NGO / NPO Audit & Management - Role of a Chartered Accountant

NGO / NPO AUDIT & MANAGEMENT

Presentation by:CA Sandeep Garg

[email protected]

om

Program by:NIRC of ICAI

September 26, 20151

OUTCOMEBy the end of this session you will be

able to:• Understand the importance of Audit &

Management in NGO’s Growth

• Audit Areas

• Identify the Areas of Management

• Identify various Tools of Management

• Realise that CAs have a Large Role to Play

NGO / NPO Audit & Management 2

STRUCTURE• Understanding the Issues faced by the

NGO Sector

• Why Audit & Management are required?

• What is Audit & what needs to be Managed?

• How to Manage?

• WHY …. WHAT …. How.


How many of us here are associated with NGO Sector?• Running an NGO;• Providing Services to NGOs.

What are your Experiences?


I N D I A (OUR MINI WORLD)

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Can any Government (Central & State) remove all the issues on its own ?

OR Do we require NGOs / NPOs as a Partner

to reduce these issues?


Spending on Philanthropy• Foreign Contribution - FY2003-04 - $0.8 billion (INR

5105 Cr.) to FY2011-12 - $1.9 billion (INR 11546 Cr.) [Source: MHA / FCRA Annual Report 2011-12]

• The Bill & Melinda Gates Foundation, FY 2003-2013 invested approximately $1 billion (INR 6000 Cr.) in India.

[Source: bain.com/publications/articles/india-philanthropy-report-2015]

• CSR Estimates - $2.5 billion (INR 16500 Cr.) to $3.3 billion (INR 21830 Cr.).

• Top 10 Indian Rich contributed INR 17696 Cr. during 2014 [Hurun India philanthropy list 2014]

• Contributions from WORD BANK, United Nations, USAIDS..


Despite so much funding, why the Problems around us are Sustaining ?


How to Resolve these Issues?


What stops us to place the Solutions / Suggestions in Place?


MOTIVE OF WORKING WITH AN NGO

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COMMERCIAL VS. NPO

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• In NGO, fund provider wants to see the change around does not have time and specialisation searches for right NGO reposes the trust of bringing the change on his / her behalf frustration and bad words when the same not fulfilled;

• In commercial organisation, person receives the products or services after paying the price; In NGO, there is no receiving of goods / services only SATISFACTION is received.

• More professionalism and organisation building in commercial organisations.


FUNDS APPEAL


Source: http://www.bain.com/publications/articles/india-philanthropy-report-2015.aspx17

What do we ask from an NGO before spending even Rs. 1 from a person or time-spending support (Volunteer) :

• Whether NGO is a serious NGO? • What are NGO’s activities?• How the money would be spent?• Is NGO like any other NGOs with lot of corruption?

Building TRUST is important before the person shares Rs. 1 or 1 hour of time.


CHARTERED ACCOUNTANTS• CAs playing an important role in building-up

Processes in any Industry including NGOs / NPOs

• CAs = Custodian of Accounting (CA) & Financial Systems

• Demand for Governance

• CSR mandate by Companies Act, 2013

• Foreign NGOs / Companies / Indian NGOs looking for Right Consultants to build their processes


SUMMARY• NGOs / NPOs are required for Public Welfare

alongwith Govt. Govt. can’t serve 129 Cr. Population on its own.

• Personal Profit Motive needs to be avoided for NGO’s Growth.

• Funds from Donors can come with Better Audit & Management, Better Processes, Transparency….

• CAs have a large role to play


AuditManagement

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AUDIT


What is Audit?"Auditing is an independent examination of

financial information of any entity, whether

profit-oriented or not, and irrespective of its

size or legal form, when such an examination

is conducted with a view to expressing an

opinion thereon.“

-

ICAI


Who requires Audit?• One of the most important tools of Controls,

Monitoring and Review

• Extensively used by the Donor agencies to assess

• Whether the funds have been utilised in accordance with the terms of the grant; and

• Whether the intended benefits have reached the beneficiaries or not.


Types of Audit?• Statutory Audit

• Required under the statue i.e. under the Societies Act, Companies Act, etc.

