financial reporting

Financial Reporting & Corporate Governance in Not-For-Profit Organisations

Introduction

Charities and other not-for-profit organisations play a vital role in our society and yet there is littleinformation available specific to the sector. The management of these organisations have limitedcomparative information against which to benchmark their own organisation's governingstructures or the adequacy of their financial reporting procedures.

We at PricewaterhouseCoopers, believe that this report, aimed specifically at the not-for-profitsector, provides comprehensive comparative benchmarks for not-for-profit organisations operatingin Ireland on issues such as:

• The board of directors/trustees - do the boards of Irish not-for-profit organisations operate

within best practice guidelines relating to structure, constitution, composition, monitoringand appointments?

• Accountability and risk - how do not-for-profit organisations ensure that all major risks are

identified and the systems in place to mitigate those risks?

• Financial reporting and disclosure - does the information provided by not-for-profit

organisations in their annual report or financial statements meet the level of disclosurerecommended under Statement of Recommended Practice 2 and other laws and regulations?

• Internal control - are the control procedures adequate to allow the boards of

directors/trustees of these organisations to meet their monitoring and control responsibilities.

In order to compile the information for the report we asked a significant sample of charities andother not-for-profit organisations to complete a comprehensive questionnaire. As a result webelieve that this report and its results will be a useful reference source for the board of directorsof almost every charity and not-for-profit organisation in Ireland.

We would like to acknowledge and thank the organisations that participated in our study for thetime and assistance that they provided us with. We hope that you find this report interesting andinformative.

I, or any of my colleagues in PricewaterhouseCoopers, would be pleased to discuss with you anymatters that arise from this report. The relevant contact details for each of our offices are set outin Section 5 of this publication.

Teresa HarringtonNot-for-Profit PracticePricewaterhouseCoopers


Section Page

1. The Board of Directors 1Board StructureBoard SizeBoard MeetingsBoard MembershipNew Member OrientationTerm of OfficeManagement Information

2. Accountability & Risk Assessment 13Internal Control, Compliance & Risk ManagementRisk AssessmentControl Environment and Control ActivitiesMonitoring and CommunicationAudit Committees and Internal AuditBoard Responsibilities

3. Internal Control 21Supplier InvoicesSupplier StatementsCheque PaymentsCash & Cheque ReceiptsPublic CollectionsFund-Raising EventsInvestmentsBank Reconciliation StatementsBoard Responsibility

4. Financial Reporting 33Financial Statement DisclosureThe Directors/Trustees' ReportInternal Control DisclosuresBoard Responsibility

5. Not-For-Profit Sector Contacts in PricewaterhouseCoopers 41

6. PricewaterhouseCoopers' Not-For-Profit Practice in Ireland 45


1. The Board of Directors

1. The Board of Directors

New media technology and a wider stakeholder community mean that corporate governancearrangements of companies and other organisations are coming under greater scrutiny. Theserequirements for greater transparency and increased accountability extend beyond public andprivate companies to all not-for-profit organisations operating in Ireland.

Every not-for-profit organisation should be headed by an effective board that leads and controlsits activities. There is, however, no "one size fits all" structure that can be applied to everyorganisation. Each board must be structured according to an individual organisation'scircumstances. That said, there are best practices that all not-for-profit organisations should atleast consider, regardless of the sector they are operating in or the services that they provide. Inthis section of our report we set out some of these best practices. Where appropriate, we haveillustrated existing Irish not-for-profit board practices by reference to the responses received fromour recent survey.

1.1 Board StructureThe structures adopted by not-for-profit organisations' boards of directors vary widely dependingon the nature of the organisation's activities. Generally, the board types may be summarised intotwo main categories:

Two-tier Boards: In this model the supervisory and management functions are separated. Thesupervisory or upper-tier board is typically concerned with overseeing the strategic managementof the organisation and consists wholly of independent members. The lower-tier management board is made up of executive directors who deal with the day-to-day management functions.

One-tier: Here, executive and independent directors are brought together in a single unit whichassumes all directors are equal and share collective responsibility for decisions - both strategicand operational.


Regardless of structure the board should operate within a corporate governance framework whichensures:• The board remains accountable to the organisation and its stakeholders;

• The organisation's management is monitored effectively by the board; and

• Board members are committed to achieving the agreed strategic aims.

It is important that not-for-profit organisations appoint board members and senior executives withthe necessary personal competencies and abilities to work together. A successful governanceframework must involve a partnership between the board and senior management - with theboard providing oversight and guidance, while management take responsibility for day-to-dayoperations. Best practice for board appointments is set out in more detail below.

Well-run boards are all about working together and reaching a degree of consensus - they are notabout the dominance of one individual or special interest group and the stifling of healthydebate. An effective board will include adequate representation of independent directors, whoare able to bring an objective view to board deliberations.

The board of directors or equivalent body within any not-for-profit organisation, or any sub-committees thereof, should have documented terms of reference. Such a charter provides a clearunderstanding of the board or sub-committee's role and sets out a framework within which theboard is required to operate. Typically, the terms of reference should include:

• Overall purpose and objectives of the board or sub-committee;

• Details of board/committee membership;

• The frequency and timing of meetings;

• The roles and responsibilities, including qualifications and terms of office, of the various

members; and

• The relationship with management and stakeholders.

Figure 1.1 shows that 75% of not-for-profit organisations participating in our survey haveformal terms of reference in place for the board and any sub-committees thereof.

Are there formal terms of reference in place for the board and sub-committees thereof?

Figure 1.1 - % Of Irish not-for-profit organisations with formal terms of reference for the board and its sub-committees


Yes 75%

No 25%

1.2 Board SizeIt is of course more important to have the right quality and experience of director on the boardthan sheer number of individuals. Figure 1.2 indicates the trends we noted regarding the averagesize of not-for-profit organisation boards during our survey:

Board Size

Figure 1.2 - Size trends for Irish not-for-profit boards of directors

There is a growing recognition of the role independent directors can play in providing a bridgebetween the management and stakeholders of not-for-profit organisations, notably in the areas ofexternal communications, financial reporting and internal controls. As you can see from Figure1.3, 95% of organisations surveyed have a majority of independent directors on their board.

