D.4 Financial Management

The Code of Conduct places significant emphasis on financial management and reporting.  The need for irreproachable management and application of donated funds and transparent, easily comparable financial reporting are central to the credibility of aid and development organisations.

The Principles and Obligations that relate to financial matters are therefore more prescriptive than for many other parts of the Code.

Section D.4 of the Code of Conduct includes three sets of Standards with respective Principles and Obligations. Standards D.4.1D.4.3 cover internal financial controls, audit requirements and the effective use of resources.

The financial Standards outlined in Section D.4 are closely related to other aspects of the Code, namely: 

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D.4.1 Internal financial controls

Principle

Signatory organisations will maintain internal financial control procedures that minimise the risk of misuse of funds.

Obligations

  1. Signatory organisations will maintain detailed accounting records.
  2. Signatory organisations will have policies and procedures in place to ensure appropriate segregation of duties, taking into consideration size and capacity of the organisation.
  3. Signatory organisations will have adequate procedures for the review and monitoring of income and expenditure by management and the governing body.
  4. Signatory organisations will have a governing body approved policy for internal loans and transactions to staff and governing body members. This policy will include disclosure and reporting about such loans and transactions.
  5. The nature of the relationship and the amount of any loans or payments to the members of the governing body or related parties must be fully disclosed in the annual financial report and subject to audit.
  6. Signatory organisations will ensure that funds and resources entrusted to them are controlled and properly invested and managed prior to their disbursement to any third party.

Why

Your organisation is accountable for your programs and finances to all of your stakeholders including members, contributors, government donors and others. Sound internal controls must be developed and implemented. This will also lead to the more efficient and effective management of your resources and operations.

Values

This standard reflects the Code of Conduct’s commitment to:

  • Accountability to all stakeholders
  • Honesty and transparency in all dealings.

Practical Guidance

  • Internal financial controls are systems of policies and procedures that safeguard assets, ensure accurate and reliable financial reporting, promote compliance with laws and regulations, and achieve effective and efficient operations.
  • These systems relate not only to accounting and reporting but also to internal and external communication processes, staff management and error handling.
  • Implement systems that are appropriate to the size and capacity of your organisation. A large organisation may have dedicated financial staff, monthly management reports, internal websites, an audit committee and internal audit functions. A smaller organisation may have one staff member or volunteer accountable for finances, an honorary treasurer, and quarterly meetings of a committee or the Board to oversee the processes. Providing the arrangements are demonstrably appropriate to the risk, they would be compliant with this Code.
  • Undertake a risk analysis of internal systems to identify areas of your organisation that need to be monitored and protected. Determine where possible risks to these areas exist, and implement controls to manage these risks.
  • Create and document a policy and procedures manual that may cover the following:
    • Handling receipts and expenditure of funds
    • Budgeting and forecasting of activities
    • Preparing appropriate and timely financial reporting to board members and senior management
    • Conducting the annual external audit of your financial statements and Annual Report
    • Evaluating your organisation’s performance
    • Evaluating staff and programs
    • Maintaining inventory records of property (including fixed assets and stock)
    • Implementing personnel and conflict of interest policies. 

Accounting Systems

  • All signatory organisations must have accounting records and systems that are capable of reliably producing the required reporting, and supporting the controls and other requirements of this Code. Within this requirement, develop accounting records and systems that suit your operational, legal and structural requirements, and are adequate to the scale, capacities, and risks of the organisation.
  • A large, sophisticated signatory organisation would be expected to use accounting software in its financial management, and have documented policies, controls and systems.
  • A small signatory organisation may keep largely manual or spreadsheet-based accounts and rely, in part, on honorary officials in its financial management.

Managing funds

  • Put appropriate controls, policies and procedures in place to ensure funds are managed and invested well and to protect the value of funds or resources that have been donated or provided to your organisation.
  • In some states of Australia, charitable collections legislation requires that funds that are not immediately applied to the purpose or object of an appeal must be held or invested in the manner of a trust fund. This has the effect of requiring those responsible for holding or investing the funds (fro example the directors of the signatory organisation company) to act as if they were trustees of such funds.
  • There are some requirements for signatory organisations that operate a gift fund that is endorsed by the Australian Taxation Office. The requirements for Overseas Aid Gift Deductibility are outlined in Tax Ruling 95/2, available on the Australian Taxation Office’s website. 

Related Party Transactions

  • Avoid internal loans or other financial transactions with related parties in general as they are difficult to justify to external stakeholders and invite criticism and suspicion.
  • A ‘related party’ may include your governing body members and staff, and their immediate families, and companies that they control. A ‘related party transaction’ is therefore a transaction with someone who has a close, and possibly privileged, relationship with the signatory organisation. For a more precise definition of related parties, refer to Australian Accounting Standard AASB 124 Related Party Disclosures.
  • Where there may be justifications to permit these transactions, there must be clear policies allowing them, and processes to record them. Full disclosure of these transactions should be provided in the Annual Report.
  • All signatory organisations are expected to reach the same standard of implementation, irrespective of their size.

Resources

Cross-references to other standards

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D.4.2 Auditing of financial statements

Principle

Signatory organisations will demonstrate their commitment to transparency and integrity of their financial reporting by having their financial reports independently audited by a qualified accountant.