• Done by an External Team of Auditors• Scope of audit and report is determined by the Law• In case of trust, there is no Statue, still, all the trusts

normally provide for audits• Societies have the provisions relating to Audit in their

Charter• Auditors’ report is mandatory under the various Acts like

FCRA, 2010 and Income-tax Act, 1961. [Form 10, Form 10BB]

• Section 8 companies are required for Statutory Audit under Companies Act, 2013


Types of Audit?• Internal Audit

• Looks more closely at the Systems, Controls Processes, Management Decisions, Wastages, etc.

• Suggests measures to streamline as well as identifies risk areas from control perspective.

• Scope of such audit is to be determined by the Board of Trustees of the NPO.

• May be conducted by external auditors or it can be done in-house.

• Not a legal or statutory obligation for the NPO; however for large and big NPOs, it is a matter of necessity and a good practice


Types of Audit?• Management Audit

• Audit in respect of Management Policies, decisions with reference to the Objectives of the Organisation.

• Includes review of processes and controls.

• Commonly prevalent in the corporate sector. Slowly, gaining prevalence in the NPO sector on account of growing need for greater efficiency and transparency in this sector.

• An audit gives an assurance that the Public funds in case of an NPO are being used effectively and efficiently


Accounting StandardPurpose

• Uniformity of Recognition, Measurement, Disclosures and Presentation of accounting information by different enterprises• Accounting is often said to be a social science.• Operates in an open and ever changing economic

environment the nature of transactions and the circumstances surrounding such transactions differ widely.

• Leads to adoption of different accounting practices by different enterprises for dealing with similar transactions or situations. • (Fixed Assets received as Donation – Some NPOs

capitalize them at fair market value; some of them capitalize at Rs.1.)

• Accounting Standards lay down the rules for uniformity• Comparability (users are able to compare the information of

an enterprise through time and with similar information of other enterprises)


Accounting StandardIndia

• The task of formulating accounting standards is with ICAI, • Based on the fundamental accounting assumption of accrual. • Para 3.3 of ‘Preface to the Statements of Accounting

Standards’• Applicable to Commercial, Industrial and Business

enterprises. • NGOs usually fall under non -commercial, non-industrial

or non-business enterprises, hence AS usually not applicable

• Even if a small portion of a charitable organisation is considered to be commercial, industrial or business in nature, then NO EXEMPTION In that case AS shall apply to the entity as a whole and not only to commercial, industrial or business transactions. NGO / NPO Audit & Management 29

Accounting StandardIndia

• ICAI Issued a “Technical Guide on Accounting and

Auditing in Not-for-Profit Organisation” (2009 edition)

Recommended that all NPOs, be it commercial, industrial or

business in nature, should follow Accounting Standards.


Accounting Standard• Section 8 Companies [Companies Act, 2013]

• Whether Financial Statements comply with AS notified under Sec. 133 ?{Section 129 (1)}

• AS specified under the Companies Act, 1956 deemed to be the applicable AS {Rule 7 of Companies (Accounts) Rules, 2014 read with Sec. 133 (1)}

• “Directors' Responsibility Statement” – Whether AS has been followed ?{Sec. 134 (5)}

• Auditors’ Report – compliance with AS {Sec. 143(3)}


Accounting StandardCategorisation

• Companies {Governed under Companies Act, 2013}

• Small and Medium Sized Companies (SMCs) and Non-SMCs

• Non-Companies {ICAI Standards}

• Level I, Level II and Level III, where the entities that fall within the meaning of the latter two categories are Small and Medium-sized Enterprises (SMEs).


Small and Medium-Sized Company (SMC) as defined in Clause 2(f) of the Companies (Accounting Standards) Rules, 2006

“Small and Medium Sized Company” (SMC) means, a company-• whose equity or debt securities are not listed or are not in the

process of listing on any stock exchange, whether in India or outside India;

• which is not a bank, financial institution or an insurance company;• whose turnover (excluding other income) does not exceed INR 50

Cr. in the immediately preceding accounting year;• which does not have borrowings (including public deposits) in

excess of INR 10 Cr. at any time during the immediately preceding accounting year; and

• which is not a holding or subsidiary company of a company which is not a small and medium-sized company.

NGO / NPO Audit & Management

Corporate

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Level I Level II Level IIINon-SME SME SME

Entities whose equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India

√ X X

Banks (including co-operative banks), financial institutions or entities carrying on insurance business

√ X X

All commercial, industrial and business reporting entities, whose turnover (excluding other income) in the immediately preceding accounting year

Exceeds Rs. 50 Cr.

