The practices followed by NGOs in Bangladesh are varied and diverse and there by preparation of financial statements are incomparable and difficult for uses to understand. The paper tries to demonstrate financial reporting and accounting system of a BRAC’s project and provide a guideline for constituting suitable financial reporting and accounting systems for NGOs.
The article elaborates on basis of preparation of financial statements and reporting procedure and then followed by accounting systems of regional office and head office of that project. The final part of the article discuses issues relating to financial report and financial transparency of the project.
NGOs have become major players in the field of international and national development. Since the mid-1970s, the NGO sector in both developed and developing countries has experienced exponential growth. From 1990 to 2000 total development aid disbursed by international NGOs increased ten-fold. In 1992 international NGOs channeled over $7.6 billion of aid to developing countries. Bangladesh has largely failed to assist the poor or reduce poverty because of limited resources and planning, while NGOs have grown dramatically, but it ostensibly fails to fill this gap. There are more and bigger NGOs here than in any other country of equivalent size.
The Association of Development Agencies in Bangladesh (ADAB) had a total membership of 886 NGOs/PVDOs (Private Voluntary Development Organizations) in December 1997, of which 231 were central and 655 chapter (local) members (ADAB, 1998). The ADAB Directory lists 1007 NGOs, including 376 nonmembers NGOs. The NGO Affairs Bureau of the Government of Bangladesh (GOB), which has to approve all foreign grants to NGOs working in Bangladesh, released grants worth about $250 million US dollars in FY 1996-97 to 1,132 NGOs, of which 997 are local and 135 are foreign (NGO Affairs Bureau, 1998). NGOs have mainly functioned to service the needs of the landless, usually assisted by foreign donor funding as a counterpoint to the state’s efforts (Lewis, 1993). Besides all these advancement the field of NGO, Financial Reporting process and application of accounting is disgraceful. NGOs in Bangladesh have increasingly become subject to question and criticism from the government, political parties, intellectuals and the public in genus for misuse of funds, gender discrimination, and nepotism. Absence of proper guidelines in preparing financial statements and reports makes it more complex. The government of Bangladesh doesn’t have any unique rules for preparing the financial reports.
BRAC is one of the largest NGOs in Bangladesh. It has more than hundreds projects. BRAC maintains books of accounts and other record on a program or project basis. And its reporting process is transparent and one of the most structured system in Bangladesh. This report we will discuss about the financial reporting and Accounting system of BRAC Education Program (BEP). BEP begun experimentally in 1985, it is an independent education program organized and managed by BRAC with the approval of NGO Bureau of the Government of Bangladesh. The analysis and discussion of reporting systems of BRAC Education Program will give guidance and support to other NGOs about the generation of accounting systems and reporting procedure, and to maintain a transparent system of utilizing grants.
International Accounting Standards (IAS) doesn’t have specific guidelines for NGOs. Regarding applicability of Accounting Standards to NGOs, the Accounting Standards Board (ASB) has given an opinion in September 1995.
“The Institute will issue Accounting Standards for use in the presentation of the general purpose financial statements issued to the public by such commercial, industrial or business enterprises as may be specified by the Institute from time to time and subject to the attest function of its members”
It is clear from the above that the Accounting Standards are applicable to NGOs who are some, or more, of the activities are commercial or business in nature. However, it is very difficult to determine what the exact meaning of commercial is or business activities with reference to NGOs. NGOs are not meant for earning profit out of their activities. There are some NGO related laws and regulations in Bangladesh. While registration is not mandatory for any NGOs, 2 types of legal frame work govern NGOs of Bangladesh.
- Laws for Incorporation Acts: There are four such Acts in Bangladesh: the Societies Registration Act, 1861; the Trust ACT, 1882; Co-operative Societies Act, 1952 and the Companies Act of 1994.
- Three laws and ordinances for regulation the relationship of such associations with the Government: The Voluntary Social Welfare Agencies (Regulation and Control) Ordinance, 1961; the Foreign Donation (Voluntary Activities) Regulation Ordinance, 1982. This Forms the basis for registration with the NGO Affairs Bureau (NGOAB); the Foreign Contribution (Regulation Ordinance 1982)
The NGOs prepare their annual program report within three months of ending the financial year and send copies to NGOAB’s Economic Relation Divisions, Concern Ministries, Concerned Deputy Commissioner and Bangladesh Bank, the following information should be incorporated with it:
- Project should be shown separately in the annual report. The main theme of project based report should expenses against actual target achieved in detail on the proposal, expenses against the Thana & Districts in the project should also be shown clearly
- full list of permanent or liquid assets with vehicles of the organization
- Sources of organizations own income & expenditure
- Details of organization’s foreign travels by its officers & employees
- Details of organization’s revolving loan fund investment described by sector
- Details of fund for projects implemented with fund generated through agreement with Government’s different ministries and directors and other sources
- Details of persons employed by the organization (with monthly salaries of Taka 5,000 and above or one time Taka 10,000 or above, their names, designation, qualifications, age, total salaries, allowance and length of services with the organization) should be attached.