% of Not-For-Profit Organisations Where Majority of Board of Directors are Independent or Non-Executive Directors

Figure 1.3 - % of Not-For-Profit organisations using independent or non-executive directors

1.3 Board MeetingsThere are no firm rules for how, where and when board meetings need to be conducted, beyondany company law requirements that may apply to certain not-for-profit bodies. However, thereare a number of characteristics that are likely to contribute to successful board meetings.

The most important factor as far as board meetings are concerned is to maintain an open andinclusive atmosphere, in which members feel free to speak their minds. It is important thatmembers understand their specific roles and responsibilities within the overall board structure.Much of the responsibility for this falls on the chairperson. He or she should direct the meetingin a way that stimulates open debate on each of the issues, ensuring that meetings neither getdistracted by convoluted arguments, nor leap to hasty conclusions without due consideration.Best practice indicates that the Chairperson and the Chief Executive Officer should be separateand in 80% of organisations surveyed this was the case.


16-2010%

20+5%

1-510%

6-1035%11-15

40%

Board Majority areIndependent/Non-ExecutiveMembers 95%

Board Majority areExecutive Members 5%

A board that fails to hold regular meetings runs the risk of being unable to fulfil its responsibilitiesto the organisation and its various stakeholders. Moreover, directors who do not meet on aregular basis could be leaving themselves open to legal or other action from employees,stakeholders or regulatory bodies for failing to discharge their duties.

The frequency of meetings will depend on the company's specific situation, and on internal andexternal events and circumstances. As a general rule, full board meetings should be held no lessthan quarterly, and quite possibly monthly. Sub-committees of the board tend to meet lessfrequently, perhaps three to four times a year, but again this will vary with circumstances and thespecific functions of the sub-committee.

Figure 1.4 shows the frequency with which Irish not-for-profit organisations meet.

How often does the board meet?

Figure 1.4 - Frequency of board meetings

1.4 Board MembershipThe appointment of suitably qualified members to the governing body of a not-for-profit, orindeed any, organisation is a critical factor in that body and the organisation's performance.

Best practice suggests that a nomination committee be established for identifying and screeningnew board members and senior executive officers. Only 40% of participant organisations in oursurvey have indicated the use of a nomination committee in making recommendations to theboard on all new appointments - see Figure 1.5.


35%Quarterly

Semi - Annual

Not-Specified

5%10%

50%

Monthly

Is there a nomination committee to make recommendations to the board on new appointments of directors or executives?

Figure 1.5 - Use of nomination committees when appointing directors or senior executive officers

It is important when making new appointments to director or senior executive officer roles thatthere are clear and transparent procedures in place. Figure 1.6 indicates that 75% of our surveyparticipants have formal procedures in place for the appointment of new directors orexecutives.

Formal and transparent procedures exist for appointment of new directors or executives

Figure 1.6 - Use of formal and transparent procedures for the appointment of new directors or executives.

All board members should have the ability to read and understand basic financial statementsincluding the organisation's balance sheet, income and expenditure statement and cash flowsummary. It is also beneficial for one or more of the independent directors to have accounting orfinancial management expertise. This could have arisen through past employment in finance oraccounting, a professional qualification in accounting, or any other comparable experience. Thisskill set is useful to the board when it comes to discharging its financial oversight and internalcontrol responsibilities.

To fulfil their responsibilities board members need to dedicate a significant amount of time andenergy to board activities. This will include familiarisation with the organisation's activities andsector; preparation for, and attendance at, meetings; and informal meetings with interested partiesand other groups. The number of other directorships held by board members may affect theamount of time they are able to devote to the organisation's activities. When evaluating potentialcandidates the board should therefore consider the number of other directorships held bycandidates and factor this already committed time into their decision-making.


No 25%

Yes 75%

No 50%

Not specified 10%

Yes 40%

It will not be possible for every board member to have the full technical knowledge required forevery decision and therefore it is important that procedures exist for board members to takeindependent professional advice as required to discharge their duties.

65% of survey participants confirmed that procedures exist within their not-for-profitorganisation for the directors, or members of the board of management, to take independentprofessional advice required to assist them in the discharge their board responsibilities. Theremaining 35% represents a sizable minority. These organisations may be leaving theirdirectors and the organisation itself exposed to personal or corporate liability where thedirectors pursue a strategy without the necessary professional advice having been sought andincluded in their discussions.

1.5 New Member OrientationBoard members should be provided with sufficient background information and training. Theeducation process should begin as soon as the candidate is appointed to the board. Newmembers should meet with the financial and operations managers to ensure that they have anappropriate understanding of the organisation, its services, areas of risk and its internal controlsand financial reporting systems. New board members need to understand the requirements andobjectives of the board and so should review the board's terms of reference, minutes of priormeetings and any recent reports prepared for the board.

84% of the directors of not-for-profit organisations participating in our survey do not receiveappropriate training on the first occasion of being appointed a director - see Figure 1.7. Whilethe exposure that this can create is mitigated in cases where the candidate is an existing directorof another organisation it is nonetheless best practice and our recommendation that all newboard members receive appropriate orientation and training on appointment.

Do directors receive appropriate training on the first occassion of being appointed director?

Figure 1.7 - Provision of new member training

Term of OfficeThe number of years that members serve on a board varies. Best practice would suggest acommon term is 1-3 years, with possible reappointment for a second term, but longer or openterms are also possible. In our survey we found that almost one-fifth of the participants had nofixed term in place for members of the board of directors.


No 84%

Yes 16%

When determining the length of time board members may serve two opposing considerationsshould be weighted against one another - continuity and freshness. Rapid turnover can bedetrimental to a board's effectiveness since members need time to familiarise themselves with theorganisation's activities and understand any specific technical issues. On the other hand, newmembers bring a fresh perspective to the board. To balance these considerations, the board maywish to establish staggered terms for members.

Figure 1.8 sets out the trends noted in our survey relating to directors' terms of office. Our surveynoted that 70% of participant organisations that have specified terms of office for boardmembers comply with the suggested best practice period of 1-3 years.

