockey Canada's 2022 annual report fails to disclose but is reported in its audited financials

Hockey Canada released its 2022 annual report and its audited financial statements. Incredibly, its annual report barely mentions the events of the 12 months ending June 2022. In contrast, Hockey Canada’s audited financial statements provide significantly more disclosure and discussion about the scandal that rocks this Canadian charity and was one of 2022’s largest news stories.

This is another example of why it is critical that charities publicly post their audited financial statements. Right now in Canada, transparency is a platitude. It is just guidance or best practice. It is long past time that the Charities Directorate regulates transparency. Our government must require that every large charity or non-profit that receives more than $1 million in revenues post full audited financial statements or else have its tax-free status suspended.

In December 2022 Hockey Canada committed to being financially transparent and its audited financial statements are now posted on its website.

Canadians deserved this transparency years ago. If the books had been open in the past, one can only wonder if there would have been fewer shocking revelations reported over the last year. Canadians have a right to know.

Hockey Canada’s audited financial statements answer many questions it dodged in its testimony before the Parliamentary committee. Here’s our walkthrough and key points of what you need to know:

Hockey Canada's auditors set the record straight on a number of issues

Your media elite got it right on the Legacy Trust

The auditor’s opening letter to the F2022 financial statements for Hockey Canada highlights the Legacy Trust. The Legacy Trust, what we call Uninsured Claims Settlement Fund #2, was only discovered on October 3, 2022 by the Globe and Mail’s investigative reporters that dug through Alberta court documents. In Andrea Skinner’s testimony before the Parliamentary hearings, the former Hockey Canada interim chair disparaged the media saying it had misconstrued information and reported misleading information.

Hockey Canada’s auditors set the record straight. In their opinion, the Legacy Trust should be disclosed on Hockey Canada’s books by virtue of Hockey Canada’s control over the trust. Your media is vindicated. It got the story right. 

This is one more example that calls into question the credibility of Hockey Canada’s prior statements and testimony. Charities get the benefit of the doubt. We trust charities to tell the truth. Cromwell’s report also found major discrepancies between Hockey Canada’s statements and facts. Hockey Canada said the National Equity Fund spent money on treatment and counselling for players. Cromwell found no record of these payments. Hockey Canada corrected its statement five months later. Hockey Canada also corrected its earlier statement that the woman involved in the settlement did not participate in the London Police investigation. She did. Too often what Hockey Canada says sets the narrative and later corrections go largely unmentioned. Going forward, its statements cannot go unverified. 

Did management fail to disclose?

This lack of disclosure in the past opens a whole new can of worms. It looks like the auditors were as surprised as Canadians to learn about the Legacy Trust. Hockey Canada’s auditors note that prior audited financial statements did not report the Legacy Trust. This material omission is now corrected.

Reading between the lines one has the impression that, if the auditors had known about the Legacy Trust earlier, it would have been reported. What other conclusion is there but Hockey Canada management withheld information from its auditors?

This calls into question the integrity and judgement of management, and rattles stakeholder confidence. We note that Hockey Canada’s brand promise is “honesty and integrity” “at all times”. Hockey Canada’s management now needs to live up to its promise.

The F2022 financial statements disclose that the Legacy Trust has $7.5 million. This is nearly the exact amount that Hockey Canada set aside in 1999 to cover uninsured claims. The Legacy Trust’s annual income is distributed to certain provincial hockey members and the Canadian Hockey League which are the beneficiaries of the trust. (Source: Financial Note 14).

While the Legacy Trust is technically outside of Hockey Canada, it exists to pay for uninsured claims.

 

No dislosure on salaries and number of staff 

The auditors report Hockey Canada’s CEO, Scott Smith, was terminated without cause. There is no disclosure on severance costs nor staff salaries.

Canadians want more transparency and disclosure. Charities must annually report information on staff and compensation. As a Registered Canadian Amateur Athletic Association, a RCAAA, Hockey Canada is not required to disclose staff and salary information. This is another area where regulators must make changes to improve transparency.

 

Annual registration fees are the only source of National Equity Fund revenue

Hockey Canada also testified that the National Equity Fund (NEF) was funded "in part" by player registration fees “among other” sources. The auditors clarify this: the NEF is only funded by player registration fees and the investment income earned on prior surpluses (profits) of player registration fees. There are no other revenue sources. Journalists have asked about this point. The audited financial statements inform the public about where the money comes from and how player registration fees are spent.

In F2022, there were no transfers from the National Equity Fund to other Hockey Canada funds. Last year, $1.5 million of player registration fees was transferred to the Insurance Rate Stabilization Fund. This fund is commonly known as Fund #3 uncovered by Cromwell’s investigation in October 2022 (see Financial Note 12 Interfund Transfers).

 

$2.9 million paid out for sexual assault settlements in F2022

In F2022, Hockey Canada paid out a total of $2.9 million in settlements from the National Equity Fund. These settlement payments include the claim against Hockey Canada and eight junior hockey players for allegedly sexually assaulting a woman in June 2018. Please note: the auditor reports Hockey Canada paid out settlements (plural). As such, it is not possible to ascertain how much was paid for just the London, Ontario claim. But $2.852 million is the maximum. This information clarifies the $3.55 million claim number that is often quoted. (Financial Note 13: Other Liabilities and Provisions).

In sworn testimony before the Parliamentary Committee, Hockey Canada said that it “settled for the maximum amount” as “the right thing to do was to deal with the young woman” “in the best interest of the young woman to protect her privacy and also for her benefit going forward.”

This “maximum” statement that presents a “good guy” image is unsupported. It does not reconcile with the legal claim of $3.55 million. What happened in between to get the claim down from $3.55 million to $2.85 million? There are no minutes of this discussion. Indeed, the Parliamentary Committee is frustrated that many of Hockey Canada’s director meetings are undocumented as they were held in camera.

