Addis Abeba

IFSMRC AIJRM Volume-02 Issue-03 Jan-Jun-2014 Online ISSN: 2308-1341
Print ISSN: 2308-3034
Assessment of Financial Management

Practices in Local NGOs-A Case of Local
NGOs in Addis Ababa)
*Mengesha Ayene, **Prof. Raman Kumar, ***W/ro Fitsum Asefa
*M.Sc Students, **Professor, ***Dean
School of Management and Accounting, College of Business and Economics, Hawassa
University, Ethiopia, East Africa
Abstract
Local NGOs are types of organizations those are geared toward the provision of some sort of
benefits to the society and are citizen-based associations. These organizations are mobilizing
financial resources from various national and international voluntary agencies to work in a
coordinated manner consistent with the requirements of the society. The purpose of assessment
was to assess the financial management practices of the local NGOs in Addis Ababa.
Descriptive method of assessment was conducted and data were collected by applying random
sampling technique, 92 respondents were selected from the total population of 1,275. The major
findings were: lack of budget approval by board, common cost allocation system, records
keeping for gifts in kind items, cash forecast preparation, finance staff participation in budget
preparation and review, and concentration on limited projects and sources of fund, weakness in
standardized financial statement preparation and delay in reporting among others. Finally, the
researcher recommended: as means to discharge responsibility & accountability and to show
service giving efforts, operational efficiency and effectiveness to contribution to the development
endeavor of the country, they should establish a well organized financial management systems:
budget management, accounts record keeping, internal control and reporting. Board should
monitor regularly the financial management system, senior management shall give due attention
for strengthening internal control activities.
Key Words:NGOs-associations- financial- management- fund- weakness- recommended- control
Introduction
1.1Background of the Study
The term, "non-governmental organization" government control, not seeking to

or NGO, came into use in 1945 because of challenge governments either as a political
the need for the UN to differentiate in its party or by a narrow focus on human rights,
Charter between participation rights for non-profit-making and non-criminal.
inter governmental specialized agencies and
those for international private organizations. NGOs can be identified under two
At the UN, virtually all types of private groups:
bodies can be recognized as NGOs. They
only have to be independent from The first are operational NGOs:
Assessment of Financial Management Practices in Local NGOs- A Case of

Local NGOs in Addis Ababa
They mobilize resources, in the form of and that managers are able to report
financial donations, materials or volunteer financial information accurately to the
labor, in order to sustain their projects and Board and to donors.
Programs. The fund obtained from donors,
government, and companies require time A good financial management system
and expertise on planning, budgeting, makes it easier to be accountable to donors
implementing, accounting and reporting. and project beneficiaries, thereby enhancing
their respect and confidence in the
The second are advocacy NGO: organization. This, in turn, helps an NGO
They carry out much the same functions, be more competitive and can increase its
but with a different balance between them. chances of maintaining long-term financial
Fund-raising is still necessary, but on a health (mango course hand book, June
smaller scale and it can serve the symbolic 2003).
function of strengthening the donors'
identification with the cause. Persuading One of the key requirements for good
people to donate their time is necessary, governance is accountability. The issue this
but, in addition to a small number of people creates is to whom are NGOs accountable.
giving a great deal of time, it is also At first this question may appear to have an
necessary to be able to mobilize large easy answer. Obviously they are expected
numbers for brief periods. External donors to account for the use of resources to the
may not impose administrative burdens, but funders. This paper attempts to assess the
supporters still have to be supplied with financial management practices of local
information on an efficient regular basis. NGOs/Charities in Addis Ababa.
Major events will aim to attract favorable
publicity rather than raise funds, (Iranian The local NGOs are required to have well
Studies Group at MIT, June 2005). organized and established financial
The Charities and Societies Agency of management practices for successful
Ethiopia has a mandate to register, license, accomplishment of its objectives. NGOs
regulate and support charities and societies operate in a rapidly changing and
operating in more than one Regional State, competitive world. If their organizations are
or securing most of their funds from foreign to survive in this challenging environment,
sources even if they operate only in one it is required to develop well organized
regional state, or operating in the City financial management tools:
Administration of Addis Ababa or Dire- a. to help managers to make effective
Dawa Pursuant to Article 3 (1) of the and efficient use of resources to
Proclamation. Currently, 1,275 local NGOs achieve objectives and fulfill
based in Addis Ababa are reregistered commitments to stakeholders help
(CHAS, 2013). NGOs to be more accountable to
donors and other stakeholders,
Financial Management for NGOs: b. to gain the respect and confidence
Financial management is more than just of funding agencies, partners and
keeping accurate accounting records. It also those served; give the NGO the
involves planning, controlling and advantage in competition for
monitoring financial resources to achieve increasingly scarce resources; and
organizational objectives. At a minimum, a c. help NGOs prepare themselves for
financial management system should ensure long-term financial sustainability,
that costs are properly categorized, tracked (Stephenson, 2003).
and charged to the appropriate accounts,

1.2. Statement of the Problem:
B. at national level
The role of Non-Governmental Keeping good relationship with government
Organizations is to supplement the and private sectors to have their support is a
government agencies in providing services critical success factor for every NGO. Most
to the people. NGOs are formed as a result NGOs face problem to keep relationship
of certain needs identified by individuals or with them. Sustainability and survival of
groups of individuals. Financing of NGOs every NGO is strongly dependent on a close
is largely by donors while management is and trusted relationship with its donors.
by individuals who oversee the programs of
the organization. The donors rely on the The most commonly identified weaknesses
managers of these programs for the full of the sector include; limited financial and
management of their finance and management expertise, limited institutional
implementation of the programs. In the capacity, low levels of self-sustainability,
application and sources of fund, the NGOs isolation/lack of inter-organizational
as project implementing partners are communication and/or coordination, lack of
required to have well organized financial understanding of the broader social or
management systems and timely submission economic context (Malena,1995).
of financial and activities reports to the
donors. 1.3 Research Questions:
The NGOS are required to comply with The assessment attempts to address the
donors and government rules and following questions on financial
regulations in the financial management management practices in local NGOs in
activities and project implementation. To Addis Ababa:
achieve success, NGOs have to continually 1. Do the local NGOs comply with the
improve and professionalize their work, CHSA, Donors, Government rules and
which puts more and more demand on the regulation and the financial
management and leadership of an management standards and GAAP?
organization. 2. How is the strength of the internal
control system?
Challenges facing NGOs: 3. Do the financial management
A. Challenges at NGO level activities have effects on project
It is very hard to work without registering implementation?
the NGO. So, registration process is the key 4. What are the areas to be improved in
challenging issue on the way of NGOs, the financial management practices?
whether at the time of establishment or 5. What are the factors affecting the
afterwards. financial management activities?
The absence of well defined objectives and
goals, vision, mission and even values is 1.4 Objectives of the Study:
another issue facing NGOs. Human 1.4.1 General Objective of the Study:
resource issues such as recruitment, The general objective of this study is to
compensation, training, promotion and etc. examine the financial management practices
are often addressed as the key challenging of non-governmental-organizations in
issues. Weak performance of some NGOs Addis Ababa.
has degraded the Image of other NGO and it 1.4.2 Specific Objective of the Study:
makes difficult to persuade people to They are:
support NGOs through donation.

a. To evaluate compliances issues to The primary focus of the assessment was on
the CHSAs and donors rules and the financial management practices of local
regulations, NGOs in Addis Ababa. The assessment
b. To assess the strength of the includes the financial management
internal control systems in activities: budgeting and planning, accounts
practices, record keeping, financial control and
c. To identify the effects of financial reporting practices of them. It focuses on
management practices on project the compliance issues in the accounting and
implementation, reporting practices accordingly guidelines,
d. To assess how the internal and rules and regulations required by CHSA and
external auditors perform auditing donors’ accepted accounting standards and
activities. GAAPs. This assessment presented the
e. To identify risks associated with major findings in financial management
financial management activities. practices and provided recommendations.
f. To assess the financial monitoring
activities run by the donors. 1.6 Limitations of the Study:
g. To evaluate financial reporting
practices to donors and CHSA of The limitations that have been encountered
Ethiopia. in this assessment were the following:
h. To provide suggestions and a. Time period of the study was limited
recommendations on financial and hence was difficult to conduct
management practices based on this interviews for the selected NGOs.
study. b. Unwillingness of some respondents
to give necessary information and
1.5 Significance of the Study: answer for the questions.
The results of this assessment are expected 2.1 Historical Background of the Study:
to benefit the followings:
Local NGOs: The recommendation will “Local NGO” will be used to refer to local
show the possible solutions for the indigenous organizations that include
identified findings. It can assist the local national NGOs, FBOs, and CBOs that fall
NGOs to use findings as input for within the functional categories of advocacy
reinforcing their financial management and service delivery, and are located in
activities and focus on the factors that developing countries. It focuses on
enhance effective financial management delivering quality services and improving
systems for donors’ funded project’s their individual practices rather than
implementation. influencing others. For the purpose of a
The donors and other stakeholders: The donor seeking collaboration with NGOs, it
recommendation and the suggested possible helps to distinguish between local NGOs
solutions for the identified gaps can be used that work in multiple countries, national
as an input for capacity building activities NGOs working on countrywide issues, and
by donors and other stakeholders community-based NGOs ,FBOs, or CBOs
Researchers: This assessment will enhance focused on local stakeholders and issues,
and encourage other researchers who have (Eric Werker an Assistant Professor of
interest on financial management areas of Business Administration at Harvard
local NGOs to do further research. Business School, Boston).
1.5 Scope of the Study:

For organizations to be recognized as not- in Ethiopia use both generally accepted
for-profit, they should satisfy the following accounting principles (GAAP) and
criteria: international financial reporting system
First, an NGO should be privately set up (IFRS)/IAS. US GAAP is highly applicable
and sufficiently autonomous in its activity, and there is a tendency to use IFRS/IAS in
that is independent of direct governmental the future. Most CSs in Ethiopia keep
control. records of non exchange transactions,
Secondly, an NGO should also be non- prepare the three basic financial statements
profit, which would clearly define its prescribed by FASB, and the statements are
voluntary character. continuously validated by independent body
Thirdly, it cannot be connected with a (Munima Siddika1, Mohammad Sarwar
political party with an aim of attaining Jahan Rekabder2 and A.K.M.
political power. DelwarHossain3).
Fourthly, an NGO should support
development which demonstrates its public 2.2 The Role of NGOs:
interest character (Schiavo-Campo et al,
2001). NGOs have become major players in the
field of international and national
Effective management of an NGO’s development. Since the mid-1970s, the
resources is done in a manner which is NGOs in both developed and developing
transparent, accountable, equitable and countries has experienced exponential
responsive to the needs of the people. Since growth. From 1990 to 2000 total
NGOs aim at becoming sustainable, then development aid disbursed by international
good governance is critical to their NGOs increased ten-fold. In 1992
existence. In many developing countries international NGOs channeled over $7.6
NGOs often lack the institutional capacity billion of aid to developing as in many
and resources to operate. Also, funds from African countries, the governmental efforts
donors are sometimes poorly managed. in the area of socio-economic development
Thus, in order to ensure effective and are supplemented by the activities of many
proper management of resources, good non-governmental, voluntary and social
governance becomes an important aspect of organizations.
every NGO. One of the key requirements
for good governance is accountability. They are meant to fill the gaps that exist in
Charities and Societies in Ethiopia mean the governmental efforts. The non-
humanitarian private organization, using its governmental organizations are mobilizing
own resources, not profit making and the resources from various national and
participating to fulfill government efforts international voluntary agencies. These
with a view to eliminate poverty. The major organizations are to work in a coordinated
intervention areas of CSs in Ethiopia are; manner consistent with the requirements of
general health, education, agriculture, water the society. They are regulated and
and sanitation, child development, controlled by the Government agencies like
eradication of HIV/AIDS, and others Charities and societies’ agency,
focused on child and women rights. (worldbank.org).
Financial statements prepared by CSs serve There is a heavy competition among the
as a means to communicate with funding NGOs in mobilizing financial resources,
agents, government and other stakeholders. resulting in mutual bickering and mistrust.
In preparing basic financial statements, CSs In this process, a few of the NGOs are

found lagging behind in developing Help managers to make effective and
required documents to ensure true and fair efficient use of resources to achieve
view of their financial dealings through the objectives and fulfill commitments to
accounting and reporting procedures. stakeholders, (Stephenson, 2003).
Hence, this study attempts to assess how the
financial management practices are being 2.3 Development of NGOs in Ethiopia
carried out in compliance with the funders, and establishment of CHSA
donors, government policies and acceptable
standards. /generally accepted accounting In 1960 both foreign and local NGOs were
principles of financial management/. established when these self-help groups
could no longer suffice to support the needy
A not-for-profit organization’s primary goal of the country. The first NGOs as we know
is to provide some socially desirable need them today that were established in the
on an ongoing basis. A not-for-profit country were the Ethiopian Red Cross and
generally lacks the financial flexibility of a Swedish save the Children. Following this
commercial enterprise because it depends and the famine of 1973 and later of 1984,
on resource providers that are not engaging the number of NGOs increased and these
in an exchange transaction. The resources were mostly international. Later on with the
provided are directed towards providing change in government in 1990 a more
goods or services to a client other than the conducive environment was established
actual resource provider. Thus the not-for- further encouraging the growth of NGOs in
profit organizations must demonstrate its Ethiopia. This time as their numbers
stewardship of donated resources — money increased more local NGOs flourished.
donated for a specific purpose must be used Today 90% of NGOs operating in the
for that purpose. That purpose is either country are local,(Ethiopia – Country
specified by the donor or implied in the not- Profile 1998, Jos van Burden, GOM, 1998).
for-profit’s organizations stated mission.
The Agency has a mandate to register,
The management and reporting activities of license, regulate and support charities and
not-for-profit organizations must emphasize societies operating in more than one
stewardship for these donated resources. Regional State, or securing most of their
The staff must be able to demonstrate that funds from foreign sources even if they
the dollars were used as directed by the operate only in one regional state, or
donor. The shift to an emphasis in external operating in the City Administration of
financial reports on donor restriction has Addis Ababa or Dire-Dawa Pursuant to
made the use of fund accounting systems Article 3 (1) of the Proclamation It is
even more critical. known that the Agency has begun rendering
a full-fledged service as from September
The local NGOs are required to have well 2009 after having made all the necessary
organized and established financial preparations and arrangements for the last
management practices for successful one year since commencing its official
accomplishment of its objectives. NGOs operation in June 2009 to carry out re-
operate in a rapidly changing and registration and formal registration of
competitive world. If their organizations are Charities and Societies as well as other
to survive in this challenging environment, services. Currently 1,275 local NGOs/
it is required to develop well organized charities in Addis Ababa are
financial management tools to. reregistered,(Data collected from Charities

and Societies Agency of Ethiopia on purposes in accordance with the
10/4/2013). law; and
b. To ensure that Charities and
Ethiopian Charities \ Ethiopian Societies are Societies are transparent,
those Charities or Societies that are formed accountable, and operate lawfully.
under the laws of Ethiopia, all of whose The Agency is given broader powers in the
members are Ethiopians, generate income administration of charities and societies. It
from Ethiopia and wholly controlled by has the authority, among others, to license,
Ethiopians. However, they may be deemed register and supervise legal compliance,
as Ethiopian Charities or Ethiopian determine the public benefit status of CSOs,
Societies if they use not more than ten provide education and training to ensure
percent of their funds which is received compliance, and impose sanction in case of
from foreign country sources and Ethiopian any violation of the law.
Residents Charities\Ethiopian Residents
Societies are those Charities or Societies In addition, the Agency has the
that are formed under the laws of Ethiopia responsibility to facilitate consultative
and which consist of members who all forums with Charities and Societies. CSOs
dwell in Ethiopia and who receive more should therefore actively articipate in these
than 10% of their funds from foreign forums in order to seek solutions to
country sources, (www.chsa.gov.et). challenges and problems they face, as well
as to strive for a more conducive
According to the Charities and Societies environment for their operations, (Users’
Proclamation, a Charity” is “an institution manual for charities and societies, by
which is established exclusively for taskforce, and 2011).
charitable purposes and gives benefit to the
public”. A distinctive feature of charitable
activities is the fact that they are intended to 2.4 Requirements for Charities in
benefit the public. The law recognizes five Ethiopia:
forms of charities which include Charities
and Societies Agency (CHSA) Charities and societies are required to
The Proclamation provides for the maintain day-to-day records of financial
establishment of an independent body transactions. They are also required to
called Charities and Societies Agency furnish an annual statement of accounts to
(CHSA) to oversee the activities of CSOs the Charities and Societies Agency. Despite
which fall under its scope. the requirement to submit to an annual audit
The Director General of the ChSA is of accounts by certified auditor, an internal
appointed by the Government. The auditor or an auditor designated by the
Proclamation makes the ChSA accountable Charities and Societies Agency, an
to the Ministry of Justice (but this has been organization can be subject at anytime to an
changed by administrative fiat and the audit of accounts according to the directives
Agency is now under the jurisdiction of the of the Minister of Justice.
Ministry of Federal Affairs.
Furthermore, CSOs are required to submit
The Agency has the following objectives: to the Agency an annual activity report
outlining their major activities and other
a. To enhance the development of relevant information along with a statement
Charities and Societies and to of accounts. They are also required to renew
enable them to achieve their their license and registration every three

years, which is subject to an executive record of the assets and liabilities of the
evaluation of the completeness and Charity or Society.
accuracy of their performance and audit c. Charities and Societies may not receive
reports. anonymous donations and shall at all
times keep records that clearly indicate
The requirement to renew the license and the identity of donors.
registration certificate every three years, The Officers of a Charity or Society shall
coupled with the fact that no time limit is preserve any accounting records made for
prescribed for renewal, leaves ample scope the purposes of this Article for at least 5
for motivated procedural delays, (By years from the end of the financial year of
Mandeep S. Tiwana, Civil Society Watch the Charity or Society in which they are
Associate, and CIVICUS). made.
The charities and societies agency of 2.4.2 Reporting:

Ethiopia has the following objectives:
a. to enable and encourage Charities and As a means to discharge responsibility and
Societies to develop and achieve their accountability and to show their service
purposes in accordance with the law; giving efforts, operational efficiency and
b. to create a situation in which the effectiveness and their contribution to the
operation of Charities and Societies is development endeavor of the country,
transparent and accountable; Charities and Societies prepare financial
c. to ensure that Charities and Societies Statements. The primary purpose of
operate legally financial statements is to provide relevant
All NGOs in Ethiopia registered and information to meet the common interest of
revising their activities are required to use donors, members, creditors and others who
the resources for the intended purpose, in provide resources to not-for-profit
compliance with the CSA of Ethiopia and organizations. The basic financial
funder’s rules and regulations, and to statements issued by Charities and Societies
submit finance and activities reports to the are: a statement of financial position, a
charities and societies’ agency of Ethiopia statement of activities, and statement of
and the funders and the donors. Hence, all cash flows.
the NGOs functioning shall have well
organized financial systems. 2.4.2.1 Annual Statements of Accounts
2.4.1 Accounting Records Keeping
a. Any Charity or Society shall submit
a. The Officers of a Charity or Society to the Agency an annual statement of
shall ensure that accounting records are accounts prepared in accordance with
kept in respect of the Charity or society acceptable standards.
which is sufficient to show and explain b. Notwithstanding sub-article (1) of this
all the transactions and disclose at any Article, Charities and Societies whose
time. annual flow of funds does not exceed
b. The accounting records shall, in Birr 50,000.00, (fifty thousands) the
particular ,contain entries showing from statement of accounts may choose to
day to day all sums of money received prepare a receipts and payments
and expended by the Charity or Society, account and a statement of assets and
and the matters in respect of which the liabilities.
receipt and expenditure takes place; and c. The Officers of a Charity or Society
shall preserve any statement of accounts

and related documents prepared under directly or as a sub recipient, during
sub-article (1) and (2) of this Article for their fiscal year.
at least 5 years from the end of the b. Foreign nonprofits that receive all or
financial year. a majority of their USG funding
from USAID (either directly or as a
2.4.2.2 Annual Activity Report; sub recipient), if they receive
US$300,000 or more during their
a. The Officers of a Charity or Ethiopian fiscal year.
Resident Society shall prepare and c. For-profit organizations that receive
transmit to the Agency an annual all or a majority of their funding
activity report on the major activities from USAID will be reviewed
and relevant information regarding the annually to determine if an audit is
Charity or Society. required. (U.S.-based nonprofit
b. The annual activity report required organizations that receive
under sub article(1) of this Article shall US$500,000 or more in total
be transmitted to the Agency within funding from the USG either
three months from the end of that directly or as a sub recipient, during
financial year or within such period as their fiscal year.)
the Agency may for any special reason d. Foreign nonprofits that receive all or
require. a majority of their USG funding
c. Every such annual activity report from USAID (either directly or as a
shall have attached to it the annual sub recipient), if they receive
statement of accounts US$300,000 or more during their
fiscal year.
2.4.2.3 Annual Audit Requirements e. Not-for-profit organizations that
receive all or a majority of their
An audit is an independent review and funding from USAID will be
examination of an organization’s systems, reviewed annually to determine if
records and activities. Many donors require an audit is
yearly audits of their grant recipients, and required,(www.NGOConnect.NET).
the U.S. Government (USG) is no different.
Both prime recipients and sub recipients 2.5 Financial Management Guide For
that receive a certain threshold of funds Non –Profit Organizations:
from the USG must conduct an annual
audit. This guide is to those who are responsible
for grant Management, including those who
An audit enables to verify financial prepare grant proposals and those who
numbers ensure their accuracy and identify record and report on grant project activities.
and assess internal controls that should be It is intended only to provide practical
in place to improve the integrity of the information on what is expected from grants
financial systems. It evaluates how are implementing organizations in terms of
spending USG funds and complying with fiscal accountability
the regulations set forth in the agreement.
2.5.1 Financial Management:
a. U.S.-based nonprofit organizations
that receive US$500,000 or more in In many NGOs financial management is
total funding from the USG either given a low priority. This is often
characterized by poor financial planning

and monitoring systems. But NGOs operate The voluntary organization should get it
in a rapidly changing and competitive budget approved by the board, and its
world. If their organizations are to survive financial system should be accurate and all
in this challenging environment, managers the financial records (accounts) are kept in
need to develop the necessary time. The organizations should assure the
understanding and confidence to make full financial resources are used in furtherance
use of financial management tools. of the organization’s charitable purposes. In
2.5.2 Key Pillars of Financial order to establish sound governance
Management: practices we have to establish an effective
structure of overall and financial
Although no one model of financial management. For every voluntary
management fits every organization, the organization and its members it is very
following components are essential to good much important to understand the basic
financial management: concept of financial term; budgeting,
a. Planning looks ahead to prepare for the financial strategy, accounting system,
future, such as developing budgets to financial policy, social security for its staffs,
cover activities of a program or the internal control & internal audit. The local
entire organization for a year or a NGOs are required to have well organized
longer period. and established financial management
b. Controlling establishes systems and practices for successful accomplishment of
procedures, checks and balances, to its objectives. NGOs operate in a rapidly
make sure that the financial resources changing and competitive world. If their
of the organization are properly handled organizations are to survive in this
and that risks are managed. challenging environment, it is required to
c. Monitoring compares plans with develop well organized financial
actual performance to identify strengths management tools to:
and weaknesses in planning and a. to help managers to make effective and
implementation and adjust as necessary efficient use of resources to achieve
(Mango June 2003 Mango Course objectives and fulfill commitments to
Handbook). stakeholders;
b. to help NGOs to be more accountable
Well organized financial management is a to donors and other stakeholders;
key to an organizational sustainability. It c. gain the respect and confidence of
will impact on decision making across the funding agencies, partners and those
organization and as such should be served;
integrated into all aspects of an d. give the NGO the advantage in
organization’s operations, from managing competition for increasingly scarce
project budgets to gathering information for resources; and
strategic decision-making. Nonprofit e. Help NGOs prepare themselves for
voluntary organization must practice sound long-term financial sustainability
financial management and comply with a (Stephenson, 2003).
diverse array of legal and regulatory
requirements. It is essential that Effective management of an NGO’s
organization successfully manage their resources is done in a manner which is
funding and financing sources to ensure the transparent, accountable, equitable and
best and most efficient use of their financial responsive to the needs of the people. Since
resources. NGOs aim at becoming sustainable, then
good governance is critical to their

existence. In many developing countries system encompasses both administrative
NGOs often lack the institutional capacity systems and accounting systems.
and resources to operate. Also, funds from Administrative systems provide the
donors are sometimes poorly managed. framework for handling procurement,
Thus, in order to ensure effective and travel, inventory, facilities and personnel
proper management of resources, good matters such as payroll and benefits.
governance becomes an important aspect of Accounting systems encompass the
every NGO. One of the key requirements methods, procedures and controls
for good governance is accountability. The established to gather, record, classify,
issue this creates is to whom are NGOs analyze, summarize, interpret and present
accountable. At first this question may accurate and timely financial data,
appear to have an easy answer. Obviously (www.world bank.org.et, and accessed
they are expected to account for the use of 20/5/2013).
resources to the funders.
2.5.4 Internal Controls:
There are a number of ways in which NGOs
can improve on their governance and Internal controls are systems of policies and
management operations. These include the procedures that protect the assets of an
following: organization create reliable financial
a. stating their mission, values and reporting, promote compliance with laws
objectives clearly and ensuring that and regulations and achieve effective and
these strategies are followed efficient operations. These systems are not
b. better human resources development only related to accounting and reporting but
and training for their managers and staff also relate to the organization’s
including board members and communication processes, internally and
volunteers externally, and include procedures for:
c. Better management processes as well (1) Handling funds received and expended
as financial management, accounting, by the organization,
and budget systems (University of (2) Preparing appropriate and timely
Botswana). financial reporting to board members and
officers,
2.5.3 Good Financial Management (3) Conducting the annual audit of the
organization’s financial statements,
A Good financial management involves (4) Evaluating staff and programs,
planning, organizing, controlling and (5) Maintaining inventory records of real
monitoring resources so that your and personal property.
organization can achieve its objectives and (www.oag.state.ny.us/charities/charities.ht
fulfill its commitments to beneficiaries, ml).
donors and other stakeholders.
2.6 Administrative and Operational
Good financial management requires more Costs
than simply keeping accurate accounting
records. Many NGOs may have only an Any charity or society shall allocate not less
accounting or bookkeeping system rather than 70 percent of the expenses in the
than a financial management system. budget year for the implementation of its
Accounting is a subset of financial purposes and an amount not exceeding 30
management. A financial management percent for its administrative activities.
Notwithstanding sub article (1) of this

