A quick Guide to the FMD Pro

Financial Management for Development,

Humanitarian and Conservation Professionals

fmdpro.org
fmdprostarter.org
 A quick Guide to the FMD Pro

Publisher
© Copyright 2020 PM4NGOs
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DPro and its symbols are trademarks of PM4NGOs
ISBN: 978-1-7345721-5-5

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Users are free to copy/redistribute and adapt/transform for non-commercial purposes.

Version information
This is “A Quick Guide to the FMD Pro” compiled by PM4NGOs Board Member, Peter Marlow, and
based on “A Guide to FMD Pro - Financial Management for Development and Humanitarian
Professionals”, Version 1.3 dated February 7, 2018

Version 1.0 dated September 12, 2020

Previous Versions and History:

Preface
The demand for financial accountability in the NGO sector is greater than ever before but there
remains a widespread deficit in expertise and agreed standards of competency at the project level.
FMD Pro - Financial Management for Development Professionals - has been designed to meet this
challenge and build the skills of managers who are not finance experts, thereby raising standards
across the development, humanitarian and conservation sectors. This quick guide is a brief
overview of the Guide to FMD Pro. The full guide, downloadable for free at https://fmdpro.org,
contains many useful examples and case studies to illustrate good financial management practise.
You will need to study the full guide if you are planning to take the certification exam. Also, take a
look at FMD Pro Starter at https://fmdprostarter.org which provides a useful financial toolbox for
use in projects and is downloadable for free.

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1. INTRODUCTION
Financial management: a key contributor to project success
FMD Pro focuses on one of the most critical disciplines needed to ensure project success—financial
management. It concentrates on the fundamentals of financial management in the context of
projects in the development, humanitarian, and conservation sectors. FMD Pro provides a
contextualized, comprehensive, and adaptable resource for anyone managing project finances in
these sectors.
Establishing high standards in financial management benefits organizations and projects on many
levels. Here are some of the most persuasive reasons for getting it right:
• Enables effective and efficient use of resources to achieve goals and fulfil obligations.
• Promotes accountability to funders and other stakeholders.
• Encourages the respect and confidence of funding agencies, partners, and beneficiaries.
• Provides an advantage in the competition for increasingly scarce resources.
• Prepares the ground for longer-term financial sustainability.
Yet, while there are many reasons why financial management is critical to project success, ultimately
one could roll up these benefits into two overarching categories: accountability and ‘response-
ability’.
Accountability: organizations serving the world’s vulnerable communities can “account” for the use
of their resources. Good financial management in projects helps ensure organizations improve
accountability in three directions: upward, horizontal and downward
Response-ability: when project teams better understand and manage their financial resources, they
make better decisions, respond more effectively to stakeholder needs, and are more agile in
adapting to ever-changing environments, risks, and issues.

FMD Pro target audience

This Guide to the FMD Pro is written for project team members who work in the development,
humanitarian, and conservation sectors. It aims to give them a fundamental understanding of
financial processes based on best accounting practises, and to help them collaborate with their
finance department in the planning, implementation, monitoring, reporting, and control of financial
resources. This collaboration is critical to project success. Good financial management is the
responsibility of everyone in an organization.
Audiences other than project team members will also find the FMD Pro Guide helpful. For example,
managers and mentors can use its tools, techniques, and guidance to enhance the existing skills of
their teams. Also, trainers and training organizations can use the FMD Pro Guide to inform and
structure their curricula, and as a supporting resource for their training activities.
FMD Pro is not designed for any specific organization or financial system but instead is intended to
provide the fundamental skills that project team members need regardless of the organization or
system they use.
FMD Pro is not envisaged as a guide for non-finance staff who lead organizations or country and
regional programs. People in those roles have financial responsibilities that extend beyond those of
project team members. While they may benefit from the contents of the Guide, they will need to
develop additional higher-level skills to deliver more strategic responsibilities.