Health Benefit Trust Fund

In F2022 Hockey Canada paid out $750,331 in health benefit claims, compared with $488,416 the year before. Like the National Equity Fund, player registration fees fund the Health Benefit Trust. This fund’s purpose is to cover players’ uninsured health costs.

$10 million moved off the books in fiscal 2013

The 2022 financial statements also report that, in the past, Hockey Canada moved more money off its books. The statements report for the first time that Hockey Canada holds an endowment at Hockey Canada Foundation. In F2013 Hockey Canada gave $10 million to the related Hockey Canada Foundation. This money has grown. This endowment held at Hockey Canada Foundation is now worth $13.0 million.

This endowment contributes to Hockey Canada Foundation’s Assist program that provides “up to $500” in financial aid to cover hockey registration fees. Hockey Canada reports that $175,000 was spent on registration support (2,349 children receive aid in paying registration fees for F2023). These two data points may not be connected but it is all that is reported.

Canadians want accountability. Canadians expect charities to clearly report i) how much was paid out and ii) to how many families. This is basic results reporting rather than wishy-washy figures.

 

F2022 was an annus horribilis and F2023 will likely be financially worse

Hockey Canada lost $33 million in F2022. Hockey Canada’s finances were hit by covid, volatile financial markets and high national teams and international event hosting costs in 2022.

  • $25.4 million loss of operations which includes a $12.8 million loss on hosting international events and $10.7 million on hockey operations.  
  • $8.0 million loss on investments due to the decline in the financial markets ($4.6 million in investment and interest income offset by unrealized market losses of $12.6 million).
  • $11.4 million writedown of ticket refunds with the cancellation of the Men's Junior Championship in December 2021 due to covid. Hockey Canada had received $12.6 million from ticket sales but refunded $11.4 million. The World Juniors tickets were reissued for the competition in Edmonton in August 2022 which falls in a different fiscal year. These revenues may show up in fiscal 2023. The Edmonton event had low attendance. There is a rebound with the World Juniors in December 2022-January 2023 in Halifax with 85% of tickets reported sold or "spoken for".

 

What’s notable is that Hockey Canada’s F2022 loss is not because of the collapse of revenues but due to higher costs. In F2022 Hockey Canada’s operating revenues were $53.8 million, a 5% drop compared to F2021’s revenues. But Hockey Canada’s operations costs increased 26% to $79.1 million.

The collapse in Hockey Canada’s revenues will happen in fiscal 2023. In the scandal fallout, corporate sponsors cancelled or paused their sponsorship. In contrast, in F2022, corporate sponsors contributed $17.6 million to Hockey Canada. Similarly, Sports Canada froze its funding in June. In F2022, Sports Canada gave Hockey Canada $7.7 million, a 37% increase over its F2021 funding. Again, the suspension of Sports Canada funding will show in fiscal 2023’s financial statements.

The loss of corporate sponsors and Sports Canada funding may see revenues in 2023 drop by $24 million. Hockey Canada told the Financial Post that the loss of corporate sponsorships will be $23.5 million for F2023.

Furthermore, the Financial Post reports that Hockey Canada has racked up about $6 million in additional costs to manage the scandal. These costs will be in 2023’s financial statements:

  • $1.7 million for Cromwell's governance review
  • $1.6 million for Navigator's help in communications
  • Nearly $3 million in legal and additional communication costs, including the services of Longview Communications.

The F2023 bottom line loss will likely be significantly larger. With the revenue drop of approximately $24 million and additional costs of $6 million, Hockey Canada’s loss could worsen by another $30 million.

The runway to absorb losses: $98.4 million in funds

For now, Hockey Canada has the funding reserves, the runway, to absorb these financial losses, cut costs and overhaul its operations.

Hockey Canada closed out June 2022 with $98.4 million. This is its cash and investments less bank debts. This is $45.1 million less than the previous year’s balance of $143.5 million. In F2022 Hockey Canada took out a bank loan of $7.9 million. This is just the funding on Hockey Canada’s books and doesn’t include the $13.0 million held at Hockey Canada Foundation or the $7.5 million in funds at the Legacy Trust.

 

Upcoming:

  • Late January 2023: Federal government audit of Hockey Canada’s books from 2018 to present. Retired Judge Cromwell only reported on the National Equity Funds spending. The National Equity Fund is only a small part within Hockey Canada; the NEF is 15% of Hockey Canada’s revenues, 14% of its costs, and today 6% of Hockey Canada’s funding reserves.
  • Hockey Canada lawsuit against Sports Canada fighting the release of emails.
  • January NHL investigation continues with interviews of hockey players scheduled.
  • February-March 2023 Federal audit of Hockey Canada’s books for fiscal 2016-2018 begins.

 

Related articles on Hockey Canada by Charity Intelligence:

Cromwell's Final Report with 39 Recommendations for Hockey Canada's governance overhaul, November 8, 2022

Hockey Canada - the Cromwell Report part 1, October 14, 2022

What can we do? A call for financial transparency, August 2, 2022

 

Sources: 

Hockey Canada’s 2022 audited financial statements and previous years.

Kieran Leavitt, “21 victims, $8.9M in compensation. Hockey Canada reveals its history of settling sexual misconduct claims.” Toronto Star, July 28, 2022

Barbara Shecter, “Hockey Canada reveals it’s lost almost $24 million in sponsorship this year”, Financial Post, November 14, 2022

One tidbit for the conversation on gender parity; fans spent $12.4 million on tickets for the Men’s World’s Juniors event compared $0.4 million on tickets for the Women’s World Championship.

 

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