Article, the government may confer various The information should be aggregated into
incentives to a charity or society that reasonably homogenous groups. Cash or
allocate more than 80% of its total income other assets that are received with donor-
for its operational purposes or demonstrates imposed restrictions should not be classified
outstanding performance. with cash or other assets that are
unrestricted and therefore, not available for
2.7 Cost Shared/ Allocation current use. Information about liquidity can
be provided by listing assets and liabilities
Shared Project Costs—Goods and services in order of liquidity, classifying assets and
used by multiple projects and for which a liabilities in accordance with ARB 43
vendor cannot invoice each project (Accounting Research Bulletin), or
separately that are charged to each disclosure in footnotes. The amounts of
benefiting project based on a pre- each of the following classes of assets,
determined formula. An organization with based on the existence or absence of donor-
more than one project incurs three imposed restrictions, must be included:
categories of expenses:
Direct project costs: Costs that can be Statement of Activities:
clearly attributed to a specific project, such Like the Statement of Financial Position,
as a dedicated staff person, office space the Statement of Activities should focus on
used by project staff or specific equipment the organization as a whole. Although fund
and supplies used only by a single project. accounting and reporting by fund groups is
Shared project costs: Costs are required to not advocated under FASB 117, the
carry out a project, but are difficult to Statement does not preclude a not-for-profit
attribute to a specific project, such as entity from providing this disaggregated
electricity or administrative support staff. information by fund groups as supplemental
Non-project costs: Legitimate data. The Statement of Activities must
organizational expenses, but costs not report the change in unrestricted net assets,
related to any specific project or costs that temporarily- restricted net assets,
are not “allowable.” permanently-restricted net assets and total
Most of the expenses will easily fall into the net assets.
direct cost category, while non-project costs
are usually self-evident. Costs that may be Revenues increase unrestricted net assets,
shared, however, may be the biggest temporarily-restricted net assets, or
challenge, (www.NGOConnect.NET). permanently-restricted net assets depending
upon the absence or existence of donor-
2.8 Analysis of FASB 117 (Financial imposed restrictions.
Accounting Standards Board) Gains or losses on investments will
generally increase or decrease unrestricted
Statement of Financial Position: net assets, unless their use is limited by
A statement of Financial Position must be donor-imposed restrictions.
prepared for the organization as a whole
presenting the total amounts of assets, The removal, expiration, or satisfaction of a
liabilities, and net assets. Either the donor imposed condition or restriction will
Statement of Financial Position or the notes result in a transfer between temporarily-
must provide information on liquidity, restricted, permanently-restricted, or
financial flexibility (i.e. restrictions) and unrestricted support.
interrelationship of assets and liabilities. Although FASB 117 does not encourage or
discourage further classifications such as

operating and non operating etc., if the Temporarily Restricted Support - If an
organization uses such terms these entity reports as unrestricted support,
classifications must, at a minimum, be contributions with donor-imposed
included in a financial statement that reports restrictions that are met in the same
the change in unrestricted net assets for the accounting period, it must disclose this in
period. its accounting policy note and must apply
this policy consistently from period to
Statement of Functional Expenses: period. Gifts of Long-Lived Assets If an
entity receives a gift of a long-lived asset
Expenses result in decreases in unrestricted that does not contain a stipulation as to how
net assets. Membership - Development long the asset must be used, it is reported as
activities include soliciting for prospective restricted support if it is the organization's
members and memberships dues, policy to imply a time restriction over the
membership relations, and similar activities. useful life of the asset. Promises to Give -
Voluntary health and welfare organizations Recipients of unconditional promises to
are required to continue to report give must disclose the amounts of promises
information about expenses by functional receivable in less than one year, one year to
and natural classifications in matrix format five years, and more than five years as well
in a separate financial statement. as the amount of allowance for uncollectible
promises receivable.
Other not-for-profit entities are required to
report functional classifications and are Board Designations - Board-designated
encouraged, but not required, to provide endowments of unrestricted, assets must be
information about the natural classification classified with unrestricted net assets but
of expenses. disclosed either in the body of the financial
statement or in the notes as board
Statement of Cash Flow designated. Depreciation - FASB 93
requires a not-for-profit entity to provide
FASB 117 amends a number of sections of the same information concerning
FASB 95 to require not-for-profit depreciation as for-profits organizations do.
organizations to include a Statement of In performing audits and preparing financial
Cash Flows as a part of a complete set of statements of not-for profit organizations
financial statements. Both FASB 116 and (1800Net, LLC).
117 require specific disclosures for not-for-
profit entities and encourage certain other 2.9 Analysis of FASB 116 (Financial
financial statement disclosures. Accounting Standards Board)
Contributed Services - An entity that "ACCOUNTING FOR CONTRIBUTIONS

receives contributed services must describe RECEIVED AND CONTRIBUTIONS
the programs or activities for which the MADE"
services were used, the nature and extent of Financial Accounting Standard Board
the contributed services received during the Pronouncement No. 116 "Accounting for
period and the amount recognized as Contributions Received and Contributions
revenue. Entities are encouraged to disclose made" covers all entities that receive or
the fair value of contributed services make contributions. Some key definitions
received but not recognized as revenues, if included in the statement are:
it is practical to do so.

Contributions - An unconditional transfer systems, and the organization should choose
of cash or other assets to a not-for-profit methods appropriate for its particular scale
entity or the settlement or cancellation of its of operations. If the grantee organization is
liabilities in a voluntary nonreciprocal unable to meet the standards that are
transfer by another entity acting other than covered here, funding may be terminated
as an owner. Donor - Imposed Condition - and the organization may be deemed
A future or uncertain event whose ineligible to receive subsequent financial
occurrence or failure to occur can result in assistance or may be placed on an
the return of the assets transferred to the alternative method of funding. Recipients
promissory or the release of the promissory must have accounting structures that
from an obligation to transfer assets. provide accurate and complete information
about all financial transactions related to
Donor - Imposed Restriction - A stipulation each Federally-supported project. Grant
and limitation in the use of contributed expenditure records must be at least as
assets. These restrictions can be limited as detailed as the cost categories indicated in
to purpose, time, or both. the approved budget (including indirect
costs that are charged to the project), (Office
Contributions received; including of Inspector General Audit Guidelines for
unconditional promises, should be Financial Audits Contracted by Foreign
recognized as revenues in the period Recipients, (June 2003).
received. For purposes of the Statement of
Financial Position, they should be recorded 2.10.2 Internal Control Standards:
as increases in assets or decreases in
liabilities and as either restricted support or Organizations must provide safeguards for
unrestricted revenue (1800Net.com1800Net all grant property, whether cash or other
LLC). assets, and assure that it is used solely for
authorized purposes. Control will be
2.10 Accountability Requirements: enhanced if the duties of the members of the
organization are divided so that no one
The National Endowment for the Arts person handles all aspects of a transaction
(NEA), a Federal agency, receives annual from beginning to end. The person who is
appropriations from the Congress to be used responsible for the physical custody of an
for granting financial assistance to projects asset should not also have responsibility for
related to the arts. NEA is, therefore, keeping the records related to that asset.
charged with a fiduciary responsibility to The person who has authority for placing
see that the taxpayers' money is used employees on the payroll and establishing
appropriately and to require proper wage rates should not be the same person
accountability from the recipients of its who signs the checks, (Office of Inspector
awards. Acceptance of a grant creates a General Audit Guidelines for Financial
legal obligation on the part of the grantee to Audits Contracted by Foreign Recipients.
use the funds in accordance with the terms (June 2003).
of the grant and to comply with the grant's
provisions and conditions. 2.10.3 Audit Standards:
2.10.1 Financial Management Standards Grantees are expected to maintain a state of

audit readiness. This means that records
Many alternative methods exist for pertinent to the financial and programmatic
implementing financial management aspects of their grants must be readily