Exceeds Rs. 40 Lakh to Rs. 50 Cr.

Rest

All commercial, industrial and business reporting entities having borrowings (including public deposits) at any time during the immediately preceding accounting year

Exceeds Rs. 10 Cr.

Excceds Rs. 1 Cr. to Rs. 10 Cr.

Rest


Non-Corporate

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Corporate Non-CorporateNon-SMC SMC Level I LeveII Level III

AS 1 Disclosures of Accounting Policies √ √ √ √ √AS 2 Valuation of Inventories √ √ √ √ √AS 3 Cash Flow Statements √ X √ X XAS 4 Contingencies and Events Occurring After

the Balance Sheet Date √ √ √ √ √

AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies √ √ √ √ √

AS 6 Depreciation Accounting √ √ √ √ √AS 7 Construction Contracts (revised 2002) √ √ √ √ √AS 9 Revenue Recognition √ √ √ √ √AS 10 Accounting for Fixed Assets √ √ √ √ √AS 11 The Effects of Changes in Foreign Exchange

Rates (revised 2003) √ √ √ √ √

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Corporate Non-CorporateNon-SMC SMC Level I Level II Level III

AS 12 Accounting for Government Grants √ √ √ √ √AS 13 Accounting for Investments √ √ √ √ √AS 14 Accounting for Amalgamations √ √ √ √ √AS 15 Employee Benefits (revised 2005) √ √ √ √ √AS 16 Borrowing Costs √ √ √ √ √AS 17 Segment Reporting √ X √ X XAS 18 Related Party Disclosures √ √ √ √ XAS 19 Leases √ √ √ √ √AS 20 Earnings per Share √ √ √ √ √AS 21 Consolidated Financial Statements √ X X X XAS 22 Accounting for Taxes on Income √ √ √ √ √AS 23 Accounting for Investments in Associates

in Consolidated Financial Statements √ X X X X

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Corporate Non-Corporate

Non-SMC SMC Level I Level II Level III

AS 24 Discontinuing Operations √ √ √ √ X

AS 25 Interim Financial Reporting √ X √ X X

AS 26 Intangible Assets √ √ √ √ √

AS 27

Financial Reporting of Interests in Joint Ventures (to the extent of requirements relating to Consolidated Financial Statements)

√ X X X X

AS 28 Impairment of Assets √ √ √ √ √

AS 29 Provisions, Contingent Liabilities and Contingent Assets √ √ √ √ √

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Queries about AS


MANAGEMENT



Overall NPO Management

Organisation creation

People Management

Funds Management

NPO Manageme

nt at a Glance

Expenditure Management

Beneficiary Management

Reporting Management

Compliance Management

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TOP-DOWN VS. BOTTOM-UP APPROACH

Bottom-up ApproachDemanding

Accountability / Transparency in the

Systems

Focussed towards achieving the

purpose of the NGONot compromising with the Quality

Whistle Blowing / Feedback/

Suggestions/ Grievances

Top-Down Approach

Governance flowing from

Trustees Downward

Providing Independenc

e to the Team

Setting the Precedence /

Examples

Defining Rules &

Regulations

Project Monitoring

closely

Fast redressal of Frauds, Non-compliances, grievances


GOOD GOVERNANCE PRACTICES

Top Management•Regular Meetings•Regular Elections•Regular Audit•Website and its regular updation•Disclosures (following A/cing

Standards)•Forming Committees•Project Management•Hiring Right People

Middle & Lower Management•Beneficiaries Identification

closely•Law Compliance•Full Documentation•Communication with Donors•Giving the correct feedback to

the Top Management


OVERALL NPO MANAGEMENT

Vision LeadershipCorporate Values (Integrity,

Communication, Transparency, Fairness, Commitment & Determination, Co-

ordination)

Governance Active

governing board,

minutes, statutory

compliances

Accounting Systems / Software – (Chart of accounts,

Cost centres, Budgets)

Independence / no

conflicts in interests

Suggestions & Feedback

Monitoring tools (bill of

material, wastage

identification, duty

schedule)

Internal Controls

Awareness creation & Advocacy Audit

Right to Information

Information Safety

Building Professionalism; creating Rhythm in the organisation NGO / NPO Audit & Management 43

ORGANISATION CREATION • Division into Departments, • Activities definition, • Authority delegation structure• Reporting structures, • Process maps, checklists / formats

Ease of functioning + clarity + standardisation


PEOPLE MANAGEMENT (FULL-TIME AND VOLUNTEERS)

• Identifying the right people• People draw less salaries in NGOs• Volunteers• Take leaves from their offices without

charging anything from NGO;• Spends precious time without

expecting money.• Clarity of roles and responsibilities• Training• Motivation is very important to deal

with Negativity and Remain Positive NGO / NPO Audit & Management 45

FUNDS MANAGEMENT

Which Funds?

