Internal audits often include checks on the:
• Financial accounting systems and procedures,
• Management accounting systems and procedures
• Internal control mechanisms
Rwanda MCC Threshold Program
CIVIL SOCIETY STRENGTHENING PROJECT
Internal audits
• Self-assessment and plan of action
Seven Principals of Financial Management
Consistency
The financial policies and systems of an NGO must be consistent over time. This promotes efficient operations and transparency, especially in financial reporting.
Systems may of course be modified and improved, which may cause changes.
Inconsistent approaches to financial management may indicate that financial information is being manipulated.
Accountability
NGOs must explain how all resources (including equipment) are used and the result of their use. NGOs have an operational, moral and legal duty to explain their decisions and actions, and submit their financial reports for scrutiny.
Transparency
NGOs must follow the stipulations in their funding agreements regarding information to be provided to funders and stakeholders. Financial and programmatic reports should be thorough, accurate and timely.
Viability
To be financially viable, an organization's expenditure must be kept in balance with incoming funds. The governing body and managers should have a strategy regarding this and be able to show how the NGO will meet its financial obligations and carryout programmatic commitments.
Integrity
Individuals in the NGO must operate with honesty and integrity. Managers and Board members must lead by example, following policy and procedures and declaring any conflicts of interest. The integrity of financial records and reports is dependent on accuracy and completeness of financial records.
Stewardship
An organization must manage its financial resources to make sure that they are used for the purpose intended - this is known as financial stewardship. The governing board is ultimately responsible for financial stewardship and work with managers below them to plan, monitor and control finances.
Accounting standards,
The system for keeping financial records and documentation must observe
internationally accepted accounting standards and principles and be understandable to any accountant in the world.
Resource: Mango 2006; InsideNGO 2009. Introduction to Financial Management, page 14
Financial Management Tools
Planning: Strategic plans, business plan, activity plan, budgets, work plans, cash flow forecast
Organizing: By laws, organizational charts, job responsibilities, chart of accounts financial manual and budgets
Controlling: Budgets, delegated responsibility, defined levels of authority, systems to reconcile spending, procurement procedures, internal and external audits
Monitoring: Evaluation reports, budget monitoring mechanisms, cash flow reports, reconciling finances, bank statements,
Resource: Mango 2006; InsideNGO 2009. Introduction to Financial Management
Analysis of Accounting Systems
Size and structure:
How many employees work exclusively or primarily on finances?
1. How many employees work partially on finances?
2. Does the current structure and system allow everyone access to information that needs it?
3. Does the current structure allow program managers to input information?
4. Is the current system overly bureaucratic?
5. Is the current system sufficiently organized /structured?
6. Do you feel that changes should be made to the accounting system to better fit the size or structure of the NGO?
Resources:
1. List resources:
2. List resource constraints:
Reporting requirements:
1. Does the current accounting system meet the reporting requirements? If not, why?
2. Are there multiple programs with multiple reporting cycles? If so, is this a problem for the current system?
3. Is varying information required by different programs? If so, how is this dealt with?
4. Can all programs use the same reporting preparation?
5. To what level of detail do current funders require financial reporting?
6. Are the accounting systems able to easily track that information?
7. Does the accounting system currently allow all programs’ financial information to be compiled to create an overall picture of the NGOs financial situation?
Projects and activities:
1. How many programs exist at the organization?
2. Do the programs have common categories of expenses?
3. What are some of the categories of spending?
Volume and type of financial transactions:
1. Does your NGO have accounts directly with vendors?
2. Are most payments made in cash?
3. Does your organization give grants or microloans to other parties? If so, are financial systems set up to manage this process well?
4. Does the current system track expenses by: cash and credit?
General:
1. Do all managers help code finances? If so, how and when is this be done?
2. What do you feel are your NGO’s weaknesses with the current financial system?
3. What steps need to be taken to improve your NGOs’ financial accounting and management accounting?
4. What levels/categories/classification of funding or information about the
transaction would be helpful to be tracked that is not currently being tracked or recorded?