accessible for audit. Failure to provide the
auditor with reliable documentation could The primary data were collected through
lead to questioned costs and possibly result questionnaires designed to address the
in cost disallowances requiring refunds. intended assessment questions and
Office of Management and Budget (OMB) assessment objectives. According to
Circular A-133, the definitive Federal CHSA’s of Ethiopia data, there were 1,275
regulation concerning audits of non-profit local NGOs registered in Addis Ababa
organizations, bases the requirements for (CHSA of Ethiopia, 10/4/2013).
audit on specific dollar amounts,(OMB) Hence the population under this assessment
Circular A-133). is 1,275. The appropriate sample was
calculated using the following formula:
2.10.4 Reporting Standards
The basic requirements for reporting are N ______

spelt out in the two documents, "General n = 1+N (e) 2
Terms and Conditions for Grants to = 1,275______
Organizations" and "Reporting 1+1,275(0.1) 2
Requirements," both of which are included =92
in the grant award packages furnished to all Where:
grantees. It should be noted that the failure n = is sample size
to submit reports on a timely basis may N = total population
result in delayed payments and/or denial of (e) = allowance of random
eligibility for future grants. In addition to error
the basic reporting requirements, those The questionnaire was developed and
organizations, who are required A-133 distributed to 92 respondents using random
audits, must submit the requisite audit sampling technique for those who are
reports within nine months following the performing financial management activities
end of the audit period,(Office of Inspector in these local NGOs and 83 (90%) were
General Audit Guidelines for Financial returned by the respondents. Besides this
Audits Contracted by Foreign Recipients. primary data, relevant secondary data were
(June 2003). also collected from various books, manuals,
proclamation and websites.
Research Methodology
3.3 Data Analysis:
3.1 Research Design:
The statistical tools like tables and
The descriptive method of study was used percentages were used to analyze data
for this assessment. The gathered data were gathered by questionnaires and then
analyzed and interpreted. The secondary described for each survey results. The
data was collected from reports and website questionnaire was given to finance heads
of CHSA of Ethiopia .The NGOs under and accountants. Finally, based on the
study were local NGOs who have to comply analysis, suggestions and recommendations
with rules and regulation of CHSA of were forwarded.
Ethiopia. Hence, these rules and regulations
were assessed against the financial Data Analysis and Presentation
management practices of these NGOs.
4.1 Introduction
3.2 Data Collection:

This part of the assessment discusses about secondary data were also collected from
the findings based on the information books, manuals, journals, reports,
gathered from the respondents for the proclamation, research papers and in
questionnaire. The primary objective of this various websites.
assessment is to analyze the financial
management practices in local NGOs based 4.2 Data is analyzed under following
in Addis Ababa. headings:
1. General Information,
The primary data used for this assessment 2. Budget management practices,
was collected from the staff of local NGOs 3. Accounting and Records Keeping
directly relevant for financial management practices,
activities using questionnaire and selected 4. Internal Control Practices and
by random sampling technique. The 5. Reporting practices,
On General Information
TABLE 4.2.1
1. Educational level
SL Questions Options of Responses Total
NO Certificate Diploma BA/BSc Masters Responses
1 Finance staff _____ 11 63 7 81
educational level (13.6%) (77.78%) (8.64%) (100%)
For educational level questionnaire two respondents did not respond.
2. Number of years of services
3.
SL NO Questions Options of Responses Total
0-2 3-5 6-10 Above Respo
10 nses
yeas
2 Finance staff years of 17 28 22 16 83
work experiences in (20.48%) (33.73%) (26.50%) (19.27 (100%
accounting %) )
4. Accounting method used

NO Accrual Cash Base Modified Others Resp
cash basis onses
3 Method of 19 21 43 ___ 83
Accounting used (22.89%) (25.30%) (51.80%) (100
%)
5. Accounting standard in practice

SL NO Questions Options of Responses
GAAP IAS Others Total
Responses

4 Accounting standards 77 5 ___ 82
used (93.90%) (6.10 (100%)
%
6. Major sources of funding
NO Donation Grants Membership Fund Responses
contribution raising
5 Main sources 52 33 6 5 96
of funds (54.17%) (34.37%) (6.25%) 5.21%) (100%)
6. Major activities of NGOs relates to :
Quest Options of Responses

S ions Edu Agricul Water and Child HIV/AIDS, Total
L cati ture, sanitation development alleviation Respons
N on, es
O
6 Majo 21 7 12 24 64 128
r (16. (5.47% (9.37%) (18.75%) (50%) (100%)
progr 21% )
ams )
being
imple
ment
ed
7. Financial statements prepared by NGOs

SL Question Options of Responses Total
No Resp
onses
FinancialStatement of Cash flows Statement
position activities of
(revenue and functional
expenditure expenses
report)
7 Financial 42 53 30 23 148
statements (28.38%) (35.81%) (20.27%) (15.54%) (100
you prepare %)
(Respondents’ summary to the questionnaire).
As educational background and relevant indicate that under educational background

work experiences are the main requirements 13.6% held Diploma, 77.78%BA degree
for successful accomplishment of activities and 8.64% Masters Degrees. Thus, most of
with required quality standards and quality the NGO’s staff is of BA degree
financial management activities, the educational level and the smaller proportion
respondents were requested to provide their i.e. 8.64 % are Masters Degree holders.
educational background and financial This indicates that there is small number of
management experiences. Responses staff working in financial management who

holds masters degree in local NGOs. The contribution and 5.21% other fund raising
second question was regarding financial activities. The result regarding project types
management/or accounting work indicates that the majority of the NGOs
experiences and the result indicates that (64%) are implementing HIV/AIDS
20.48% are working for 0-2 years ,33.73% Prevention projects followed by children
for 3-5 years,26.5% for 6-10 years and development (18.75%) and least are for
19.27% for above 10 years. This indicates education, water , sanitation and education
that a considerable number of staff i.e. related projects . Thus, the main project is
20.48% has work experiences up to two concerning HIV/AIDS control. Regarding
years and majority have 3-5 years of work the sources of fund the major sources of
experiences. Methods of accounting used fund comes from donation and grants and
by the respondent were 22.89% for accrual the least from members’ contribution and
base, 25.30% for cash base and 51.80% for other fund raising activities. The result
modified accounting methods. These three indicates that the Local NGOs’ financial
methods are being used by the NGOs sources are heavily dependent on grants and
though most of the organization (51.80%) donations and less on member contribution
used modified accounting methods. and fund raising activities. This implies
Regarding accounting standards the result that there is high risk for sustainability and
indicates that 93.90% follow GAAP and continuity of project implementation and
6.10% IAS. Most of the NGOs used GAAP. existence. Furthermore, these NGOs
One of the main objectives of these local compete for donation and grants for sources
NGOs establishment and existence is to of fund and hence must competent enough
perform projects for people’s good and to for compliance with the donors’ rules and
play roles in economic development procedures. The question on financial
activities. These projects are to address and statements preparation was administered on
solve the prevailing problems in health, the NGOs finance staff. The result indicates
education and other activities which require that all NGOs are preparing these required
these NGOs engagement. The types of financial statements. Literature review
project activities are the most important (FASB 117) indicates that the organization
thing for fund raising and attract attentions must prepare Statement of financial
of donors and getting government support. position, Statement of Activities, Statement
Survey indicates main activities of NGOs of Functional Expenses and Statement of
are: Cash Flow to indicate the finical position as
16.21% education, 5.47% agriculture, whole. Furthermore statement of activities
9.37% water and sanitation, 18.75% for is required by Charities and Societies
Child development and 64% for HIV/AIDS Agency.
control. Main sources of fund are: 54.17%
donation, 34.37% grants, 6.25% members’
On Budget Management Practices:
TABLE 4.2.2
Summary of budget related questions and responses:
Sl Options of Responses
No Strongly Disagree Neutral Agree Strongly Total
Questions
disagree agree Responses
d
1 All grant or contract 2 25 6 31 19 83
budget proposals are (2.40%) (30.12%) (7.23%) (37.35%) (22.89%) (100%)
reviewed by finance
staff