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How the FMD Pro Guide is organized

An Introduction, is followed by two sections, a glossary and a table of FMD Pro Learning Outcomes.
Section 1: An overview of key concepts and tools in financial management (Chapter 2) introduces
the key concepts. It includes models for assessing good practice in financial management and
explores the different roles and responsibilities required at a project level.
Financial management is an essential leadership skill for a competent project manager and an
approach that should be embedded within the processes and understanding of all project teams.
Some staff will have more responsibility than others for managing resources but at a minimum
everyone should understand the basics.
Section 2: The four building blocks of financial management (Chapters 3-6) are the essential skills
and tools of project financial management. These chapters contain examples and case studies to
demonstrate key financial management tools and concepts. These are:
Þ Accounting Records
Þ Financial Planning
Þ Financial Monitoring
Þ Internal Control

Application
FMD Pro has drawn from best practice in both the public and private sectors, making use of tried
and tested approaches and adding new tools to enhance ways of working. Most importantly, it
offers a model that, once learned and embedded, can be replicated across projects and programs
and from organization to organization to raise standards across our sector. But it’s NOT intended as
a template to be replicated blindly across all organizations and projects. FMD Pro concepts,
practices, and tools should be adapted to an organization’s unique needs and contexts:
• Development and humanitarian emergency responses: FMD Pro is as adaptable for use in
emergencies as it is for long-term development. The timeline for delivering different elements
of the model can be reduced and extended depending on the context within which it’s applied.
• Restricted and unrestricted funding: Grant funding can be restricted to deliverables and project
goals set by a funder. Funding may also come from the organization’s own sources, received
without restrictions. The tools and approaches in FMD Pro can provide reporting about both.
• Small and large: Organizations of any size can make use of FMD Pro. Some of the tools and
techniques will be recognizable and already used, others will provide a breakthrough for
financial management. The standards set by the overall FMD Pro approach allow organizations
to assess and monitor whether their financial management processes are as transparent and
accountable as they should be.

2. KEY CONCEPTS AND TOOLS

This chapter introduces you to key financial management terminology and principles and some tools
that are used throughout FMD Pro. By the end of this chapter, you will be able to:
ü describe what financial management means in practice
ü identify financial management roles and responsibilities at different levels in the
organization, including for project staff
ü understand the Plan–Do–Review and the financial planning process
ü outline the four building blocks of good financial management systems
ü describe the purpose and contents of a finance manual
ü understand the seven principals of financial management.

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What is financial management?

Financial management involves four types of activity: planning, organizing, monitoring, and
controlling the financial resources of an organization to achieve its objectives.
• Planning. To look ahead and build a comprehensive overview of the resources needed to
implement activities and produce a Project Financial Plan.
• Organizing. To organize project implementation efficiently, such as people, buildings, vehicles,
money, and financial paperwork. Roles and responsibilities assigned to project team members.
• Monitoring. To track progress so as to identify risks or issues early on and taking corrective
action if required. It’s essential to have up-to-date financial information which compares actual
performance with the plan.
• Controlling. To ensure efficient and effective use of resources and to protect people from false
accusation, being manipulated, or the temptation to misuse organizational resources.

The role of project teams in financial management

Employees at all levels of an organization are responsible for contributing to strong financial
management. Organizations use a model of delegated authority, a formal process by which
decision-making is delegated from one party to another. This allows an employee or trustee to
represent and act on behalf of an organization within specified instructions and limits (tolerances).
Project Managers and their teams are responsible for the day-to-day financial management of their
projects in line with their delegated authority. This typically includes four areas of operations:
o Resource Management: Ensuring funds are used properly to best effect.
o Risk Management: Risks must be actively managed to limit their impact.
o Strategic Management: Keeping in mind the “bigger picture”.
o Project Management: Progressing and monitoring the project objectives.
The finance team provides support to project teams and other non-financial staff as they engage in
the financial management process. Their support includes:
o Handling an organization’s cash, including issuing receipts and banking money
o Administering payment processes to ensure that accounts are paid on time
o Ensuring that financial data from projects is entered into the books of account and
reconciled every month
o Ensuring that all financial documents are filed and available for auditors to view

Plan–Do–Review and the financial planning process

To Plan a project, you establish clear objectives and prepare budgets so you can get funding. Having
got funding, you Do the project and start spending money, accounting for the financial transactions.
Throughout the project you Review progress against the plan and the budget. Learning from this
you move forward to the next planning phase and repeat the process.