5. If anything was listed how would you propose to capture the information?
Checklist of Standard Forms and Common Policies and Procedures
Does the NGO have the following standard forms:
□ Bank reconciliation
□ Travel expense report
□ Vehicle log
□ Other…
Does policy exist for the following items:
□ Financial accounting routines
□ The Chart of Accounts and cost center codes
□ Management accounting routines
□ The budget planning and management process
□ Delegated authority rules (i.e. who can do what)
□ Ordering and purchasing procedures
□ Bank and cash handling procedures
□ Management and control of fixed assets
□ Staff benefits and allowances
□ Annual audit arrangements
□ How to deal with fraud and other irregularities
□ Code of Conduct
□ Do any of the above mention, whose signature or what backup documentation is required?
Does the NGO have an:
□ Organizational chart
Standard financial calendars for:
□ Recording,
□ Reconciling,
□ Reporting expenses to date,
□ Forecasting budgets (once or twice annually) and
□ Preparing for audits
Resource: Mango 2006; InsideNGO 2009. Introduction to Financial Management
Documents to Keep
□ Receipt or voucher for money received
□ Receipt or voucher for money paid out
□ Invoices - certified and stamped as paid
□ Paying-in vouchers for money paid into the bank
□ Bank statements
□ Price quotes
□ Contracts
The minimum requirements for accounting books are:
□ Bank (or cash) book for each bank account
□ Petty cash book
□ General/sub ledger
□ Journal book
□ Payroll ledger
□ Assets register
□ Inventory control book
Assessment of Accounting Practices
1. What aspects of your accounting systems are done well and correctly? Feel free to write a short assessment as well as consult the checklist below.
□ All transactions captured
□ All transactions are recorded in a consistent systematic manner
□ Accounts and transactions are reconciled monthly
□ At this time, the duality of each transaction is captured 100% of the time
□ Accounting documents are filed in an organized manner
□ Accounting documents are filed separated by “paid” and “received”
□ Books are kept for all the items they should be?
2. Is bookkeeping consistent?
3. How could your bookkeeping be improved?
4. Are the systems currently used efficient and effective? If so, why? If not, why?
Assessment of NGO’s Budgeting Techniques
What (if any) changes could be made to templates, to increase effectiveness of budgeting?
What (if any) changes could be made to templates, to increase efficiency of budgeting?
Are there aspects of the NGO’s business that are not being budgeted, which should be?
Other thoughts?
Financial Reports by Stakeholder
Stakeholder Need for Financial Reports
Project staff To know how much money and resources are
available for their projects and what has been spent so far.
Managers To keep an eye on how project funds are being
used, especially compared to the original plans. To help plan for the future.
Finance staff To make sure that there is enough money in
the bank to buy the things the NGO needs to run its programs.
Board of Trustees To keep an eye on how resources are being used to achieve the NGO's objectives.
Donors To make sure that their grants are being used
as agreed and that the projects objectives are being fulfilled. To consider whether to
support an organization in the future.
Government departments To make sure that the NGO pays any taxes due and that it does not abuse its status as a 'not for profit’ organization.
Project beneficiaries To know what it costs to provide the services they are benefiting from and to decide if this is good value for their community.
The general public To know what the NGO raises and spends
during the year and how the money is used.
(Mango February 2006; InsideNGO 2009, Introduction to Financial Management, page 72)
Assessment of Financial Reporting
1. Does the NGO currently do an annual financial report?
2. Does it include:
□ Where money has come in from,
□ For what purposes,
□ How money has been allocated
□ What has been achieved by the organization
3. Does the financial report serve its internal and external needs? Please explain.
4. Does someone or a governing body analyze the financial trends and the health of the organization?
5. Are monthly or quarterly (please circle) financial reports done for:
□ Cash flow
□ Budget monitoring
6. Do the financial managers and budget analyst have the ability and access to resources to do their jobs?
7. Do financial managers and budget analyst have the opportunity to present issues and potential solutions to managers?
8. Are financial reports given to donors honest and transparent?
9. Are donors kept informed about spending or cost challenges?
10. Does the NGO deal with over or understanding or budget changes correctly?
11. What are your conclusions? What (if any) changes need to be made to financial reporting (internal or external reports).
