Contribution Funds for Non-governmental Organizations - a Handbook

2.0 Financial management requirements

2.1 Accounting System

NGOs that receive funding from the Department of Justice Canada must have a complete and reliable accounting system in order to keep track of all transactions related to the contribution agreement. The accounting system should be computerized, and should meet the standards used in Canada: that is, a double-entry system, with balance sheet and income statements. Some commonly used accounting packages are ACCPAC, Oracle, and Simply Accounting.

All financial accounts related to a project should be identified by a specific code (e.g. responsibility centre), and each account within a category should be given a unique identification number. Specific coding for each responsibility centre segregates the transactions related to the project from all other transactions, which allows the information to be regrouped in project-specific reports.

The accounting system should be able to generate trial balances and standard financial statements at any point in the year. It should also be able to generate specific reports on revenues and expenses and other reports related to the project – or at least it should be able to easily generate all the information needed to complete those reports. The system should also allow for printouts of financial information related to previous periods.

Access to the accounting system should be limited to authorized personnel and controlled with passwords, user names, and possibly other access-control devices, such as an automatic locking mechanism for when a computer remains unused for a period of time. The person responsible for making the entries in the system should not be the same person who is responsible for approving and coding the expenses.

2.2 Internal Control Practices

Good internal control starts with precise definitions of the roles and responsibilities of each person involved in the expense approval process and in the payment process, in relation to the project. Each employee should know his or her role and authority in relation to the treatment of the financial information. All delegations of authority (permanent or temporary) should be documented.

For sound internal control, it is important that there be a segregation of duties between individuals involved in a given process. This avoids the risk of someone controlling the process from beginning to end.

Usually, the following tasks should not be done by the same individual:

  • approving expenses
  • issuing cheques for payment
  • recording transactions in the accounting system

Small NGOs with limited staff should implement a double-checking procedure. This ensures that each step is properly done and that no errors occur in the process.

A specific bank account should be opened for the project. Transfers between bank accounts should be strictly limited and always documented (including the reason for the transfer and who requested it). Advances to this account from the organization’s other bank accounts should be made only when necessary and reimbursed as soon as possible. A bank reconciliation of the project bank account with the corresponding general ledger (GL) account should be completed on a monthly basis. This reconciliation will provide the auditor with valuable information about the total number of transactions and also make it easier to select transactions for testing if there should be an audit.

There are several measures an NGO can take to assure good control over the expenses. All invoices should bear the date of receipt and be reviewed and approved formally for payment. Calculations on the invoices should be verified, and the coding of the expense should be put on the invoice or the supporting documentation, as well as the date the information was entered in the accounting system. The most common way of making sure this information is included on every invoice is by using a stamp on which this information is entered and dated, and which the rightful authority can approve afterwards.

Each employee should keep time sheets, to be reviewed and approved by the supervisor, along with any sick leave and overtime claims. It is imperative that time sheets capture the number of hours dedicated to the project versus time spent on other unrelated activities.

Travel expense claims should be backed up by a travel authorization issued before the trip is made. Thereafter, a travel claim form must be completed (see Appendix D for a sample form).

Standard procurement procedures include research and documentation of the best value for price; completion and approval of purchase orders (P.O.); inspection of the goods received against the P.O. (e.g. quality and quantity); keeping of the delivery bill with the P.O.; proper identification of the goods and entry in the inventory list (when applicable, e.g. as assets); and recording of the purchase in the accounting system.

The basic control over payments calls for two signatures on each cheque, preferably by persons not related hierarchically. Whenever possible, a third signatory should be identified to replace one of the two regular ones in case of leave, vacation or travel. All payments should be made by cheque or bank transfers. Cash payments should be exceptional and limited to small amounts for unexpected transactions that require immediate payment (see section on petty cash, below). The signatories should be clearly aware of their responsibilities before they are granted that authority, and a sample of each signature should be kept on file.

Other good internal control practices include safekeeping of all assets such as supplies, equipment, furniture, and, of course, cash. This would include proper identification of all items in inventory and controlled access to computers, supplies, and equipment that is not in use. Credit card management can also be an internal control issue.

Petty cash management is another aspect of internal control that should always be considered, even though the amounts involved are often small, since the level of risk associated with cash transactions is usually high. Petty cash should be sufficient to cover the emergency cash payments required for about a month of operations. Usually, $100 or $200 is sufficient, since cash payments should be exceptional. Petty cash should be managed to last the duration of a month, and each payment should not exceed a predetermined maximum.

One person should be designated keeper of the petty cash and given clearly stated responsibilities for making payments. Access to the petty cash box should be strictly limited to that person. The people receiving the cash should fill out and sign pre-numbered cash requisitions, and these should be kept in the petty cash box. It is good practice for a supervisor to verify frequently that the petty cash box actually contains the exact amount of cash that is supposed to be there.

Once a month, or whenever the petty cash box is almost empty, the petty cash can be replenished by writing a cheque to bring it back up to its original level. All the pre-numbered cash requisitions, together with the supporting documents provided by the recipient, are then listed and accounted for through a journal entry, and approved by the petty cash keeper’s supervisor.

2.3 Documentation Requirements

Documents related to transactions represent the financial history of an organization. In the event of an audit, the auditor will examine the documents that support the expenses claimed. It is therefore crucial that all supporting documents be kept on file at the recipient’s address and be easily accessible. The Department of Justice Canada’s agreements include a clause stating how long the project documentation should be kept by the recipient.

The documents kept on file must always be the originals. In the event of an audit, photocopies will not be considered valid supporting documents. If printouts from a computer or faxed documents are kept as sole supporting documents, they should bear the original signature of an authorized representative of the supplier.

The basic rule is that the recipient should keep on file any document that can provide information supporting a transaction, the relevance of the cost to the project, the amount, the date the expense was incurred, and all authorizations related to the expense. Expenses entered in the system on the basis of journal entries should refer to working papers that identify the calculations that resulted in those amounts, and each expense listed in the working papers should be traceable to the original invoices and supporting documents.

Also, any correspondence related to approvals by the Department of Justice Canada of costs not specifically covered by the agreement or of any variance from a clause of the agreement should be kept on file. This would include all the Department’s approvals of budget increases higher than the level permitted by the agreement for any given category of expense.

2.4 Initial Site Visits

Whenever the amount of the contribution agreement justifies it, or whenever the Department of Justice Canada thinks it would be useful, a Department program analyst and/or financial analyst could make an initial site visit to the recipient. In some instances, the initial site visit might include an auditor. Initial site visits are mostly recommended for recipients who are entering into a contribution agreement with the Department for the first time and those who have never been audited by the Department before.

The main objectives of an initial site visit are to assess the recipient’s capacity to comply with all of the financial and reporting requirements of the agreement and to assess the quality of the internal controls within the organization.

At this time, specific financial clauses of the contribution agreement could be discussed to ensure a better understanding of the terms and conditions. Such a visit can also help an organization to improve its financial controls and accounting practices and to prepare for a potential audit at a later date.

This procedure may be done shortly after the signing of the agreement or after the first interim financial report has been received. It consists mainly of an interview with the recipient and project staff to discuss policies and procedures related to internal control, and an examination of the audit trail, filing system, and documentation kept on file to support transactions.

The initial site visit can also be an opportunity to assess the quality and the reliability of the recipient’s accounting system and its capacity to record and track the project financial information and to generate the financial reports required by the agreement.

Any other topic related to the contribution agreement could also be discussed during the visit. In some cases, recommendations may be made following the visit to improve certain aspects of the recipient’s management environment or of its financial or control procedures.

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