Foundations for strong financial management

Financial control is a strong foundation for financial management. Financial control happens when
the financial resources of an organization are used correctly and effectively. Strong and relevant
financial policies and procedures must be in place to ensure financial control, otherwise money and
equipment are put at risk of theft, fraud, or abuse. Funds that are not spent according to the
project’s objectives or the funder’s contract calls into question the competence of project staff.

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The foundation of effective financial management is therefore a strong financial system essential to
planning, organizing, monitoring, and controlling of financial resources. While there is no universal
standard for a financial management system, FMD Pro uses the four building-block model as a
framework for good practice.
• Accounting records: Every organization must keep an accurate and complete record of all
financial transactions that take place during the financial year so they can show how funds have
been used. Accounting records include both the physical paperwork (such as receipts and
invoices) and the books of account where the transactions are recorded and summarized.
• Financial planning: Linked to an organization’s strategic and operational plans, budgets are the
cornerstone of any financial management system and play an important role in monitoring the
use of funds. The financial planning process includes building longer-term plans, such as a
financing strategy, shorter-term budgets, and cash flow forecasts for projects and programs.
• Financial monitoring: Providing an organization has kept accurate and timely accounting records
and has set its budgets, it is possible to produce financial reports for use by different
stakeholders. For example, budget monitoring reports help managers to monitor the progress of
their projects, and annual financial statements provide accountability to external stakeholders.
• Internal control is a system of common-sense controls, checks, and balances designed to
manage internal risk and safeguard an organization’s money, equipment, staff, and other
financial resources.
These building blocks are interconnected. For example, accounting records should be subject to
internal control checks to identify errors and omissions, and to detect any fraudulent invoices.

The finance manual

Your organization should have a finance manual containing financial policies and procedures that
guide operations and determine how it uses and manages its money. It serves as reference to avoid
any misunderstandings and encourage consistency. There’s no standard template for a finance
manual but content headings would include accounting rules and routines, bank and cash handling
procedures, a code of conduct and financial coding structures.

Seven principles of financial management

These seven high-level principles (or guiding rules) to set a standard of good practice and provide a
benchmark for assessing your current financial practices for strengths and weaknesses. A useful
mnemonic, CAT VISA, is formed using the first letter of each principle to help you to remember:
ü Consistency in the use of financial policies and procedures enable staff to follow clear processes,
use consistent accounting codes. This can help to ensure compliance and promotes
transparency.
ü Accountability is the moral or legal duty, placed on an individual, group, or organization to
explain how funds, equipment or authority given by a third party have been used.
ü Transparency: Organizations must be open about their work, providing information about
activities and plans to all stakeholders. This includes preparing accurate, complete, and timely
financial reports.
ü Viability: To be financially viable, spending must be kept in balance with money coming in, both
at the operational and strategic levels.
ü Integrity: On a personal level, individuals must operate with honesty and propriety, declaring
any conflicts of interest. The integrity of financial reports is dependent on accuracy and
completeness of financial records.

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ü Stewardship involves taking good care of the financial resources entrusted to us, to make sure
they are used for the purpose intended through strategic planning, assessing financial risks, and
setting up appropriate systems and controls.
ü Accounting standards: The system for keeping accurate financial records and documentation
must observe internationally accepted accounting standards and principles.