What is the specified term for directors’ appointments

Figure 1.8 - Terms of office for board members

Management InformationTo govern a not-for-profit organisation effectively the board must receive timely, relevant, andreliable reports on progress against the organisations business objectives or principal objects andfinancial and other information needed for decision-making and management review purposes.

Frequency with which the board is supplied with Management Information

Figure 1.9 - Frequency of Management Information

Figure 1.9 above indicates that approximately 50% of the organisations participating in oursurvey provide their board with monthly management information and 35% update the boardquarterly. Anything less frequent than this should probably be reviewed with a view toincreasing the timeliness with which information is provided.


3+ years 15%

1 year 15%

1-3 years 70%

Annually 5%

Not Specified 10%

Monthly 50%Quaterly 35%

What type of information should be provided to the board of a not-for-profit organisation? Thetype of information provided will vary depending on the nature of the organisation's activities butmay include:

• Year-to-date income and expenditure details;

• Year-to-date cash flow details;

• Period end balance sheet;

• Year-to-date actual results compared to budgeted levels;

• Year-to-date investment performance

• Market value of the organisations investment portfolio;

• Details of significant applications for aid or support; and

• Details of progress made against committed actions or initiatives.


Figure 1.10 outlines the key management information provided by the organisations in our surveyto their board of directors.

Type of management information supplied to the board

Figure 1.10 - Management information supplied

The management information above primarily deals with updating the board on the financialperformance of the organisation and its operational activities. In addition best practice wouldsuggest that the board of a not-for-profit organisation should set targets and quantifiableobjectives for the organisation's performance against its strategic objects or achievement of itsprincipal objects.

Only 40% of our survey participants include a "principal objects" measure in their standardboard reports - see page 10.


Income & ExpenditureAccount

Cash Flow Balance Sheet Budget VsActualComparison

InvestmentPerformance

Applicationsfor Aid/Support

95%

50% 50%

70%

40%

80%

Is the board provided with details of the organisations performance against indicators specific to principal objects?

Figure 1.11 - Information relating to progress against principal objects

In addition to performance management information, directors of not-for-profit organisationsshould seek information reports on the progress of the organisation in meeting its principalobjects. While this information can be harder to measure the board can, by determiningappropriate criteria for measuring such progress and establishing relevant goals to be met, furthermotivate the organisation, and indeed the public at large, by reporting progress against theorganisation's stated principal objects. In addition details and improved trends in these areas canassist both the board and management in seeking further funds for their activities from corporatedonors and the public.

When properly structured and with a clear mandate, the board can be of great benefit to a not-for-profit organisation. By playing a proactive role board members enhance the performance ofthe organisation and strengthen its ability to achieve its principal objectives.


Yes 40%

Not specified 5%

No 55%

2. Accountability andRisk Assessment


2. Accountability and Risk Assessment

2.1 Internal Control, Compliance and Risk ManagementThe topic of "risk" and how to manage it is one that now dominates the debate about internalcontrol and strategy development in most organisations. Significant risks faced by mostorganisations include those related to liquidity, legal, health and safety, reputation, foreignexchange and financial misstatement.

The concept of risk is now much broader, and it is no longer limited to the possibility ofsomething bad happening, but covers a continuum of future outcomes ranging from the verynegative to the very positive. So it also represents an opportunity as well as a threat - andmanaging risk proactively is an important element in the success of any well-governed not-for-profit organisation.

In this section we explore the issue of accountability and risk management. We also look atsome of the questions that board members should be asking about the control environment andrisk management in their own organisations.

2.2 Risk AssessmentThe board should ensure that the organisation has a continuous process in place to identify risk,assess its potential impact, and take the action required to manage it. Historically, boards mayhave taken a passive role, which involves being informed of major risks "after the event" andchecking that the right corrective action is being taken. This approach leaves the organisationexposed to new risks as they emerge, with potentially damaging results - either in the form offinancial loss or missed opportunities.


What is needed is a systematic approach to identifying and managing risk. Management shouldexamine the risks involved in achieving key objectives - including the potential barriers tosuccess, and the factors critical to that success. This should encompass areas such as economic,competitive, political, environmental, and technological risk. In conducting such an examinationit is important that management have a clear understanding of what risks are acceptable to theboard. Figure 2.1 shows that in 85% of organisations surveyed management had a clearunderstanding of what risks were considered acceptable by the board.

Is there a clear understanding by management as to what risks are acceptable to the board?

Figure 2.1 - Understanding of acceptable risks

Based on this external examination and analysis of the risk factors facing the organisationmanagement can decide what actions are needed to manage these risks, and then identify andimplement the additional controls needed to ensure these actions are carried out.

Once the internal control and risk management systems are in place, the board should ensurethat a regular review of their effectiveness is conducted. Such a review should be performed onat least an annual basis with a report back to the board on the results.

Only 20% of the not-for-profit organisations surveyed undertake an annual review of theeffectiveness of their internal control systems - see Figure 2.2.

Does the board undertake an annual assessment for the purpose of making a public statement on internal control?

Figure 2.2 - Performance of annual internal control assessment

To be meaningful this review should cover all controls, including financial, operational andcompliance controls. To assist them in their review the board may engage the assistance of staffspecifically designated for the purpose, the internal audit function, the external auditors, or acombination of all three.

No 80%

Yes 20%

No 15%

Yes 85%


In conducting the review the board will consider how significant risks were identified, evaluatedand managed. If any major control weaknesses were identified during the period, the board willwant to consider how those were dealt with and whether any further remedial action is needed.

2.3 Control Environment and Control ActivitiesThe board of a not-for-profit organisation should have clear strategies for dealing with thesignificant risks that have been identified. For example, the organisation's code of conduct,human resource policies and performance reward systems should support the organisation'sobjectives and the risk management or internal control systems.

The board should also ensure that authority, responsibility and accountability levels are clearlydefined so that decisions are made and actions taken by appropriate members of themanagement team. Figure 2.3 below indicates that within 65% of the organisationsparticipating in our survey authority, responsibility and accountability levels are clearly defined.