Assessment of Financial Management Policies
Delegation of Authority:
NGO has:
□ Governing board and Chief Executive Officer with clear levels of responsibility and authority
□ A Delegated Authority Document exists that states who should do what in financial procedures (this document is approved by the governing board).
□ This document includes instructions regarding:
□ Placing and authorizing orders for goods and services
□ Signing checks
□ Authorizing staff expenses
□ Handling incoming cash and checks
□ Access to the safe and petty cash
□ Checking and authorizing accounting records
□ Signing legal undertakings
Formal rules of authority:
□ Financial authority is defined and documented from most junior-levels up
□ There is a rule that states that no employee can authorize transactions for □ which they will personally benefit
□ There is a rule that states that subordinates cannot authorize payments to managers Comments:
Separating Duties:
□ Different people are responsible for ordering goods, receiving goods, authorizing the payment, keeping the accounting records and reconciling the accounts.
Procurement Processes are in place to:
□ Require multiply managers review and approval of purchases,
□ Set requirements for how purchases or made (i.e. large expenses should not be paid for through petty cash)
□ Determine after what amount competitive price quotes must be sought out
Policies and procedures regarding separating of duties:
The NGOs has established that:
□ Checks must be signed by multiple people to avoid fraud
□ Upper management must review systems and double check accounting to ensure accounting is accurate.
□ Employees are encouraged to be report irregularities, abuse or fraud
□ Any irregularities must be investigated swiftly and professionally with a third person present
Comments:
Reconciliation:
Policies and procedures:
The NGOs has established that:
□ The bank or cash books are reconciled monthly
□ The petty cash is reconciled weekly
□ Cash is accounted for (recorded) as it received (and before it is used)
□ Receipts are always given for money received
□ Receipts are always obtained for money paid out
□ Te surplus cash is to be kept in the bank – or in a safe
□ There are procedures for receiving cash (such as two people have to be present when a large sum of cash in withdrawn from the bank)
□ Access to petty cash is restricted to a few people
□ Cash transactions are kept to a minimum Comments:
Physical Controls:
□ The NGO has a safe
Policies and procedures to safeguard fixed assets:
The NGOs has:
□ A list of valuable supplies and equipment and tracking number on the items
□ The list shows the original worth of the item and the date & places it was acquired.
□ Expensive items are insured
□ The building and vehicles (etc.) are insured from theft, fire, flooding, etc.
Comments:
Internal Audit & Plan of Action
Utilizing all that you have learned in this training, review and analyze your NGOs current accounting structures. Look over your notes and the handouts provided to assess the largest strengths and weaknesses of current systems and procedures.
You should consult the: Financial Management Tools, Principals of Financial Management, Checklist of Documents to Keep, Analysis of Accounting System (Structure), Standard Forms, Policies and Procedures, Assessment of Accounting Practices, Assessment of Budgeting, Assessment of Financial Reporting and finally the Assessment of Financial Management Policies.
Depending on the needs you see fit, prepare the following for your NGO:
1) Summary of strengths of current system and why these elements are necessary (brief)
2) Summary of weaknesses of current system and what risks, costs or other potential consequences are associated with not changing practices or systems.
3) For each weakness, present a solution for dealing with the issue.
4) Prioritize the urgency of changes to be addresses and write a justification for why you think certain weaknesses or solutions should be addresses first. This may include a logical order of steps that would need to be taken or policies that could easily be initiated and yield greater impacts, etc.
5) From the list of priorities, start drafting a Plan of Action that includes: a) when changes will be made, b) who needs to be involved in approving changes, c) how staff will be notified or trained.
6) If this assignment is not completed during the training, it should be sent back to IREX’s office when it is completed.
7) IREX management will follow-up on the progress of improvements to your NGO’s financial management and impacts the changes are having on the NGO’s operations and/or programming.
Auditing