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

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NGOs are key partners with any Government in carrying Social Welfare in any Society. Effective Audit & Efficient Management are extremely important in building transparency. Chartered Accountants play an important role.

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

  1. 1. NGO / NPO AUDIT & MANAGEMENT Presentation by: CA Sandeep Garg sandeepgarg@ssarca.com www.revitalisedprocesses.com Program by: NIRC of ICAI September 26, 2015 1
  2. 2. 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
  3. 3. 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. NGO / NPO Audit & Management 3
  4. 4. How many of us here are associated with NGO Sector? • Running an NGO; • Providing Services to NGOs. What are your Experiences? NGO / NPO Audit & Management 4
  5. 5. I N D I A (OUR MINI WORLD) 5
  6. 6. 6
  7. 7. 7
  8. 8. 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? NGO / NPO Audit & Management 8
  9. 9. 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.. NGO / NPO Audit & Management 9
  10. 10. Despite so much funding, why the Problems around us are Sustaining ? NGO / NPO Audit & Management 10
  11. 11. How to Resolve these Issues? NGO / NPO Audit & Management 11
  12. 12. What stops us to place the Solutions / Suggestions in Place? NGO / NPO Audit & Management 12
  13. 13. MOTIVE OF WORKING WITH AN NGO 13
  14. 14. COMMERCIAL VS. NPO 14
  15. 15. • 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. NGO / NPO Audit & Management 15
  16. 16. FUNDS APPEAL NGO / NPO Audit & Management 16
  17. 17. Source: http://www.bain.com/publications/articles/india-philanthropy-report-2015.aspx 17
  18. 18. 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. NGO / NPO Audit & Management 18
  19. 19. 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 NGO / NPO Audit & Management 19
  20. 20. 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 NGO / NPO Audit & Management 20
  21. 21. Audit Management 21
  22. 22. AUDIT NGO / NPO Audit & Management 22
  23. 23. 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 NGO / NPO Audit & Management 23
  24. 24. 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. NGO / NPO Audit & Management 24
  25. 25. 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 NGO / NPO Audit & Management 25
  26. 26. 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 NGO / NPO Audit & Management 26
  27. 27. 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 NGO / NPO Audit & Management 27
  28. 28. 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) NGO / NPO Audit & Management 28
  29. 29. 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. NGO / NPO Audit & Management 29
  30. 30. 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. NGO / NPO Audit & Management 30
  31. 31. 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)} NGO / NPO Audit & Management 31
  32. 32. 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). NGO / NPO Audit & Management 32
  33. 33. 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 33
  34. 34. 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 NGO / NPO Audit & Management Non-Corporate 34
  35. 35. NGO / NPO Audit & Management 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
  36. 36. NGO / NPO Audit & Management Corporate Non-Corporate 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
  37. 37. NGO / NPO Audit & Management 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 √ √ √ √ √ 37
  38. 38. Queries about AS NGO / NPO Audit & Management 38
  39. 39. MANAGEMENT NGO / NPO Audit & Management 39
  40. 40. NGO / NPO Audit & Management Overall NPO Management Organisation creation People Management Funds Management NPO Management at a Glance Expenditure Management Beneficiary Management Reporting Management Compliance Management 40
  41. 41. 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 NGO / NPO Audit & Management 41
  42. 42. 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 NGO / NPO Audit & Management 42
  43. 43. 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 NGO / NPO Audit & Management 43
  44. 44. ORGANISATION CREATION • Division into Departments, • Activities definition, • Authority delegation structure • Reporting structures, • Process maps, checklists / formats Ease of functioning + clarity + standardisation NGO / NPO Audit & Management 44
  45. 45. 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
  46. 46. FUNDS MANAGEMENT Which Funds? • Internal • External NGO / NPO Audit & Management 46
  47. 47. 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
  48. 48. EXPENDITURE MANAGEMENT • Project Management • Expenditure Management • Budgeting • Following Authorisation Structure • Documentation NGO / NPO Audit & Management 48
  49. 49. 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
  50. 50. 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 NGO / NPO Audit & Management 50
  51. 51. 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
  52. 52. • Who will advise and develop such systems? • Low Affordability of NGOs NGO / NPO Audit & Management 52
  53. 53. MANAGEMENT – HOW? NGO / NPO Audit & Management 53
  54. 54. TOOLS OF GOOD MANAGEMENT • Finance Manual • Fraud Prevention Systems • Checklists • Team Management Software • Budgeting • ……… NGO / NPO Audit & Management 54
  55. 55. FINANCE MANUAL NGO / NPO Audit & Management 55
  56. 56. 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 NGO / NPO Audit & Management 56
  57. 57. 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. NGO / NPO Audit & Management 57
  58. 58. FRAUD - PREVENTION NGO / NPO Audit & Management 58
  59. 59. 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
  60. 60. 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 NGO / NPO Audit & Management 60
  61. 61. CHECKLIST NGO / NPO Audit & Management 61
  62. 62. 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
  63. 63. 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 NGO / NPO Audit & Management 63
  64. 64. 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 NGO / NPO Audit & Management 64
  65. 65. TEAM - MANAGEMENT NGO / NPO Audit & Management 65
  66. 66. 66
  67. 67. 67
  68. 68. 68
  69. 69. BUDGETING NGO / NPO Audit & Management 69
  70. 70. 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 NGO / NPO Audit & Management 70
  71. 71. 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
  72. 72. 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
  73. 73. 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
  74. 74. “You must be the change you wish to see in the world . . .” Mahatma Gandhi 74
  75. 75. NGO / NPO Management 75
  76. 76. www.revitalisedprocesses.com 76
  77. 77. THANK YOU SANDEEP GARG, FCA, ICWA S S A R & ASSOCIATES Ph: (011) 65960912-13, 9810020508 sandeepgarg@ssarca.com www.ssarca.com www.revitalisedprocesses.com NGO / NPO Management 77

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