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

NGO / NPO
AUDIT & MANAGEMENT
Presentation by:
CA Sandeep Garg
sandeepgarg@ssarca.com
www.revitalisedprocesses.com
Program by:
NIRC of ICAI
September 26, 2015
1

OUTCOME
By 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.
3

How many of us here are associated with NGO
Sector?
• Running an NGO;
• Providing Services to NGOs.
What are your Experiences?
4

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?
8

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..
9

Despite so much funding, why the Problems
around us are Sustaining ?
10

How to Resolve these Issues?
11

What stops us to place the Solutions /
Suggestions in Place?
12

MOTIVE OF WORKING WITH AN NGO
13

• 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.
15

FUNDS APPEAL
16

Source: http://www.bain.com/publications/articles/india-philanthropy-report-2015.aspx
17

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.
18

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
19

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
20

AUDIT
22

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
23

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.
24

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
25

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
26

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
27

Accounting Standard
Purpose
• 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)
28

Accounting Standard
India
• 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.
29

Accounting Standard
India
• 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.
30

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)}
31

Accounting Standard
Categorisation
• 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).
32

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.
Corporate
33

Level I Level II Level III
Non-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
34

Corporate Non-Corporate
Non-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 X
AS 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)
√ √ √ √ √
35

Non-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 X
AS 18 Related Party Disclosures √ √ √ √ X
AS 19 Leases √ √ √ √ √
AS 20 Earnings per Share √ √ √ √ √
AS 21 Consolidated Financial Statements √ X X X X
AS 22 Accounting for Taxes on Income √ √ √ √ √
AS 23 Accounting for Investments in Associates
in Consolidated Financial Statements
√ X X X X
36

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
√ √ √ √ √
37

Queries about AS
38

MANAGEMENT
39

Overall NPO
Management
Organisation
creation
People
Management
Funds
Management
NPO
Management
at a Glance
Expenditure
Management
Beneficiary
Management
Reporting
Management
Compliance
Management
40

TOP-DOWN VS. BOTTOM-UP APPROACH
Bottom-up Approach
Demanding
Accountability /
Transparency in the
Systems
Focussed towards
achieving the purpose
of the NGO
Not compromising with
the Quality
Whistle Blowing /
Feedback/ Suggestions/
Grievances
Top-Down Approach
Governance
flowing from
Trustees
Downward
Providing
Independence
to the Team
Setting the
Precedence /
Examples
Defining Rules
& Regulations
Project
Monitoring
closely
Fast redressal
of Frauds,
Non-
compliances,
grievances
41

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
42

OVERALL NPO MANAGEMENT
Vision Leadership
Corporate 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
43

ORGANISATION CREATION
• Division into Departments,
• Activities definition,
• Authority delegation structure
• Reporting structures,
• Process maps, checklists / formats
Ease of functioning + clarity + standardisation
44

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
45

FUNDS MANAGEMENT
Which Funds?
• Internal
• External
46

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 NGO / NPO Audit & Management
47

EXPENDITURE MANAGEMENT
• Project Management
• Expenditure Management
• Budgeting
• Following Authorisation Structure
• Documentation
48

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
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
50

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.)
51

• Who will advise and develop such systems?
• Low Affordability of NGOs
52

MANAGEMENT – HOW?
53

TOOLS OF GOOD MANAGEMENT
• Finance Manual
• Fraud Prevention Systems
• Checklists
• Team Management Software
• Budgeting
• ………
54

FINANCE MANUAL
55

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
56

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.
57

FRAUD - PREVENTION
58

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….
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
60

CHECKLIST
61

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
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 Management
Whether Accounts are being audited? Treasurer Yearly
Whether Accounting Books are
updated?
Treasurer Weekly
Whether Budgets are prepared? Treasurer Yearly
Whether Budget Variance is reported
to Trustees?
Treasurer Monthly
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’ Management
Whether reports sent to Donors? Treasurer Donors’
Program
Leadership
Staff Turnover Rate is less than 25% Trustees Monthly
64

TEAM - MANAGEMENT
65

BUDGETING
69

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
70

Budgeting
Program Budget
Sl. Name
of
Progra
m
Specific
Objectives
of this
Program
Logic /
reasoning
for each
activity /
item
Number
of
direct
beneficia
ries
Village /
location
where the
activity will
occur
Duratio
n
of
activity
Budget
Line
Item
Narrati
on
Budget
Line
Item
Calculati
on
Amount
(Rs.)
1 NFE
School
s
To run 12
NFE centres
for children
from tribal
groups. To
give basic
literacy,
general
knowledge
to
children
For teaching
the
children. Each
teacher will
work
for six hours.
One
teacher for
each
school. Senior
teachers are
paid
more.
150 girls;
170 boys
1. Jasidih
2. Haldia
3. Parsidhhia
4. Jajori
5. Terahawi
6. Koldiha
7. Jalalpur
8. Khapatia
12
months
Salary
to 8
Senior
teacher
s
Rs.1000 x
8
teachers
x 12
mths.
96,000
2 NFE
School
s
As above As above 60 girls;
80 boys
1. Chakrata
2. Khekda
3. Jewar
12
months
Salary
to 4
new
Rs.850 x
4
tchrs. x
40,800
71

Budgeting
Accounting Budget
Ref Account Head Progra
m
Duration Calculation Amount
(Rs.)
1 Salary to Senior Teachers NFE 12 months Rs.1000 x 8 teachers 96,000
2 Salary to new teachers NFE 12 months Rs.850 x 4 teachers 40,800
6 Stipend to vaids Health 12 months Rs.1000 x 8 vaids 96,000
8 Salary to C.H.Ws Health 12 months Rs.500 x 3 workers 18,000
9 Salary to Project Manager Admin. 12 months Rs.3,000 36,000
10 Salary to Accountant (shared) Admin. 12 months Rs.1,000 12,000
Salary Sub Total 298,800
3 Teaching resource material NFE Over the
year
Rs.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
72

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
74

76

THANK YOU
SANDEEP GARG, FCA, ICWA
S S A R & ASSOCIATES
Ph: (011) 65960912-13, 9810020508
sandeepgarg@ssarca.com
www.ssarca.com
NGO / NPO Management
77

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

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