2 Cash forecast is always 1 7 28 37 10 83
prepared for each (1.20%) (8.43%) (33.73%) (44.58%) (12.05%) (100%)
month, six months and
a year for cash need
planning for project
implementation
3 The boards formally 1 8 8 45 21 83
authorizes the annual (1.20%) (9.64%) (9.64%) (54.21%) (25.30%) (100%)
budget of the
organization
4 Budget monitoring 1 17 9 25 31 83
report is done at the end (1.20%) (20.48%) (10.84%) 30.12%) 37.35%) (100%)
of every month and
provided to managers
to see actual expanses
and performances
against budget and
activities planned
variance analysis used
for decisions
5 There are occasions 5 23 12 11 32 83
that the organization (6.02%) (27.71%) (14.45%) (13.25%) (38.55%) (100%)
does not implement
activities on the
planned time due to
delay of fund transfer
from the donor
The budget management includes planning about difficulties in having appropriate

and control activities: Forecasting the budget amount calculation and forecasting
budget required for implementation of a the required amount of budget. The budget
project, assurance of budget utilization up preparation process shall be participant and
to the budget and used for the planned the finance staff shall involve and
activities. Furthermore it is also important participate in budget preparation and
as guideline towards the achievement of reviewing for better budget preparation,
planned programs and measurement of implementation and monitoring activities.
performance. Budgeting, implementing, Various financial management documents
monitoring and measuring the performance indicate the importance of finance staff
are the main activities to be done by finance participation in budgeting process activities,
and program staff and requiring the for instance, the finance staff review the
involvement and participation of staff from costing of planned activities. The responses
both technical managerial levels. Budget for cash forecast preparation results indicate
proposal reviewing and cash forecast as: 1.20% strongly disagrees, 8.43%
preparation related questions were provided disagree, 33.73% neutral, 44.58% agree and
to the respondents and the 2.40% strongly 12.05% strongly agree. Thus a considerable
disagree, 30.12% disagree, 7.23% neutral, number of respondents responses indicate
37.35% agree and 22.19 % strongly agree to that no cash forecast are prepared and have
the statement that the budget proposals are no ideas on cash forecast. Cash forecast
reviewed by finance staff. The responses preparation is very important for smooth
from the respondents indicate that the implementation of activities as planned.
finance staffs participation in budget Cash forecast document is required for
proposal reviewing is less. This brings augmenting the required cash for activities

implementation .It is required to avoid board in organization leadership is
project activities implementation due to authorization of annual budget in the
shortage of cash at the right time. implementation of project activities. Once
the budget is prepared and approved, the
Question was asked to respondents that how implementation process is to be done. The
far they agree that budget is always implementation of the budget should be
approved by board .In this respect: 1.2% monitored for its day to day implementation
strongly disagree, 9.64% disagree, 9, 64% to take appropriate decision for its
said they have no idea, 54.21% agreed and deviations from the planned activities and
25.30% strongly agreed. Here the budget amount. The respondents’ results
considerable respondents indicated there indicate that: 6.02% strongly disagree,
was no board budget authorization or have 27.71% disagree, 14.45% neutral, 13.25%
no idea on this issue. For having better agree and 38.55% strongly agree that delay
internal control system, it required budget in project implementation is due to delay in
authorization and monitoring by the board fund transfer. In implementation of
on continuous basis. projects, sufficient cash must be available
for activities implementation at the time of
To be a good and effective NGO, Board requirement. Thus due to cash shortage
provides a basis for successful management activities implementation should not be
of its organization; familiarizes its target affected. Researcher has observed that
constituents with the activities of the NGO; many project implementation activities are
help in better understanding the affected due to delay of reports between the
organizational structure of the NGO, and implementer and the donor. This cash flow
also assists in distributing responsibilities also depends on financial management
among the team members within the NGO activities and the information flow between
organization. One of the main activities of a the project executer and the donor.
On Records Keeping Practices TABLE 4.2.3
Summary of respondents:
Sl Questions Options Response Total
No Stron Disagree Neutr Agree Strongl Respo
gly al y agree nses
disag
ree
1 The organization has 2 4 32 45 83
written policies and (2.41%) 4.82% (38.55 (54.21 (100%
guidelines sufficiently ) ) %) )
indicating the
procedures and
processes for
accounting of
revenues and
applications for funds
2 The accounting 4 36 7 29 7 83
system keep records (4.82 (43.37%) (8.43 (34.94 (8.43% (100%
for fixed assets and %) %) %) ) )
calculate depreciation
expense to account it
in financial

statements
3 The financial 2 2 6 57 16 83
management system (2.41 (2.41%) (7.23 (68.67 (19.28 (100%
of the organization is %) %) %) %) )
in line with donors’
requirement (if you
don’t agree give your
comments in the last
column)
4 The organization 2 12 13 45 11 83
maintain records for (2.41 (14.46%) (15.66 (54.21 (13.25 (100%
monetary and in kind %) %) %) %) )
gifts received from
volunteers’ and show
it in the financial
statements and
prepare supporting
documents
5 There is a culture of 6 43 11 17 6 83
calculating (7.23 (51.81%) (13.25 (20.48 (7.23% (100%
depreciation expense %) %) %) ) )
of fixed assets and
account in the
expenses reporting
and indicate in
financial statements
6 Funders /donors 4 16 12 43 7 82
provide trainings on (4.82 (19.51%) (14.63 (52.43 (8.53% (100%
financial management %) %) %) ) )
activities on agreed
projects
7 The organization has 3 18 9 41 12 83

common cost (3.61 (21.68%) (10.84 (49.39 (14.45 (100%
allocation methods %) %) %) %) )
established for
common expense
allocation among
different projects
8 Appropriate computer 1 4 7 49 22 83
software is utilized to (1.21 (4.82%) (8.43 (59.03 (26.51 (100%
perform recording %) %) %) %) )
functions
(Respondents ‘summary
Questionnaire).

Accounts records keeping is one of the main pillars of financial management activities.
The records keeping embrace many activities like accounting systems, accounting
manual and accounting software among others. Questions on these areas were put before
the respondents and the results indicate regarding availability of sufficient written
policies and guidelines for financial management activities and whether the accounting
system is in line with the donors’ requirements. Question was asked to respondents that
how far they agree on the alignment of the financial management systems to donors’
requirements: In this respect: 2.41% strongly disagree,2.41% disagree,.23% Neutral
,68.6 % agree and 19.28% strongly agree. The analysis indicate that about 5% of the
respondents showed that the financial management system is not in line with the donors
requirements and 23% have no ideas on that matter. Most of the respondents showed
that the financial management system is in line with the donors requirements.
The financial management requires being in line with donors’ requirement for regarding
with the recording and reporting requirements. As indicate in table 3,2,4 the
respondents for the question whether the accounting system keep records for fixed
assets and calculate depreciation expense to account it in financial statements , the
respondents gave their answers that 4.82% strongly disagree,43.37% disagree ,8.43 %
neutral ,34.94% agree and 8.43% strongly agree. The result indicates most of the NGOs
are not calculated depreciation for fixed assets. Some of the organization are keeping
records and calculating depreciation for fixed assets. Literature review indicated that
Fixed assets may represent considerable wealth held in the form of land, buildings,
vehicles, machinery and office equipment and, often over-looked; require special
attention to ensure their value is maintained and that they do not disappear.
TABLE 4.2.4
Analysis of Internal Control Control practices
Summary of Internal Control Questions Reponses
S Questions Options of Responses Total

L Strongly Disagre Neutr Agree Strongl Respon
N Disagree e al y ses
o Agree
1 The finance staff is 3 18 6 47 9 83
sufficient in number
and qualification to (3.61%) (21.68% (7.23 (56.62% (10.84% (100%)
perform the financial ) %) ) )
management of the
organization
2 program staffs job 17 15 4 37 10 83
descriptions clarify
financial management (20.48%) (18.07% (4.82) (44.58% (12.05% (100%)
roles and ) ) )
responsibilities

3 The organization 0% 9 8 23 42 82
ensures the application
of existing segregation (10.97% (9.75 (28.05% (51.22% (100%)
of duties and ) %) ) )
responsibilities
4 I know that there is 1 3 2 52 25 83

board of directors for
the organization (1.20%) (3.61%) (2.40 (62.65% (30.12% (100%)
%) ) )
5 The board meets 3 8 9 22 41 83
regularly and have
schedule for meetings (3.61%) (9.64 (10.84%) (26.51% (49.39% (100%)
%) ) )
6 Funders/donors review 2 6 6 28 41 83
the financial
management activities (2.40%) (7.23 (7.23%) (33.73% (49.39% (100%)
of projects in %) ) )
reasonable time
7 The financial reports 1 7 3 33 39 83
are checked and
reviewed against the (1.20%) (8.43 (3.61%) (39.76% (46.98% (100%)
activities reports by %) ) )
the management
8 Finance staff is 2 8 4 27 42 83
involved in the annual
budget preparation (2.40%) (9.64 (4.80%) (32.53% (50.60% (100%)
process %) ) )
9 Executive Director 3 11 11 29 29 83
reviews the monthly
financial statements (3.61%) (13.25 (13.25%) (34.94% 34.94%) (100%)
%) )
10 ‘Segregation of duties’ 1 4 12 32 33 82
is implemented within
the organization’s (1.22%) (4.88 (13.63%) (39.02% (40.24% (100%)
financial management %) ) )
activities sufficiently
Financial control/internal control are one of the most important parts of financial
management activities. Different literature indicate it is system of controls, checks and
balances – collectively referred to as internal controls – to be put in place to safeguard
an organization’s assets and manage internal risk. Their purpose is to deter
opportunistic theft or fraud and to detect errors and omissions in the accounting
records. An effective internal control system also protects staff involved in financial
tasks. Internal Control/Financial Control practices related questions were submitted to
local NGOs staff and their responses are summarized in table 3.2.5. The existence of
sufficient number with better qualification is vital for better accomplishments of
financial management activities. The respondents’ response for a question existence
finance staff sufficient in number and qualification to perform the financial
management of the organization showed that 3.61% and 21.68% for strongly disagree
and disagree respectively and 7.23% no comment while 56.62% and 10.84% for agree
and strongly agree respectively. This indicates that a considerable number of