Obligations

  1. Signatory organisations’ full financial reports and Code of Conduct Summary Financial Reports will be independently audited and in accordance with the relevant Australian Auditing Standards.
  2. The auditor will be at a minimum a qualified accountant who is a member of the CPA Australia, Chartered Accountants Australia and New Zealand or the National Institute of Accountants, or be a registered company auditor.
  3. An audit report that specifically relates to the Code of Conduct Summary Financial Report will be included in the Annual Report and must be signed by the auditor and include their identity, qualifications and contact details.
  4. An audit report that specifically relates to the full financial report must accompany the full financial report and must be signed by the auditor and include their identity, qualifications and contact details.

Why

A range of State and Commonwealth government regulators are involved in mandating the financial reporting and associated audit requirements for not-for-profit entities. The extent and form of financial reporting and related audit requirements vary depending on the size and type of entity.

Whether required by law or not, an independent external audit provides assurance to your organisation’s governing body, membership, donors and stakeholders that your annual financial statements provide a true and fair view of your finances.

While many small signatory organisations are not required by law to obtain independent external audits, they are considered so important to the sector’s credibility that no exemptions are permitted under the ACFID Code, even though this can be more onerous than the law requires.

Values

This standard reflects the Code of Conduct’s commitment to:

  • Accountability to all stakeholders
  • Honesty and transparency in all dealings.

Practical guidance

Here are some practical suggestions to ensure your organisation’s commitment to transparency and integrity and having independently audited financial statements:

  • The Code requires all signatory organisations’ accounts to be independently audited by a qualified auditor
  • For companies, a registered company auditor must undertake the audit
  • For incorporated associations, the audit must be undertaken by at least a qualified accountant who is a member of CPA Australia (CPA);Chartered Accountants Australia and New Zealand (CAANZ); or the National Institute of Accountants (NIA) and holds a public practice certificate
  • For trusts, the auditor guidelines are based on the trustee’s entity type and are as above
  • For other entity types, the auditor requirements will be decided on a case-by-case basis as considered appropriate by the Code of Conduct Committee but will not exceed the above requirements
  • The auditor must be independent and have no conflicts of interest i.e. they must not be a member of the governing body, staff or volunteer otherwise engaged by your organisation. (Refer to APES 110: Code of Ethics for Professional Accountants and the relevant provisions of the Corporations Act 2001).
  • For both the ACFID Code compliant and Full Statutory Financial Report (if separate), the auditor must be identified clearly enough to be contacted. This would generally include the names of the individual auditor and auditing firm and an address, telephone number, email address and website.
  • A full listing of ACFID Code compliant financial statements should be included in the audit report that accompanies the Annual Report when that report includes ACFID Code compliant Financial Statements. For example, if a ‘Table of Cash Movements for Designated Purposes’ is included in the Annual Report, then the audit report must make reference to this.
  • The audit report must also make reference to compliance with the ACFID Code of Conduct.
  • An independent audit report of the ACFID Code compliant financial statements must be included with the financial statements. 

Resources

Cross-references to other standards

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D.4.3 Effective use of resources

Principle

Signatory organisations will strive to be effective in their use of resources and will minimise financial wastage in the planning and implementation of development and aid activities.

Obligations

  1. Signatory organisations will ensure that their aid and development activities are structured to enable measurement of costs.
  2. Signatory organisations will be diligent in reviewing the costs of their engagement, seeking cost savings and efficiencies where appropriate to the context and nature of their aid and development activity

Why

The effective use of resources is fundamental to external credibility, and central to demonstrating the effectiveness of delivering international aid and development through NGOs.

Signatory organisations must strive to accurately understand the costs and benefits of their aid and development activities. This allows the best choices to be made, as well as meaningful evaluation and learning. This can be referred to as ‘value for money’.

This Standard is not about profit or financial gain. It is about the effective use of resources in a way that is consistent with your organisation’s values and long-term development objectives

Values

This standard reflects the Code of Conduct’s commitment to accountability to all stakeholders.

Practical guidance

Here are some practical suggestions for your organisation to strengthen its approach to the effective use of resources:

  • Consider the most effective use of resources in all organisational practices including planning, operations, evaluation, finances and program management
  • Define what an effective use of resources means for your organisation and context

Financial management

  • Document financial policies and procedures
  • Develop budgets appropriate to your organisation’s activities
  • Undertake regular financial reporting against budgets including budget variance analysis
  • Undertake regular financial reconciliations and corrective action to resolve differences and to ensure the accuracy and completeness of transactions
  • Regularly review financial information against budgets, forecasts, prior periods or other benchmarks
  • Implement systems that allow accurate cost analyses of your activities
  • Segregate financial management duties among different people to reduce the risk of error or inappropriate action
  • Create and document a procurement policy
  • Provide training and build the financial management capacity of staff
  • Undertake periodic internal audits that focus on efficiency.

Organisational management

  • Regularly review finances by the governing body and management
  • Undertake organisational and program level risk assessments
  • Benchmark administration and remuneration costs against other organisations in the sector
  • Undertake staff performance reviews
  • Develop, document and implement policies on:
    • Whistle-blowing
    • Fraud prevention
    • Travel and accommodation
    • Remuneration
    • Conflict of interest
    • Value for money

Cost consciousness

Cost consciousness is a term that relates to an awareness of costs and how they can be contained or reduced. Examples of practices that demonstrate cost consciousness include:

  • Using pro bono corporate services
  • Travel policies that encourage fare comparisons and early bookings
  • Accommodation policies that specify reasonable rates
  • Employing local consultants and staff wherever appropriate
  • Minimising travel costs by using telephone and web conferencing where appropriate 

Resources

Cross-references to other standards

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