• Internal

• External


FUNDS MANAGEMENT• Funds forecasting• Internal funding building sustenance• Optimisation of existing resources• Grants / Donations Management

• Brochures & pamphlets• Business plans• Past results of projects undertaken• References & Recommendations• Presentations• Fund Raising events + Identification of fund

providers• Regular follow-up• Safeguards for pre/post –conditions of

contracts, • Other income (Royalty, Interest, Rent,

Dividends, etc)• Investment management of surplus funds• Documentation


EXPENDITURE MANAGEMENT

• Project Management• Expenditure Management • Budgeting• Following Authorisation Structure

• Documentation


COMPLIANCE MANAGEMENT• Compliances–

• Income-tax • Exemptions (Sec 10)• Annual Return• TCS (applicable - Sec 8) + TDS (All entities)• Deductions to Donors (Sec. 80G, 80GGA, 35AC,

35CCA)• FCRA• Service Tax, Labour Laws• Registrations, Tax deposits & Returns filing

• Identification of Right Consultants• Tax updates NGO / NPO Audit & Management 49

BENEFICIARY MANAGEMENT

• What do they want ??? Identify the needs• Evaluation criterion (to whom the benefits to

go)• Documentation to be kept• Post disbursement checking

• How the funds were actually spent?• Whether NPO’s evaluation criterion

effective?

Root level checking & Impact analysis


REPORTING MANAGEMENT• Reporting to Funding Agencies• Formats of reporting• Regular + Timely + Error-free;• Communicate if DELAYS.

• Audit • Formats of Annual Accounts• Accounting Standards

• Communication Management with outside world (website, brochures, pamphlets, etc.) NGO / NPO Audit & Management 51

• Who will advise and develop such systems?

• Low Affordability of NGOs


MANAGEMENT – HOW?


TOOLS OF GOOD MANAGEMENT

• Finance Manual

• Fraud Prevention Systems

• Checklists

• Team Management Software

• Budgeting

• ………


FINANCE MANUAL


FINANCE MANUAL• Features• Describes how the Financial Systems work• Helps staff understand their

responsibilities and how systems fit together

• Less training time for the new staff / cross-training

• Precautions• Each NGO's finance manual different

(reflects changing circumstances and ways of working)

• Manuals to be as easy to read as possible, keeping jargon to a minimum

• Needs of Head Office staff and Field Staffs to be addressed simultaneously


FINANCE MANUAL

• Contents• The NGO's values, mission and strategy • Key responsibilities (Authority Structure) and

organisational structure • Specific finance policies (policies approved by

senior managers and trustees about how the NGO should work)

• Key minimum standards (one page summary)• Specific finance procedures (how to put the

policies into practice) (e.g. procurement, banking, accounting routines)

• Chart of accounts • Examples, resources materials, checklists,

formats, etc.


FRAUD - PREVENTION


FRAUD – Prevention• Values • Vision and mission • Involve beneficiaries more • Increase staff connection with beneficiaries • Transparent Recruitment • Recruitment – interviewing • Recruitment – references checking closely• Induction programs• Employee commitment • Pay levels (Less variance in the highest and lowest paid

staff)Contd…. NGO / NPO Audit & Management 59

FRAUD – Prevention (Cond.)

• Management by walking about • Financial management training to Non-finance

staff• Develop a risk register • Develop a good internal control system • Internal audit • Look out for the warning signs of fraud• Be aware of power relations • Whistle blowing • Taking action on fraud or suspected fraud • Written fraud policy


CHECKLIST


CHECKLIST• Should work on the principle of ‘comply or

explain’.• Defines Actions to be taken to complete a

Process• Defines the End-result of the Process• Specifies Expected time for completing an

Action• Defines Ownership of Process / Action• Lists Documents to be captured• Defines the Best Processes of the industry• It could be the part of Finance Manual NGO / NPO Audit & Management 62

CHECKLIST - Example• Health Check-up

Particulars Ownership Periodicity

Y / N

Whether Charter / Rules of the NGO has clauses for:• Regular election of trustee• Number of meetings to be

held during the year• Number of meetings to be

attended by a Trustee

Trustees Initially (One Time)

Financial ManagementWhether Accounts are being audited?