respondents Reponses showed that there is gap on fulfillments of sufficient finance
staff in these organizations. Job description is highly important to state at least main
duties and responsibilities of staff and this also helps in application of segregation of
duties and responsibilities so that it helps for strengthening of internal control systems
of the organization. Two questions were provided to the respondents on whether the
job descriptions for program staffs clarify financial management roles and
responsibilities and the organization on ensures the application of existing segregation
of duties and responsibilities.
For job descriptions clarity 20.48% and 18.07% strongly disagree and disagree
respectively and 4.82% no comment, 44.58% and 12.055 for agree and strongly agree.
A considerable number of responses showed that no clear job description for program
staff on their financial management related responsibilities for which directly and
indirectly all staff have financial management responsibilities. And for the assurance of
segregation and duties and responsibilities by the organization, the response showed
that 10.97% disagree and 9.75% no comment respectively and 28.07% and 51.22%
agree and strongly agree receptively. Here the result indicates there are gaps on
assurance of segregation of duties and responsibilities which is the most important part
in internal control system. Literatures indicate that for successful and effective
management of NGOs, existence of board is vital. Having a good and effective NGO
Board provides a basis for successful management of its organization, hence, the
existence and managerial role of board is highly required for local NGOs. Two
questions were provided to local NGOs staff for their responses whether there are
boards and the board members have regular/scheduled meetings for managing the
organization. The responses for existence of board for management of the organization
responded 1.2% and 3.61% for strongly disagree and disagree respectively and 2.4%
no comment, and62.65% and 30.12% strongly agree and agree respectively. Regarding
the board meeting the reopens indicate that 3.61% and 9.64% for strongly disagree and
disagree respectively and 1o.84% no comment, and 26.51% and 49.39% for agree and
strongly agree respectively. Here, from the responses it is clear that there are gaps on
having scheduled and regular meetings by the board which is vital for better
management and accomplishment of the organizations. As system of controls, checks
and balances referred to as internal controls are to be place to safeguard an
organization’s assets and manage internal risk. Segregation of duties means that there
is check and balance, that is, financial transaction activities are to be done and checked
by different staff.
In relation to this three questions were provided to the respondents and their responses
indicate: For funders reviewing financial management activities timely; the responses
indicate 2.4% and 7.23% for strongly disagree and disagree respectively and 7.23% no
comments, and 33.73% and 49.39% for agree and strongly agree respectively. The
reviewing and checking of the actual practices timely by donors are required to
strengthen the existence of good financial management practices. For checking and
reviewing practices for reports and financial statement questions the respondents
answers indicate that: For financial reports reviewing and checking against the
activities 1.2% and 8.43% for strongly disagree and disagree respectively and 3.61 no
comment, and 39.76% and 46.98% for agree and strongly agree and for monthly
financial statement reviewing by executive director: responded 3.61% and 13.25% for

strongly disagree and disagree respectively and 13.25 no comment, and 34.44% and
34.94% for agree and strongly agree respectively. Here the result indicates that there
are gaps for reviewing and checking of financial statements and reports financial
against activities.
TABLE 4.2.5
Analysis of Reporting Practices:
Summary of Responses on Reporting Practices

No Strongl Disagr Neutra Agree Strongl Respo
y ee l y nses
Disagre Agree
e
1 Financial 1 2 0% 23 57 83
statements are (1.20%) (2.40) (27.71% (68.67 (100)
audited every ) %)
year by external
auditors within
the time
requirement of
donors, and
Charities and
societies agency
of Ethiopia
2 Funders/donors 1 14 12 32 24 83
transfer fund (1.20%) (16.86 (14.45 (38.55% (28.90 (100)
timely as per the %) %) ) %)
original plan in
the
implementation
of projects
3 There are 9 19 10 33 12 83
occasions that (10.84% (22.89 (12.05 (39.76% (14.45 (100)
organization’s ) %) %) ) %)
external audit
report is
qualified
4 Financial reports 1 4 7 24 47 83
are submitted to (1.20%) (4.80% (8.43% (28.90% (56.62 (100)
the concerned ) ) ) %)
government
agency in the
right format and

on time within
three months
from the end of
the financial year
5 The activity 0% 3 7 36 37 83
performance (3.61% (8.43% (43.37% (44.58 (100)
reports are ) ) ) %)
analyzed and
measured against
budget allocated
6 Monthly 2 13 3 30 34 82
financial (2.44%) (15.85 (3.66% (36.58% (41.46 (100%
statements are %) ) ) %) )
available no later
than the end of
the following
month
7 The Board select 1 9 6 46 21 83
an independent (1.20%) (10.84 (7.23% (55.42% (25.30 (100)
auditor to %) ) ) %)
conduct an
annual audit
8 The Board 1 8 8 23 41 81
reviews the (1.23%) (9.88% (9.88% (28.39% (50.62 (100%
annual audit ) ) ) %) )
report for its
internal controls
and compliance
with
governmental
law and
regulation
9 The board 0% 15 8 34 26 83
ensures the (18.07 (9.64% (40.96% (31.32 (100)
fulfillment of the %) ) ) %)
government’s
and donors
requirements and
evaluate the
organization’s
activities, use of
funds, record
keeping, and
reporting
consistently
10 The organization 1 6 15 38 23 83
is at a very good (1.20%) (7.23% (18.07 (45.78% (27.71 (100)
status in meeting ) %) ) %)

government and
donor
requirements in
financial
management and
reporting
11 The reporting 2 12 15 17 35 81
system has a (2.47% (14.81 (18.52 (20.98% (43.21 (100%
mechanism of %) %) ) %) )
linking the
financial
information with
the annual work
plan’s physical
progress
12 Are financial 2 6 13 18 43 82
reports are (2.44%) (7.32% (15.85 (21.95% (52.44 (100%
always submitted ) %) ) %) )
to donors on time
As a means to discharge responsibility and qualified, the responses indicate 10.89%

accountability and to show their service and 22.89% for strongly disagree and
giving efforts, operational efficiency and disagree and 12.o5% no comment and
effectiveness and their contribution to the 39.76% and 14.45% for agree and strongly
development endeavor of the country, agree. These responses showed that a
Charities prepare financial Statements and considerable number of audit reports are
other required reports to provide qualified, thus there are gaps to be
information to meet the common interest of improved and lesser quality of financial
donors, members, creditors and others who reports. Financial reports are to be
provide resources to not-for-profit submitted on time as greed and required by
organizations. As many literature reviews donors and government bodies. Two
and the charities and societies agency, the questions were given to the respondents on
NGOs are required to submit financial and financial reports submission to the
activities implementation status reports to concerned government agency in the right
stake holders: to government agency and format and on time and financial statement
funder/donors on time as per the agreements availability no later than the end of the
and CHSA regulations. Questions for following month. The responses are stated
reports related were submitted to NGOs here as for financial report submission 1.2%
staff for their responses and the responses and 4.8% for strongly disagree and disagree
are summarized: for auditing of financial and 8.43 for no comment and 28.90% and
statement on time 1.2% and 2.4% 56.62% for agree and strongly agree
responded strongly disagree and disagree respectively. And for financial statements
respectively and 27.71 and 68.67% for availability 2.445 and 15.855 for strongly
strongly agree and agree. Here, some disagree and disagree respectively and
respondents show that there are gaps on 3.66% for no comment, and 36.58% and
timely auditing financial statement. For a 41.46% for agree and strongly agree.
question for whether the audit report is