- All foreign funds or foreign Currency remitted but received in Bangladeshi Taka (Currency) should be received through only one bank account by each NGO.
- Bangladesh Bank on receipt of six monthly foreign currency accounts received in July and January each year from NGOs will send it to NGO Affairs Bureau and Economic Relations Division.
- All expense vouchers will be preserved for 5 years at head office of the NGO. At them field level, they will preserve copy of expense vouchers at their office for 5 years.
- NGO will preserve books of accounts:
- In the case of foreign aid material Form, FD-5
- In the case of foreign funds through double entry system Cash Book.
But the activities of the NGOs’ are too numerous and diverse and the legal interests of the government and the public are too diverse to make this possible. BRAC has consistently maintained high levels of transparency in all its operations; its extraordinary effort towards financial transparency was recognized in 2005 when it won the CGAP (Consultative Group to Group to Group to Assist the Poor). BRAC follows and prepare the financial reports on the basis of GAAP and International Accounting Standards (IAS).
FINANCIAL ACCOUNTING SYSTEM OF BRAC EDUCATION SYSTEM
EP has some principles; these principles guide the Project behavior and help in the development of policies and procedures for financial activities. The principles are: stewardship or safekeeping of the project resources, accountability to explain how funds are being used, transparency to ensure financial information is recorded accurately and presented clearly; consistency is maintained over the years so that comparisons can be made; non-deficit financing, it represents sufficient funding source, standard documentation guides the system of maintaining financial records and documentation according to internationally accepted accounting standards and principles. The procedures and the implications of the accounting standards followed by BRAC Education Program for reporting; are adopted depending on the expertise and resources available; the volume and type of transactions; reporting requirements of managers; and obligations to donors.
Basis of Preparation of Financial Statements of BEP
According to the IAS-1, non-profit, government and other public sector enterprises seeking to apply this standard may need to amend the description used for certain line items in the financial statements and for the financial statements themselves. BRAC prepare the BEP’s financial statements under the historical cost convention on a going concern basis. BEP also follows the accrual basis of accounting or a modified form there of key income and expenditure items. The head office or the main center records all treasury, investment and management functions. The accounting records and financial statements are maintained and presented in accordance with the principles of fund accounting. Funds are established and maintained the under fund accounting principles.
BRAC preserve and accumulate foreign grants according to Foreign Donations (Voluntary Activities) Regulation Ordinance, 1978. At present three practices are widely followed by NGOs in recognition of grants: Grants recognized as income, grants recognized as liabilities and grants recognized as income only to the extent of the expenditure incurred (Anand Pagaria, 2006). BEP recognize grants as income when conditions on which they depend have been met. If the grants are specified for the funding of specific project, then income is recognized equal to expenditure incurred on the project or program. For donors’ grants which involve funding fixed assets, income is recognized as the amount equivalent to depreciation expenses charged on the fixed assets concerned. All donors’ grants received are initially recorded at fair value as liabilities in the “Grants Received in Advance Account”. For grants utilized to purchase fixed assets are transferred to deferred income accounts. Donors’ grants received in-kind through the provision of gift and/ or services, are also recorded in fair value. Income reorganization of such grants follows that of cash based donor and any expenditure yet to be funded but for which funding has been agreed at the end of any specific period is recognized as grant receivable.
According to ISA-18, revenue should be measured at fair value of consideration received or receivable. NGOs don’t have revenues like the normal business organizations, they recognize grants as revenues. BRAC maintains a bank account for foreign donors
(According to: Foreign Donations Regulation Ordinance, 1978 (30) under sub-rule (4) of rule 4) and revenue is recognized as the interest accrued and as per IAS-18, interest revenue is recognized on a time-proportion basis using the effective interest rate. All other incomes are recognized when the right to receive such income has been reasonably determined and all conditions precedent is satisfied.
Matching of Expenses
BEP’s program related expenses arise from goods and services being distributed to beneficiaries in accordance with the program related objectives and activities. Head office’s program related expenses are allocated to the program at approximately 7% of their costs, most of the time these allocations are made with the consent of the donors.