3. ACCOUNTING RECORDS
This chapter explores the first of the four building blocks of financial management: accounting
records. It will introduce you to the process of accounting for projects and enable you to interpret
and use financial reports. By the end of this chapter, you will be able to:
ü explain why we need to keep accounts and which records to keep.
ü describe the difference between financial accounting and management accounting.
ü describe how to sort financial transactions using accounting codes.
ü outline two different methods used to record financial transactions.
ü describe the process used to account for cash advances.
ü describe the ‘3 Ps of procurement’: process, people, and paperwork.

Why do we need to keep accounts?

All organizations, whatever their size, need to keep accurate and complete accounting records for
their operations to ensure accountability and transparency, and to provide data for future decisions.

Financial accounting and management accounting

Financial accounting is the everyday important work of recording, classifying, and summarizing
financial transactions for an organization. The main outputs of financial accounting are the
mandatory annual financial statements: a retrospective view (showing historical data) that is used
for external accountability.
Management accounting uses the data gathered by the financial accounting process and analyzes
this information (e.g. by comparing it to the budget) for decision-making and control purposes.
Management accounting is therefore primarily for internal use and is forward-looking.

Accounting codes
Every organization needs a list of appropriate codes to classify and sort financial transactions, to
summarize internal budgets and create financial reports. The two key coding tools are:
The chart of accounts. To record different kinds of financial transaction we need to sort them into
predetermined descriptive categories or account codes. The list of income and expenditure codes is
the chart of accounts to be applied consistently across the organization.
Project or activity cost centers are used to separate the same account codes for different activities
within financial accounts and budgets.

Which accounting records to keep

Keeping accounts is about finding a way to store financial information so that the organization can
show how it has spent its money and where the funds came from. Accounting records fall into two
main categories: books of account and supporting documents.

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Books of account are used to keep track of all financial transactions. The main ones are:
Þ Cashbook (or bank book or cash analysis book), one for each cash holding or bank account
Þ Accounts payable and receivable ledgers
Þ General or nominal ledger (the principle book for recording & totalling transactions)
Þ Journal register or day book
Þ Salaries or wage records
Þ Assets register
Þ Stock register.
While cashbooks are regularly used, not all of the other books of account are required. This will
depend on the size of the organization, the number of transactions, reporting requirements and the
method of accounting used. Accounting data is now usually kept on a computer as a spreadsheet or
in an accounting package.
Supporting documents are the original paper or electronic records of financial transactions such as
invoices and receipts which show when, how much, what, who and why. Information is transferred
from these to the relevant books of account. Remember every financial transaction MUST be
supported by at least one valid supporting document as it provides evidence that the transaction
took place for audit purposes. It also protects staff against any suspicion of mishandling funds. It’s
important that organizations should have a self-receipt process, approved by its funders, for small
purchases where receipts are not issued (e.g. market stalls).
All supporting documents must be filed and kept in a safe place so that they are available for cross-
reference and audit. It is important to mark invoices as paid to prevent fraudulent reuse. Each
country will have regulations about how long organizations must keep original supporting
documents. Typically, it is for the current year plus the previous five years. Funders also include
rules about retaining receipts in their grant contracts, which may be different from the local
regulations.

The financial accounting processes

As we have seen, financial accounting is about recording all the financial transactions that occur on a
day-to-day basis. There are many different types of transactions that will need to be tracked and
recorded, such as project materials, staff salaries, money received from funders, and many more.
These transactions are documented in source documents and entered into the books of original
entry (books of account), which are, in turn, rolled up into the general ledger as shown in the
diagram on the next page – how the accounting records fit together. The term trial balance means a
list of (debit and credit) balances for each nominal account that is used to prepare financial
statements.
There are two different approaches to account for financial transactions, cash and accruals
accounting. The key difference is in how they deal with the timing of cash and credit transactions.
The difference between cash and credit transactions is the timing of the payment. With cash there
is no time delay because the receipt of goods and payment occur at the same time. With credit
there is a time delay – the goods are delivered and the invoice is paid after an agreed period (e.g.
the end the month).
Some financial transactions involve no physical exchange of cash but will have an impact on the
organization’s overall financial position, for example in-kind donations such as a vehicle, and
depreciation costs reflecting the loss of value of fixed assets over their useful life.