Are authority, responsibility and accountability levels defined clearly?

Figure 2.3 - Authority, responsibility and accountability levels

No organisation can expect to manage risk effectively without creating a basic system of internalcontrols. Section 3 of this report discusses the issue of internal control systems and the morecommon control procedures in detail.

2.4 Monitoring and CommunicationThe board should ensure that there are on-going monitoring processes and communicationchannels established that observe the application of the risk management policies, processes andactivities. Such processes may include conducting a self-assessment of internal controls,performing internal audit reviews, or commissioning an external party to review the policies andactivities on a periodic basis.

There should also be appropriate communication to the board on the effectiveness of thesemonitoring processes on risk and control matters. This should include reporting any significantfailings or weaknesses on a timely basis.

No 35%

Yes 65%


40% of the organisations participating in our survey have specific arrangements in place formanagement reporting to the board on risk and control matters - see Figure 2.4 below.

The board of an organisation should establish specific arrangements for reporting to them on riskand control matters of particular importance such as suspected breaches of law, regulations orother improprieties.

60% of not-for-profit organisations surveyed have established channels of communication forall employees to report suspected breaches of law, regulations or other improprieties - seeFigure 2.5 below.

Are there specific arrangements for management reporting to the board on risk and control matters?

Figure 2.4 - Board reporting arrangements in place on risk and control matters

Are there established channels of communication for employees to report suspected breaches of law, regulations or other inproprieties?

Figure 2.5 - Existence of communication channels to report suspected breaches of law and regulations

2.5 Audit Committees and Internal AuditThere is a growing recognition of the importance and usefulness that audit committees can playin supporting the board of directors with their financial reporting, risk management and internalcontrol responsibilities. An audit committee will typically be assigned prime responsibility forthese matters to ease the pressure on both management and the board of directors. Auditcommittees are now widely recognised as a key force in protecting the interests of anorganisation's stakeholders and assisting in the organisation's communication process.

Despite these trends only 40% of the organisations in our survey had an audit committee inplace - see Figure 2.6.

Yes 60%No 35%

Not specified 5%

No 55%

Yes 40%

Not specified 5%

Does your organisation have an audit committee?

Figure 2.6 - Audit Committees

Recent reports in the UK have again highlighted the role independent directors and auditcommittees can play in the areas of external financial reporting and internal controls. Calls toimplement the practices set out in these reports have been made here in Ireland by the Instituteof Directors and it is likely in today's environment of increased transparency and accountabilitythat we will see an increase in the use of audit committees in public interest organisations -including the not-for-profit sector.

Another area enjoying renewed popularity at the moment is the internal audit function. Internalauditors assist the board and the audit committee in discharging their risk management andinternal control responsibilities. Some of the functions performed by an internal auditor includeobjective assessments of the organisation's risk management policies, detailed reviews of theorganisations internal control and management reporting systems; and participating in internalspecial investigations.

Does your organisation have an internal audit function?

Figure 2.7 - Use of internal audit function

70% of Irish not-for-profit organisations surveyed do not have an internal audit function and ofthose only 29% assess the need for such a function on an annual basis - see figures 2.7 and 2.8.


No 70%

Yes 30%

Yes 40%

No 50%

Not specified 10%

If no internal audit function exists does the board assess the need for such a function annually?

Figure 2.8 - Annual assessment of need for internal audit function

An internal audit function may not be cost-effective or appropriate in all organisations but it is afunction that can play a vital role in assisting the board of directors to discharge their riskmanagement and internal control responsibilities. Outsourcing is a popular option for many ofthe smaller not-for-profit organisations. This option allows the directors to meet recommendedbest practice by performing annual control effectiveness reviews but does not add significantly tothe organisation's cost base.

2.6 Board ResponsibilityLike it or not, the board is ultimately responsible for an organisation's risk management andinternal control systems. Once these policies have been established and communicated tomanagement, staff and stakeholders alike the board is required to monitor and assess them on aregular basis.

Members of the board should ensure that management and other officials are aware of theirresponsibilities and that they receive adequate information about the organisation's compliancewith the risk management policies on a regular and timely basis.

Finally, the board should review the adequacy of internal controls on a periodic basis to ensurethat they remain effective and to check that the risks which the controls were intended to mitigatehave not changed in the intervening period.


No 71%

Yes 29%

3. Internal Control


3. Internal Control

We saw in Section 2 of this report that the board of directors and the management of not-for-profit organisations are responsible for identifying and evaluating the risks faced by theorganisation. The board and management of an organisation are also responsible for designing,operating and monitoring a basic system of internal controls that safeguards the assets of theorganisation.

An internal control system should enable the organisation to respond appropriately to business,financial and compliance risks; safeguard the assets from inappropriate use and loss from fraud orerror; help ensure the quality of internal and external reporting, through the proper maintenanceof records and information flows; and facilitate compliance with applicable laws, regulations andinternal policies.

In this section we outline examples of best practice internal control techniques that should beused by not-for-profit organisations. We also share with you the extent to which these commoncontrol procedures have already been adopted and are in use in the Irish not-for-profit sector.

3.1 Supplier InvoicesSupplier invoices, credit notes and related documentation should be checked to:

• A record of the goods received to ensure that the organisation does not pay for goods or

services not received. If a record of goods received is not maintained the organisation couldbe exposed to the possibility that the goods or proceeds from sale may be misappropriated;

• A record of the goods or services ordered to ensure that the organisation doesn't pay for

items which have been not ordered;

• Supplier price lists. Pricing and calculation errors can result in considerable loss to an

organisation if not identified on a timely basis;

• Ensure the accuracy of the additions and other calculations on the invoice. Errors in

additions and calculations are often used to hide misappropriations.

Do you check supplier invoices to:

Figure 3.1 - Use of supplier invoice control checks

As indicated in Figure 3.1 the majority of not-for-profit organisations surveyed have controlprocedures in place to perform these basic checks on supplier invoices.