IAS-1 standards requires certain disclosures on the on the financial statements.
Enterprises need to present current and non-current assets and liabilities on the face of the balance sheet as separate classifications considering nature of operation of the enterprises. When an enterprise chooses not to make this classification, assets and liabilities should be presented broadly in order of their liquidation value. As BEP is a project of BRAC, it presents the balance sheet according to its operational nature, and it doesn’t classify its assets and liabilities as current and non-current assets. According to
IAS-16 and IAS-1, the NGO states its’ fixed assets at cost less accumulated depreciation, depreciation is provided for on a straight line basis over the estimates useful life. Like the profitable business organization, accounts receivables are stated at nominal value and stated net provision for irrecoverable amounts.
Provisions for Liabilities
BEP’s Provisions for liabilities are recognized when there is a present obligation as a result of a past event and it is probable that an overflow of resources embodying economic benefit will be required to settle the obligation and a reliable estimate of the amount can be made. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best estimate. If the effect of time value of money is material, the amount of a provision is the present value of the expenditure expected to be required to settle the obligations.
Under the income Tax Ordinance 1984 (Amended),in addition to its commercial activities, BEP is also subject to taxation on income derived from its other non commercial activities unless they are tax exempt. The tax charge is in respect of taxable income arising from Deferred taxation is provided for using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purpose. Deferred taxation benefits are only recognized when their recognition is probable.
Impairment of Assets
IAS-36 addresses mainly accounting for impairment of goodwill, intangible assets and property plant and equipment. The standard includes requirements for identifying an impaired asset, its recoverable amount, recognizing or revising any resulting impairment loss and disclosing information on impairment losses or reversal of impairment loss. At each balance sheet date, BEP carried out a review, on the carrying amount of assets to determine whether there is any indication of impairment. If any such indication exists, impairment is measures by comparing the carrying values of the assets with their recoverable amounts.
According to IAS-32, BEP recognize and disclosure financial instruments in the balance sheet when the NGO become a party to the contractual provisions of the instrument.
Receivables are carried at anticipated realizable values. Unlike the profitable organization bad debts are written off when identified and an estimate is made, based on all outstanding amounts of the balance sheet.
ACCOUNTING SYSTEMS OF THE REGIONAL OFFICE
Traditionally, Accounting records fall into two main categories: Supporting Documents and Books of Account. BEP keep files of the following original documents to support every transaction taking place: Receipt or voucher for money received, receipt or voucher for money paid out, invoices, certified and stamped as paid, paying-in vouchers for money paid into the bank, bank statements, and journal vouchers for adjustments and noncash transactions. BEP maintains several books of accounts as part of a full bookkeeping system: General/Nominal Ledger, Journal or Day Book, Wages book, Assets Register and Bank Reconciliations statements. The management information system of BEP collects data from 565 area office then these are integrated under 139 regional offices and then send it to head office for analysis. The accounting system of these regional offices is well organized and supported by computer aided accounting software but we will discuss the systems manually.
Charts of Accounts
The first step taken by BRAC is to choose an accounting software package which is clear and concise and easy to operate and maintain the NGO accounting. The second step of BRAC was to clarify purpose of organization and reflect that in a clear and concise chart of accounts. It is important that a chart of accounts reflect all the major functions and project operation of the organization in a concise and systematic manner (retrieved from:
http://www.global.net.pg/atprojects/manage.htm, retrieved on February 23, 2007). BRAC has more than hundreds projects, it prepares charts of accounts and codes them for computer aided soft ware. The coding of the account head represents the specific project, regional office, and lastly the respective income, expenditure, liabilities or assets.
Regional office maintains separate cash books according to IAS-7 for different area office under it. The area office maintains petty cash books for the recording of cash. The area office conveys all its accounts (mainly expenditure) at the end of the month to the regional office. The regional office then prepare separate cash book for every area office. The opening balances of these cash book represent the cash on hand of the area office. All expenditure and revenue recorded in the cash book are supported by vouchers.
The format and procedure of preparing the ledger is same as the normal business organization. Different transactions of account heads are accumulated here. After recording the transaction of the last date of the month, balance is drowned. As it is a computerized system, data is typically entered into the system only once. Once the entry has been approved by the user, the software includes the information in all reports in which the relevant account number appears
Receipt and Expenditure Statement
The receipts and expenditure statement is one kind of trial balance which is prepared by regional office, which include the balances of the ledger. In computer aided accounting system the receipt and expenditure statement is automatically prepared when ledger is prepared.