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Cash-based accounting system

This is the simplest way to keep accounting records and does not require advanced bookkeeping
skills. It’s often known as the Receipts & Payments system. The main features are:
Þ The main book of account is called the cashbook (which incorporates the petty cash book).
Þ Incoming cash is called a receipt and cash going out is a payment.
Þ Transactions are recorded in the cashbook on the date they happen.
Þ There is no record yet of outstanding credit transactions; these only get accounted for when
the payment is made.
Þ This system cannot record non-cash transactions because there is no physical cash
transaction.
Þ When summarized, these records produce a receipts and payments report for a given
period. It simply shows the movement of cash in and out of an organization under different
categories (accounts) and the cash available at the start and end of the reporting period. It
does not show the value of the resources owned by the organization (assets) and the
amounts owed to other parties (liabilities).

Accruals-based accounting system

This is a more sophisticated and comprehensive approach to accounting that requires a higher level
of bookkeeping skills. The main features are:
Þ It uses double-entry bookkeeping, which recognizes that there are always two sides to every
transaction: the giver and the receiver. The dual aspects of each transaction are referred to
as debits and credits.
Þ The main book of account is the general ledger (backed up by other ledgers, such as
accounts payable and accounts receivable, as well as cashbook data).

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Þ The terminology used for incoming and outgoing transactions is income and expenditure.
Þ Income is recorded when it is earned or due, rather than when the cash is received.
Expenditures are recorded as they are incurred, rather than when the invoice is paid. This
overcomes the problem of time delays with credit transactions.
Þ The system can deal with all types of transactions, including non-cash transactions.
Þ Adjustments are included in the accounts, which compensate for the timing delays caused
by credit transactions. These adjustments are called accruals (which is how this accounting
method gets its name).
Þ By recognizing financial commitments when they occur, not when they are paid or received,
the system automatically builds in up-to-date info on the organization’s assets and liabilities.
This process produces a more comprehensive picture of an organization’s financial position. The
reports produced from a general ledger are described as the financial statements. Financial
statements usually include information on the previous year and are required in all countries
applying International Financial Reporting Standards (almost all the countries where development
practitioners and humanitarians work). Financial statements include a balance sheet report and a
statement of income and expenditure. See the full Guide for examples.

A footnote on accounting methods

Many smaller organizations cannot afford to employ qualified accountants and therefore adopt a
“half-way house” approach to accounting. They use the simpler cash accounting basis during the
year (which requires basic bookkeeping skills) and then, with the help of an external accounting firm,
convert the cash-based figures to an accruals basis at the year-end for the annual accounts & audit.

Cash advances
It is common practice to give project staff a cash advance (or cash float) to make cash purchases
when implementing projects, especially for trips to the field to cover expenses such as fuel, per
diem, accommodation, and meeting expenses. If you are given a cash advance, you must be ready
to account for every cent of it, keeping an itemized record and providing supporting documentation.

The 3 Ps of procurement
We need to be organized about the procurement process to ensure efficient, effective, and
economic use of resources. There are three key aspects of procurement, the 3 Ps: Process describes
the rules we follow to make different kinds of purchases. The higher the value and the risk more
People are involved in the process to protect it from fraud. Each part of the process generates
Paperwork which should be filed for audit purposes.

4. FINANCIAL PLANNING
The second of the four building blocks, financial planning, lies at the heart of effective financial
management as it helps organizations to achieve both their longer-term strategic goals and shorter-
term project objectives. By the end of this chapter, you will be able to:
ü describe how the financial planning process works in programs.
ü describe different budget formats.
ü describe the three main types of budgets.
ü explain how to create an activity-based budget using a budget worksheet.
ü explain why it is important to budget for central support costs.