In addition to performing the above checks the supplier invoices and credit notes should besequentially numbered on receipt to ensure that they are subsequently processed in the purchaseledger. If these documents are not controlled in this manner invoices mislaid or suppressed maynot be detected for some time. As a result the financial statements or other managementinformation may be misstated. If a credit note is not recorded the organisation may erroneouslypay for goods that were returned.

Do you sequentially number invoices on receipt to ensure that they are subsequently processed to the purchase ledger?

Figure 3.2 - Supplier invoice tracking

45% of organisations surveyed do not sequentially number supplier invoices on receiptexposing themselves to the risks outlined above.

Page 22


Yes 45%

No 45%

Not specified 10%

Record of GoodsReceived

Records of GoodsOrdered

Supplier Price List Accuracy ofCalculation

90%

80%

90%

80%

3.2 Supplier StatementsEvery organisation should periodically reconcile its creditor balances with the related supplierstatements. By performing such a reconciliation invalid adjustments, deliberate or otherwise, tothe creditors accounts are more likely to be detected preventing excessive or irregular paymentsfrom being made. In addition this reconciliation also acts as a deterrent against any employeesetting up a fictitious supplier in an attempt to extract money from the organisation.

Best practice would suggest that monthly or quarterly supplier reconciliation statements beprepared to ensure that any errors or misstatements are identified and corrected on a timely basis.

Figure 3.3 shows that 65% of not-for-profit organisations participating in our survey preparesupplier reconciliation statements. The boards of the remaining 35% run the risk of overpayingsuppliers or facilitating fraud.

Do you reconcile creditors accounts periodically to suppliers’ statements?

Figure 3.3 - Preparation of supplier reconciliation statements

While the preparation of supplier reconciliation statements is a useful control technique in itself itis also important that these reconciliation statements are reviewed and approved by the financemanager or financial controller. In the absence of this type of review the reconciliation may notbe performed adequately.

55% of the organisations in our survey that prepare supplier reconciliation statements, requirethe supplier reconciliation to be reviewed and approved by the finance manager or equivalentexecutive - see Figure 3.4.

If supplier reconciliations are performed are these reconciliations reviewed by the finance manager?

Figure 3.4 - Requirement for supplier reconciliation review

Page 23


No 35%

Yes 65%

No 30%

Yes 55%

Not Specified15%

3.3 Cheque PaymentsAt least two people should be required to sign all cheques. At the time of signing cheques thesignatories should examine the original supporting documentation. Examples of supportingdocumentation include:

• Approved invoices or reconciled statements;

• Payroll records;

• Details of petty cash expenditure together with supporting vouchers or receipts; or

• Other documents, such as remittance advices/cheque requisitions with supporting invoices.

Figure 3.5 indicates that 70% of organisations participating in our survey require a minimum oftwo people to sign all cheques.

Are at least two people required to sign all cheques?

Figure 3.5 - Number of cheque signatories required

For the remaining 30% the risk of errors or irregularities such as those below occurring issubstantially increased. Failure to adopt the above control procedures could lead to:• Excessive amounts being paid;

• Cheques being paid for goods or services not supplied to the organisation;

• Cheques being drawn in respect of invoices already paid and the funds diverted;

• Fictitious payees going undetected; and/or

• Fictitious documentation may go unnoticed.

In addition to reviewing the supporting documentation as outlined above each of the signatoriesshould then effectively cancel these documents to prevent subsequent re-use by marking "paid"across the documentation.

The cheque signatories in 55% of surveyed organisations do not effectively cancel thesupporting original documentation to prevent subsequent re-use - see Figure 3.6.

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No 30%

Yes 70%

Do signatories cancel supporting documents at the time of signing cheques to prevent subsequent re-use?

Figure 3.6 - % of organisations effectively cancelling supporting documentation to prevent re-use

All cheques should be restrictively crossed "account payee only - not negotiable" at the time ofissue. It is now possible with most business current accounts to have this pre-printed on allcheques. Despite this only 55% of not-for-profit organisations participating in our survey userestrictively crossed cheques - see Figure 3.7.

Are all cheques restrictively crossed “account payee only - not negotiable”?

Figure 3.7 - Use of restrictively crossed cheques

3.4 Cash & Cheque ReceiptsThe area of cash and cheque receipts is a particular control risk for not-for-profit organisations -especially those that may receive unsolicited donations from the public. 75% of surveyedorganisations keep a detailed record of amounts received, whether cash or cheque. Theserecords are prepared at the time the post is opened - see Figure 3.9.

Figure 3.8 sets out the typical income sources of Irish not-for-profit organisations.

Page 25


Yes 45%

No 55%

Yes 55%No 45%

Source of Funds

Figure 3.8 - Sources of income

It is important that cheques and cash received are recorded when the post is opened. If nocontrol total is kept it is easier for cheques or cash to be misappropriated.

Do you record cheques and cash received in detail when the post is opened

Figure 3.9 - Detailed recording of cheques and cash receipts

Is the opening of the post and recording of remittances supervised by a responsible official, or at least carried out by two staff members?

Figure 3.10 - Supervisory controls over cheque and cash receipts

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CorporateDonations

Donations TradingIncome

Bequests Events InvestmentIncome

StateFunds

SponsorshipSubscriptions

No 25%Yes 75%

Yes 80%

No 20%

82% 82%

73%

64% 64% 64%

36%

55%

9%

As you can see from Figure 3.9 above 80% of organisations surveyed the opening of the post issupervised by a responsible official or performed by two or more people.

It is important that the opening of the post and the recording of cheques and cash received besupervised by an executive, or at a minimum carried out by at least two staff members.Unsupervised, or without a second person involved, the capacity exists for the person openingthe post to take some of the cheques or cash from the opened post and exclude these amountsfrom any detailed record maintained.

Cheques and similar documents received should be restrictively crossed at the time of receipt.An un-crossed cheque that is lost or stolen may be cashed or deposited into a bank accountother than that of the organisation.

As a final control over cash or cheques received it is suggested that amounts received by post arelodged to the bank intact each day. A comparison of the amount of cash deposited with theoriginal listing prepared when the post is opened makes it easy to identify, on a timely basis, ifany amounts have been lost or stolen.