Treasurer Yearly

Whether Accounting Books are updated?

Treasurer Weekly

Whether Budgets are prepared? Treasurer YearlyWhether Budget Variance is reported to Trustees?

Treasurer Monthly NGO / NPO Audit & Management 63

CHECKLIST - Example• Health Check-up (contd. 2)

Particulars Ownership Periodicity

Y / N

The Organisation has Written Financial Controls to Limit spending and account for all expenses

Trustees One Time

Whether Financial Controls are reviewed for their relevance

Trustees Yearly

More than 3 months of Cash Reserves on hand

Treasurer Yearly

Donors’ ManagementWhether reports sent to Donors? Treasurer Donors’

ProgramLeadership

Staff Turnover Rate is less than 25%

Trustees Monthly NGO / NPO Audit & Management 64

TEAM - MANAGEMENT


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BUDGETING


BUDGET• Planning is Extremely Important in NGO

• Funds dry-up unless properly spent

• Impact

• Dismantling of Team of Employees & Volunteers

• No funds even for Day-to-Day Regular Activities

• Budget is an Important Tool of Planning


Budgeting Program Budget

Sl. Name of Program

Specific Objectives of this Program

Logic / reasoningfor each activity /item

Number ofdirectbeneficiaries

Village / locationwhere theactivity willoccur

Durationof activity

Budget LineItemNarration

Budget LineItemCalculation

Amount(Rs.)

1 NFESchools

To run 12NFE centresfor childrenfrom tribalgroups. Togive basicliteracy,generalknowledge tochildren

For teaching thechildren. Eachteacher will workfor six hours. Oneteacher for eachschool. Seniorteachers are paidmore.

150 girls;170 boys

1. Jasidih2. Haldia3. Parsidhhia4. Jajori5. Terahawi6. Koldiha7. Jalalpur8. Khapatia

12months

Salary to 8 Seniorteachers

Rs.1000 x 8 teachers x 12 mths.

96,000

2 NFESchools

As above As above 60 girls;80 boys

1. Chakrata2. Khekda3. Jewar4. Korwani

12months

Salary to 4 newteachers

Rs.850 x 4tchrs. x 12mths.

40,800

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Budgeting Accounting Budget

Ref Account Head Program

Duration Calculation Amount (Rs.)

1 Salary to Senior Teachers NFE 12 months Rs.1000 x 8 teachers 96,0002 Salary to new teachers NFE 12 months Rs.850 x 4 teachers 40,8006 Stipend to vaids Health 12 months Rs.1000 x 8 vaids 96,0008 Salary to C.H.Ws Health 12 months Rs.500 x 3 workers 18,0009 Salary to Project Manager Admin. 12 months Rs.3,000 36,00010 Salary to Accountant (shared) Admin. 12 months Rs.1,000 12,000

Salary Sub Total 298,8003 Teaching resource material NFE Over the

yearRs.500 x 12 NFE centres

6,000

4 Bal Mela Food NFE Once Rs.20 x 450 children + 12 teachers + 10 others

9,440

11 Postage & Stationery Admin. Over the year

Rs.300 x 12 months 3,600

Materials Sub Total 19,040

Linked to Program Budget

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CONCLUSION

• More Funds will come with Better Audit & Management, Processes…

• Profit Motive from Consultants need to be kept Low

• We can bring changes if we really want to.

• TRUST building is must for Survival & Continuity.

• NO Management theory conclusive new circumstances keep evolving. NGO / NPO Management 73

“You must be the change you wish to see in the world . . .”

Mahatma Gandhi

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QUALITY / AUDIT PROFESSIONAL

NGO / NPO Management 75

www.revitalisedprocesses.com

76

THANK YOUSANDEEP GARG, FCA,

ICWAS S A R & ASSOCIATES

Ph: (011) 65960912-13, 9810020508

[email protected]

www.revitalisedprocesses.com

NGO / NPO Management 77

Government & Nonprofit

NGO / NPO Audit & Management - Role of a Chartered Accountant