The results indicate there are gaps on timely and less in member contribution and fund
financial reports submission and availing of raising activities. This implies that there is
the monthly financial statement, thus delay high risk for sustainability and continuity of
for financial reports submission leads to project implementation
delay of fund transfers from the donors and ►The financial statements preparation were
it also affects the project activities not as per the financial management
implementation. The management of these standers for statement for financial position,
NGOs is required to pay more attention for Statement of Activities, Statement of
timely preparation of financial statements Functional Expenses and Statement of Cash
and submission to the concerned partners. Flow to indicate the finical position as
In the literature part it is indicated that whole.
charities are required to maintain day-to- ►Lack of participation in budget proposal
day records of financial transactions. They review by financial staff and lack of cash
are also required to furnish an annual forecast preparation which may brings
statement of accounts and annual audit about difficulties in having appropriate
reports to the Charities and Societies budget amount calculation and cash need
Agency. Furthermore, CSOs are required to proposals.
submit to the Agency an annual activity ► Lack of board activities in budget
report outlining their major activities and approval and monitoring, for which a board
other relevant information along with a activities in organization leadership,
statement of accounts. They are also authorization of annual budget and
required to renew their license and monitoring the implementation of project
registration every three years, which is activities are the most important ones for
subject to an executive evaluation of the successful achievement of planned projects.
completeness and accuracy of their ►The existence of delay in fund transfer to
performance and audit reports. the project implementing partner has
negative effects on project implementation
Conclusion and Recommendation timely.
►There is lack of record keeping for ‘‘in
5.1 Conclusion kind gifts’’ received,
►There is lack of common cost allocation
The research questionnaire was develop and methods for shared costs among different
distributed to local NGOs to gather the data projects benefited from these common
on the financial management practices. costs.
Based on data gathered from the ►There are gaps on timely financial reports
respondents the following findings were submission and availing of the monthly
realized on the financial management financial statement, thus delay for financial
practices: reports submission leads to delay of fund
transfers from the donors and it also affects
►One of the main objectives of these local the project implementation.
NGOs establishment and existence is to ►There is gaps on the board’s
perform projects for people benefits and involvement in assuring fulfillments of
play roles in economical development CHAS and donators’ requirements by the
activities. The NGOs found most of their organization.
project is concentrated on HIV /AIDS ►The financial report system is lacking
program implementation. linkage with physical progress reports and
►The Local NGOs’ financial sources are delay in submission of financial reports to
heavily depends on grants and donations the donors.

of statement of financial position,
6.2 Recommendation Statement of Activities, Statement of
Effective management of an NGO’s Functional Expenses and Statement of Cash
resources is done in a manner which is Flow to indicate the finical position as
transparent, accountable, equitable and whole.
responsive to the needs of the people. Since ►The budget management includes
NGOs aim at becoming sustainable, good planning and control activities: Forecasting
governance is critical to their existence. In the budget required for implementation of a
many developing countries NGOs often project, assurance of budget utilization up
lack the institutional capacity and resources to the budget and used for the planned
to operate. Also, funds from donors are activities. Furthermore it is also important
sometimes poorly managed. Thus, in order as guideline towards the achievement of
to ensure effective and proper management planned programs and measurement of
of resources, good governance becomes an performance. Budgeting, implementing,
important aspect of every NGO. monitoring measuring the performance are
A good financial management system the main activities to be done by finance
makes it easier to be accountable to donors and program staff and requiring the
and project beneficiaries, thereby enhancing involvement and participation of staff from
their respect and confidence in the both technical managerial levels.
organization. This, in turn, helps an NGO ►The budget preparation process shall be
be more competitive and can increase its participant and the finance staff shall
chances of maintaining long-term financial involve and participate in budget
health. preparation and reviewing for better budget
preparation, implementation and monitoring
After analyzing the gaps in financial activities. Various financial management
management practices of local NGOs, the documents indicate the importance of
recommendations are stated below: finance staff participation in budgeting
►The local NGOs are required to have well process activities, for instance the fiancé
organized and established financial staff to review the costing of planned
management practices for successful activities to monetary amounts.
accomplishment of its objectives. NGOs ►Cash forecast preparation is highly
operate in a rapidly changing and important for smooth implementation of
competitive world. If their organizations are activities as planned. Cash fore cast
to survive in this challenging environment, document is required for availing the
it is required to develop well organized required cash for activities implementation.
financial management tools. Thus it is required to avoid project activities
►These projects are to address and solve implementation delay due to shortage of
the prevailing problems in health, education cash at the right time.
and other activities which require these ►For having better internal control system,
NGOs engagement. Thus, the project types it is required budget authorization and
are the most important thing for fund monitoring by the board and effective board
raising and attract attentions for donors and provides a basis for successful management
get government support. of its organization
►Financial and activities reports shall be
►To be competent and fulfill government submitted to the concerned government
and donors requirements the organization body and donors timely.
must prepare financial statement and reports
as per acceptable standards like preparation

►The financial management shall include 1. Brooks world poverty institute,
maintain records in kind gifts for university of Manchester, Nokola
implementation of its project activities. Banks, June 2012
►As a means to discharge responsibility 2. B. Arts, M. Noortmann and B.
and accountability and to show service Reinalda (eds.) (2001), Non-State
giving efforts, operational efficiency and Actors in International
effectiveness contribution to the 3. The National Nonprofit Leadership
development endeavor of the country, and Management Journal, Volume
charities shall prepare financial Statements 18, Number 1,
, other required reports and provide 4. January/February 2000,
information to donors, members and others 5. Ethiopia – Country Profile 1998,
who provide resources in time . Jos van Beurden, GOM, 1998)
►Boards’ involvement and decision in 6. Eric Werker an Assistant Professor
organizational management; auditing and of Business Administration at
audit report reviewing issues is vital. The Harvard Business School,
board also at higher managing body level, 7. Boston, Financial Accounting
required to ensure that the organization is Standard Board Pronouncement No.
fulfilling these requirement and follow up 116
and evaluate the organization’s activities in 8. Financial Accounting Standards
records keeping and reporting. Board Pronouncement No. 117
►The financial information shall relate 9. Federal Acquisition Regulation
with the activities performed, that expenses (FAR) at 48 CFR Part 31,
report shall indicate the activities performed 10. Government Auditing Standards
using those resources. Financial reports to and Circular A-133 Audits,
be reconciled and linked with physical 11. Iranian Studies Group at MIT June
progress. Hence, establishment of financial 2005
management system linking the activities 12. Mandeep S. Tiwana, Civil Society
report with the activities performance. Watch Associate, and CIVICUS
►Board should monitor regularly the 13. Mango June 2003 1Mango Course
financial management system of the Handbook, Stephenson, 2003
organization and organization shall develop 14. Users’ manual for charities and
well organized financial management societies law, task force enabling
policies and ensure application of the environment for civil Society in
established policies and procedures. Ethiopia
►senior management shall give due 15. USAID regulations, other
attention for financial management systems implementing guidance, or the
that has impacts on day to day financial terms and conditions of the award
management activities. 16. 1800Net, LLC
►organization shall ensure the existence of 17. University of Botswana,
well structured segregation of duties and 18. Understanding Voluntary
responsibilities that has effects on internal Organizations: Guidelines for
control system, Donors,“Working Paper 258.
►The organizations should have 19. Washington: World Bank, Country
transparent in accounting systems and Economics Department,
recruitment 20. www.chsa.gov.et users’ manual for
charities and societies, by taskforce,
Bibliography 2011

21. www.chsa.gov.et accessed on .html),Pp 67-71.Brown D, Korten D
20/4/2013’ (1989).
22. organizational-problems-of-non-
governmental-organizations-ngos-


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IFSMRC AIJRM Volume-02 Issue-03 Jan-Jun-2014 Online ISSN: 2308-1341

Print ISSN: 2308-3034

Assessment of Financial Management

Key Words:NGOs-associations- financial- management- fund- weakness- recommended- control

1.1Background of the Study

The term, "non-governmental organization" government control, not seeking to

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

1.5 Scope of the Study:

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

The charities and societies agency of 2.4.2 Reporting:

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Contributed Services - An entity that "ACCOUNTING FOR CONTRIBUTIONS

Assessment of Financial Management Practices in Local NGOs- A Case of

2.10.1 Financial Management Standards Grantees are expected to maintain a state of

Assessment of Financial Management Practices in Local NGOs- A Case of

The basic requirements for reporting are N ______

Assessment of Financial Management Practices in Local NGOs- A Case of

4. Accounting method used

SL Questions Options of Responses Total

5. Accounting standard in practice

Assessment of Financial Management Practices in Local NGOs- A Case of

6. Major activities of NGOs relates to :

Quest Options of Responses

7. Financial statements prepared by NGOs

As educational background and relevant indicate that under educational background

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

The budget management includes planning about difficulties in having appropriate

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

7 The organization has 3 18 9 41 12 83

Assessment of Financial Management Practices in Local NGOs- A Case of

S Questions Options of Responses Total

Assessment of Financial Management Practices in Local NGOs- A Case of

4 I know that there is 1 3 2 52 25 83

(Respondents’ summary to the questionnaire).

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

SL Questions Options of Responses Total

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

As a means to discharge responsibility and qualified, the responses indicate 10.89%

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

Assessment of Financial Management Practices in Local NGOs- A Case of

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