60% of organisations in our survey lodge remittances received by post and cash receipts intacteach day - see Figure 3.11.

Do you lodge remittances received by post and cash receipts intact each day?

Figure 3.11 - Daily lodgement of cheques and cash receipts

3.5 Public CollectionsThe aim of internal controls in respect of public collections is to ensure that the not-for-profitorganisation has as much control as possible over what could be a widespread network of fund-raising efforts.

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No 40%Yes 60%

It is suggested that the following controls should be in place:

• Collection boxes should be individually numbered and documented control exercised over

the allocation and return.

• All collecting boxes should be sealed so that any opening prior to recording is readily

apparent.

• Static collection boxes should be regularly opened and contents counted in the presence of

at least two people authorised by the board for this duty. It is also a useful control to keep adiary showing not only where static collection boxes are situated, but also giving a history oftheir takings and the name of the person designated to empty them.

• General public collections should be counted in the presence of the collector and a receipt

from a duplicate pad given to them.

• Collection money should be lodged on a timely basis into the organisation's bank account.

3.6 Fund-Raising Events The responsibilities of the board here are similar to those for public collections above - i.e. tomake sure that the organisation is in control of the funds raised on its behalf so that it receives allthe money to which it is entitled from such events.

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Records should be maintained for each fund-raising event, in sufficient detail to identify grossreceipts, how they have arisen, and all costs incurred.

In the case of events for which there is ticket income or gate money all tickets should be pre-numbered; a record should be kept of all persons who have been issued with tickets to sell, andof the ticket numbers allocated to each; details of which tickets have been sold should be noted;and a reconciliation should be performed of receipts against tickets sold.

Similar records should be maintained for sponsored events.

3.7 InvestmentsInvestments (including stocks, shares, land and buildings) are normally held in order to generateincome for the organisation and to protect its capital base. It is therefore vital to make sure thatthey are safeguarded. Typical investment controls include:

• Ensuring that full records are kept of all investments held (including details of all those sold

or purchased) by the organisation, and that these are kept in a secure place.

• The formulation of an investment policy is the responsibility of the directors or trustees. The

detailed implementation of that policy is often delegated to investment professionals, but thedirectors must, by insisting on the supply of suitable reports or otherwise, ensure that theirpolicy is in fact being implemented. This will also allow them to review properly theperformance of their investments.

• Directors should normally take professional advice before selecting or disposing of

investments.

• Where statements of investment performance are sent to a nominated director they should be

inspected at regular intervals by the board as a whole.

• Controls should be put in place to ensure that all dividends or interest payments due are

promptly received and all purchases and sales of investments are properly authorised andaccounted for.

• Wherever possible, investments should be diversified so as to ensure that the failure of one

investment does not have a major impact on the organisation.

3.8 Bank Reconciliation StatementsOne of the most basic and most common control procedures any organisation performs is thepreparation of a bank reconciliation statement on a regular basis. Most organisations prepare thisreconciliation on a monthly basis and 94% of the organisations in our survey follow this bestpractice approach.

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However, preparation of the statement is not sufficient in itself. To be an effective control tool thereconciliation should be reviewed by the financial controller, finance manager or otherresponsible official. 75% of the not-for-profit organisations surveyed require their bankreconciliation statement to be reviewed by a responsible official - see Figure 3.11.

Is the monthly bank reconciliation reviewed by a director or senior official?

Figure 3.12 - Requirement for review of bank reconciliation statement

3.9 Board ResponsibilityThe board of directors or equivalent governing body has oversight responsibility for internalcontrol, exercised through reports from and discussions with management, internal audit (ifapplicable), and the external auditors. The board should gain an understanding of the degree towhich the internal and external auditors review the internal control procedures as part of theirtesting. It should also understand the risks to which the organisation is exposed and the internalcontrol processes which management have established to manage and mitigate those risks.Indeed, in many cases the board of a not-for-profit organisation request an independentaccountant or the external auditor to prepare a special report on the internal control and riskmanagement systems.

A well-designed and implemented internal control system provides the right environment for theefficient running of an organisation's operations. It can assist in ensuring compliance withapplicable laws and regulations and will reduce the risk of the financial statements ormanagement information being materially misstated.


No 25%

Yes 75%

4. Financial Reporting


4. Financial Reporting

4.1 Financial Statement DisclosureThe purpose of a not-for-profit organisation's annual report or financial statements is to providetimely and regular information on the organisation, enabling the users of the report to gain anunderstanding of the organisation's operations and achievements and a full and properappreciation of the organisation's transactions during the period and of its financial position atthe period end.

The Accounting Standards Committee's statement of recommended practice for charities sets outrecommendations on the form and content of the annual report and the way in which theaccounts contained in an annual report should be prepared. The Accounting StandardsCommittee's purpose in setting out these recommendations is to help improve the quality offinancial reporting by charities and other not-for-profit organisations. It hopes that therecommendations, which are considered to be best practice guidance, will assist in reducing thediversity in the level and type of disclosure provided in the annual reports and financialstatements of not-for-profit organisations.

The responsibility for the preparation of the annual report rests with the board of directors, boardof trustees or equivalent body. Members of the board therefore should be aware of whatdisclosure requirements represent best practice for not-for-profit organisations. A summary ofthese has been provided in Figure 4.1.

Figure 4.1 - Best practice disclosure requirements in not-for-profit organisations' annual reports

Requirement Disclosure Requirement

Legal &AdministrativeInformation

• Organisation's name and address of principal office• Nature of the governing document (e.g. charter, trust deed etc.) and how the organisation is

constituted (e.g. limited company, unincorporated association etc.)• Director/trustee details - names, methods of appointment, etc. • Director/trustee duty and responsibility to prepare the annual report and financial statements

should be outlined and acknowledged• A summary of the organisation's investment powers and details of any specific restrictions

imposed on the organisation by its governing document.