Head Office Current Account Breakup Statement
The regional office maintains and transfers a ledger account to HO it includes transactions like Motorcycle loan, Bonus Provisions, Gratuity Provisions, Provident Fund, Insurance provisions for the employees. The regional office also transfers a Motorcycle Loan Schedule as motorcycle is considered as assets.
ACCOUNTING SYSTEMS of THE HEAD OFFICE
The head office transactions are same like the regional office. Most of the transactions are recorded at cash and the accounts are automatically posted to Receipts and
Expenditure statement under different heads. Head office maintains two sets of ledger accounts other then the normal account heads. These are “Field Area Current Account breakup” to record transaction with the regional office and Head Office Current Account Break up to maintain correlation with the Regional Offices’ breakups. It provides a provision to reconcile and find out the accounts in transit.
The income generating micro finance project transfer money to all projects and at the end of every month and the money transferred is adjusted with Head Office Current Account and it is done to avoid cash payment from the HO. The transactions are made by passing journal entries “Fund Control Account” and it is shown on the Head Office Current Account Break up Statement. In the field or regional office when micro finance project transfer money to other project, then the journal is assed like this:Here cash is being transferred from microfinance project to other project. Both projects submit Head Office Breakups to the Head Office. To adjust and prepare the combined financial statements, all the details accounting statements are transferred to head office by Head Office Breakup statement. The head office adjusts the journal like this:
The detailed accounts accumulated under Receipt and Expenditure Statement and Head Office Current Account Breakup Statement prepared in the Regional Offices are monthly transferred to the Head Office. The accounting information collected by auto taker (a computer supported device) is then automatically posted to ledger account maintained by the head office. Then finally management prepares the financial statements, which includes Balance Sheet, the Statement of Receipts and Payments, Statement of Changes in Net Assets and Statement of Cash Flows.
REPORTING OF BEP
BRAC submit audit reports for all projects, along with FD-4 certified by the auditors, to the NGO Affair Bureau and to Prime Minister’s Office.
- Reporting for the BOAD
- Reporting to the Management
- Reporting for donors
FINDINGS AND RECOMMENDATIONS
The accounting system of BRAC Education Program is well planned and contemporary and it is highly eulogize by the donors. It assists the internal control, cash control, internal auditing process, budget formulation and execution, facilities or property management, financial operations and analysis, grants management and information resources management. But there are some weaknesses in this financial Accounting system. Like:
- The project grassroots links are not efficient enough so the generation of information in that level is weak and some times not supported by documents
- The filed based development expertise some times fails to develop innovative measures to support modern financial Management
- The project doesn’t give more emphasis on long-term commitment and sustainability; which could assist the progress and accountability of the project.
- The cost effectiveness of the project is not used uniformly in every outlets
- For generation of accounting information and reporting the project authority don’t have modern process oriented approach and they failed to increase institutional capacity.
In order to make the project accounting process modern some recommendations could be considered: The project could hire more expertise and modern management technique; it could be more participative and transparent; the information could be modernized by use of internal network and of process oriented approach and value based management approach could make the accounting process efficient. BRAC Education Program is one of the largest projects in Bangladesh which is financed by the foreign donors; the accounting system of this project is well organized and transparent. The processes of presenting the financial statements are unique and very systematic. BEP after all these limitations; could give the other NGOs some guidelines for preparing and installing accounting systems, making assumptions about accounting principles and lastly but not the list to prepare and present financial statements and submit financial reports.
- Ananda Pagaria. CA. 2006. NGO’s-Accounting and Legal Intricacies, The Chartered Accountant, June2006: 1716-1723.
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- Ahmad Mokbul Morshed. 2005. “The State, Laws and Non-Governmental Organizations (NGOs) inBangladesh”. International Journal of Not-for-Profit Law. Vol. 3. Issue. 3
- BBS. (1998). Statistical Pocketbook of Bangladesh. Dhaka: BBS
- Bird, P., Morgan-Jones, P. (1981), Financial Reporting by Charities, Institute of Chartered Accountantsin England and Wales, London.
- NGO Affairs Bureau. 1998. Flow of Foreign Grant Fund Through NGO Affairs Bureau at a Glance.Dhaka: NGO Affairs Bureau, PM’s Office/GOB.
- Report of the NAB for the Prime Minister. “There are several complaints of irregularity and corruptionagainst the NGOs”, Bhorer Kagoj. 29 July, 1992 (Daily Newspaper in Bangla).