NarrativeInformation

• The principal objects of the organisation and its operating structures• A review of activities for the period including details of any funds that are in deficit• An acknowledgement by the board of its responsibilities for the internal control systems and

a review of their effectiveness• A summary of the process applied by the board in reviewing the effectiveness of the internal

control systems

Individual Funds • The nature and purpose of each fund• The assets and liabilities of each fund• Details of any significant or unusual movements or transfers

FinancialDisclosures

• Revenue recognition policies• Categories and major items of expenditure• Details of major items in support costs including directors' or trustees' remuneration• Costs of external scrutiny and advice• Departures from recommended practice

Figure 4.2 sets out the extent to which the organisations participating in our survey comply withrecommended best practice disclosures for not-for-profit organisations.

Financial statement disclosures

Figure 4.2 - Compliance with recommended best practice in annual report disclosure

As you can see the key areas where there is a divergence from the recommended disclosurerequirements are:

• Disclosure of investment powers - Only 45% of organisations surveyed disclosed details of

the investment powers of the organisation. The annual report should include a briefsummary of the investment policies of the organisation and the performance of theinvestments against that policy. The annual report should also outline any specific restrictionsthat are imposed on the investment policy either by legislation or the governing document. Itwould also be useful for the annual report to outline the monitoring controls that thedirectors operate over the investment activities of the organisation.

• Organisation structure - the annual report should contain a description of the organisation

structure and details of how policy decisions are made. Where the organisation is part of awider network of not-for-profit bodies then the relationship involved should also beexplained. 44% of survey participants do not provide organisation structure disclosures.

• Nature and purpose of individual funds - where applicable the annual report should disclose

how each of the funds has arisen (including designated funds), the restrictions imposed andthe purpose of each fund. An indication should be given as to whether or not sufficientresources are held in an appropriate form to enable each fund to be applied in accordancewith its purpose. For example, if funding has been received that is to be spent on a particularrelief project in the near future, it should be made clear in the notes to the annual reportwhether or not the assets held, or expected to be received, in the fund are liquid assets. 55%

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Directors Remuneration

Major Support Cost Items

Expense Categories

Unusual Movements/Transfers

Nature & Purpose of Fund

Assets & Liabilities by Fund

Review of Activities

Organisational Structure

Charitable Objects

Investment Powers

Director/Trustee Details

% Disclosing

75%

45%

75%

55%

80%

70%

55%

60%

80%

80%

30%


of organizations surveyed disclose the nature and purpose of their individual funds.

• Unusual movements or transfers - Explanations should be provided for material movements in

each of the organisation's funds. In disclosing details of movements on funds, materialtransfers between different funds and allocations to designated funds should be separatelydisclosed, without netting off, and should be accompanied by an explanation of the nature ofthe transfers or allocations and the reasons for them; and

• Director/trustee remuneration - Only 30% of not-for-profit organisations surveyed disclose

details relating to directors remuneration. In many cases directors of not-for-profitorganisations will act on a voluntary basis and not receive remuneration. In such incidencesit is best practice to disclose that neither the directors nor any persons connected with themhave received any remuneration.

Where the directors, or people connected with them, receive remuneration detaileddisclosures should be provided. If the not-for-profit organisation has made any pensionarrangements for directors or persons connected with them, the amount of contributions paidand the benefits accruing must be disclosed in the notes to the annual report.

If the not-for-profit organisation enters into a contract or arrangement with a related party of adirector appropriate disclosures should be provided. Each related party transaction must beseparately disclosed. The required disclosure includes the name of the transacting relatedparty; a description of the relationship between the parties; a description of the transaction;the amounts involved; any outstanding balances with related parties at the balance sheet dateand any provisions for doubtful debts from such persons; details of any amounts written offfrom such balances during the accounting period; and any other elements of the transactionswhich are necessary for the understanding of the financial statements.

4.2 The Directors/Trustees' ReportThe directors' or trustees' report is the main narrative section of the annual report. It shouldcontain:

• An explanation of the objectives of the organisation and a description of the way in which

the organisation is structured and managed. The policies that have been adopted in order totry to achieve these objectives should also be explained. If there have been any significantchanges in the objectives, organisation or policies since the last report, this should be madeclear. The purpose of this part of the report is to explain what the organisation is trying toachieve and how it is going about it.

• A review of the development, activities and achievements of the organisation during the

period. This review should bring the reader up-to-date on the organisation's progress andachievements. It should also explain the important events that have occurred during the yearand how the organisation has responded to them. It will be in this part of the report thatinformation enabling the reader to judge the effectiveness of the not-for-profit organisationwill usually be provided.

• A review of the transactions and financial position of the organisation, and an explanation of

the salient features of the accounts. This review should enable the reader to appreciate thesignificance of any surpluses or deficits disclosed in the financial statements and the purposesfor which the organisation's assets are being held. It will also put the charity's currentfinancial position in the context of its future plans and commitments, particularly with regardto on-going items of expenditure, projects not yet completed and obligations not yet met.The purpose of this part of the report is to help ensure that the financial statements areproperly interpreted.

Page 36


Other information which, if not included in the financial statements, could usefully be providedin the directors' report includes details of voluntary help, donations-in-kind and other intangibleincome received during the accounting period, and an indication of the extent to which theorganisation is dependent upon certain donors.

4.3 Internal Control DisclosuresAs we have seen throughout this report organisations are recognising, more and more, theirresponsibility to explain their actions and the decision-making process which has resulted inthese actions.

Many not-for-profit organisations now include sections in their annual reports dealing with theircorporate governance arrangements, measures taken by the organisation to ensure thatmanagement decisions are subject to appropriate oversight, and that internal control proceduresare properly designed, implemented and maintained.

The annual report should include an acknowledgement by the board of its responsibilities for:

• Establishing adequate internal control systems; and

• Reviewing the effectiveness of such systems.

75% of the annual reports of not-for-profit organisations participating in our survey includesuch an acknowledgement - see Figure 4.3.

Do the financial statements include an acknowledgement by the board that is responsible for internal control systems and for reviewing their effectiveness?

Figure 4.3 - Acknowledgement of internal control responsibilities

In addition to acknowledging their responsibilities the board should also include a statement inthe annual report summarising the process that they have applied in reviewing the effectivenessof the system of internal controls.

In 65% of not-for-profit organisations surveyed the board does not include a statement in theannual report describing the process that they have applied in reviewing the effectiveness of theinternal controls - see Figure 4.4.

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Not specified 10%

No 15%

Yes 75%

Does the annual report summarise the process the board has applied in reviewingthe effectiveness of the system of international control?

Figure 4.4 - Inclusion of internal control effectiveness review disclosure

4.4 Board ResponsibilityThe board of directors or equivalent body is responsible for ensuring that the organisation'sannual return and financial statements meet the related statutory or regulatory responsibilities.They are hold oversight responsibility for the internal control systems of the organisation. Giventhe increased interest in, and awareness of, the issue of public accountability and related dutiesof care it is important for the directors of all not-for-profit organisations to ensure that theirorganisation adopts best practices across the board - including recommendations in the areas offinancial reporting, disclosure of information and assessing the effectiveness of internal controlsystems.


Not specified 5%

No 65%

Yes 30%

5. Not-For-Profit Contacts inPricewaterhouseCoopers


5. Not-for-Profit Contacts in PricewaterhouseCoopers

For more information, or to discuss how our Not-for-Profit practice may be of benefit to yourorganisation, please contact:

DublinTeresa HarringtonPartnerTel: (01) 704 [email protected]

Maurice CavanaghSenior ManagerTel: (01) 704 [email protected]

CorkJoe O'SheaPartnerTel: (021) 427 [email protected]

Derry KeohaneSenior ManagerTel: (021) 427 [email protected]

GalwayAlan LubySenior ManagerTel: (091) 764 [email protected]

Ann LavinSenior ManagerTel: (091) 764 [email protected]

KilkennySiobhan CollierSenior ManagerTel: (056) [email protected]

Brendan O'NeillManagerTel: (056) [email protected]

LimerickKen JohnsonPartnerTel: (061) 212 [email protected]

David O'MalleyPartnerTel: (061) 212 [email protected]

WaterfordMartin FreynePartnerTel: (051) 874 [email protected]

Jim HartySenior ManagerTel: (051) 874 [email protected]

WexfordBilly SweetmanSenior ManagerTel: (053) [email protected]

Sharon O'LearySenior ManagerTel: (053) [email protected]

6. PricewaterhouseCoopersNot-For-Profit Practice

in Ireland


6. PricewaterhouseCoopers' Not-for-Profit Practice in Ireland

Not-for-profit organisations are similar to commercial businesses. They face many of the samerisks and opportunities. However, aside from ensuring the continuing operation of their activitiesthere are a number of matters of critical importance to them - not least of which is public interestand accountability. Larger or more complex not-for-profit businesses have paid careful attentionto these issues and have, with our assistance, developed suitable governance structures andcontrols to safeguard their assets and reputation.

The services that we provide to not-for-profit organisations include:

• Corporate Governance Review - This review of governance and management arrangementsprovides an organisation's board of directors with an assessment of the existing corporategovernance structures. The resulting report sets out recommendations to improve governancestructures; suggests practical measures that can be adopted to increase accountability andtransparency across the organisation; and highlights steps to that should be considered toenhance the quality and frequency of management information supplied to the board.

• Risk Management & Internal Control Evaluation - We work with the board and managementof not-for-profit organisations to identify and measure the risks that they are facing. We assistin managing and mitigating these risks by evaluating the adequacy of the risk reporting andinternal control procedures within the organisation. This service provides the board andmanagement with assurance on strategic and operational areas such as financial reporting,treasury management, statutory compliance and commercial activities.

• Strategic Planning - The not-for-profit sector is becoming a more and more complexenvironment. As a result of changes in corporate governance practices, companieslegislation, the economic environment and cost increases directors of not-for-profitorganisations are experiencing increased pressure to renew and restructure their organisationsto address the challenges of this new environment. We work with the directors to help themto understand the issues facing their organisation; to develop strategic responses and actionprogrammes; and to determine what changes are required to their operating structures andworking practices.

• Investment Planning & Review - We provide comprehensive investment planning and reviewservices designed to help maximise the performance of an organisation's investmentportfolio. We work with the directors and management team to develop investment strategiesthat are integrated with and appreciative of the balance between the social objectives and thecommercial realities that not-for-profit organisations have to face. We guide clients throughthe challenges of investment planning today: the proliferation of new investment vehicles,insurance products and retirement plans, changes in laws and regulations, and a volatileeconomy. The result is a plan based on independent, timely, accurate investment advice thathelps avoid pitfalls and promotes long-term financial viability and security for theorganisation.

• Executive Search & Selection - We help our client's management team to define the role andcompetencies required; profile the ideal candidate and determine where they may be found;and comprehensively assess candidates before a shortlist is presented. In addition to oursearch and selection services we provide a range of complementary services includingmanagement development and training, executive remuneration planning, and rewardsystems.

• VAT Planning - We provide a range for VAT services for not-for-profit organisations includingcompliance advice and support, tax authority liaison, optimising refund positions, cash-flowplanning, and advice on the VAT implications of transactions.

• Accounting Services - We offer accounting, company secretarial and payroll services to ournot-for-profit client base including the preparation of management accounts and providingaccounting support on a tempory or secondment basis.

PricewaterhouseCoopers are the market leaders in providing professional services to not-for-profitorganisations. We will continue to develop and introduce new services that will strengthen ourclient-service offering in this area.


Researched & written by

Teresa HarringtonPartner

Tel: 01 704 8558 e-mail: [email protected]

Mark LynchSenior Manager


Sheila GreyResearch Assistant


This report aims to provide guidance only, and does not purport to deal with all possible questions and issues which may arise in any givensituation. Should a reader encounter particular problems they are advised to seek professional advice that we at PricewaterhouseCooperswould be pleased to provide.

All reasonable care has been taken in the preparation of this booklet. No responsibility is accepted by the authors,PricewaterhouseCoopers, for any errors, omissions or misstatements it may contain, or for any loss or damage howsoever occasioned, toany person relying on any statement or omission in this report.

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