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Financial planning in programs

Financial planning is essential for achieving successful program outcomes. A long-term view is gained
by Strategic Planning and a much more detailed short-term view though Operational Planning,
which includes preparing program budgets and forecasts.
A budget describes an amount of money that an organization plans to raise and spend for a set
purpose over a given period of time. The budgeting process involves people at all levels of the
organization providing information, writing and approving. External stakeholders such as funders
and community partners rely on these budgets. There are two approaches to preparing budgets:
Þ Incremental budgeting for projects where activity and resource levels change little from year to
year and is therefore based on the previous year’s actual or budgeted figures.
Þ Zero-based (including activity-based) budgeting for new and one-off projects, or those that
experience a lot of change year on year. Starts with a clean sheet (a ‘zero base’) and builds the
budget according to planned activities and targets. Resources are individually costed.
Whatever approach you use it is important to work out the true costs of running a project (i.e. what
the project demands) before you look at possible funding options and to not be influenced by the
supply of funds or a specific pot of money.

Different forms and types of budgets

Budgets have a wide range of uses and users with different content and layouts:
Þ Activity level. Budgets can be prepared for one activity area, a project (several activity areas), a
program (several projects), or the whole organization.
Þ Budget detail. Some users require very detailed budgets (to show how each line is calculated)
accompany a funding proposal. Other users prefer to see a summarized version of the budget.
Þ Layout. Most organizations and funders use a standard format to present internal budgets,
which will be consistent with the codes and budget descriptions in their chart of accounts.
Þ Time frame. A budget always covers a specific time period related to each activity e.g. monthly.
Þ Currency. Budgets can be prepared in any currency or more than one depending on the need.
Budgets have a hierarchy, with lower level project budgets summarized (consolidated) into the
program budget, and program budgets consolidated into a master, organization-wide budget. There
are three main types of budget:
Þ Income and Expenditure budget shows the estimated costs of running an activity, project, or
entire organization, and identifies the funds to cover the costs for a specified period of time. It’s
created using either incremental or zero-based budgeting. It’s important for fundraising. The
budget will have a “bottom line” status as balanced, deficit or surplus. Note that some
organizations such as international NGOs with country programs manage their projects using
what called an expenses-only budget format based on the amount authorized by Head Office.
There’s no income section.
Þ Capital budget lists one-off expenditures for expensive items, such as equipment and
construction works, which will be used over several years and form part of the organization’s
fixed assets. It separately lists, and is able to monitor, the major investment and one-off costs
involved in capital projects. It is only possible to create it with a zero-based budgeting approach.
It should include a contingency line for unpredictable variations, such as exchange rate
fluctuations, and also a line for running costs. For small capital expenditure a capital budget
section can be included in a separate section of an Income and Expenditure budget.

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Þ Cash flow forecast is a financial planning tool based on existing budgets and plans that shows
the predicted flow of cash in and out of a project or organization each month. It shows periods
of cash shortages or surplus and will highlight any requirement for corrective action.

Activity-based budgeting
Activity-based budgeting is a form of zero-based budgeting which is widely used in the development
and humanitarian sector. It is ideal for creating accurate and complete project budgets. The
technique systematically lists, quantifies, and costs all the resources (i.e. people, materials, and
equipment) that are needed to run the activities described in a project plan.
The resources, quantities, and calculations are captured in a detailed table called a budget
worksheet, usually stored as a computer spreadsheet. The budget worksheet is then used to
summarize the project budget for use in whatever format is needed, i.e. for internal use or for
budgets required by funders. Before you start you should ensure you have:
• Clear and measurable project plans: key documents include the project proposal, log-frame,
and timed activity plan (such as a Gantt chart)
• Budgeting policies and guidance, such as for staff salaries and benefits, indirect costs
contribution, and inflation rates
• Price list for commonly used resources
• Budget worksheets and templates
• Latest chart of accounts
• Timetable for submitting budgets for approval.
There are eight steps involved in creating an activity-based budget:
1. Identify the project objective(s) as set out in the project design documents. Create one
activity-based budget for each objective; sometimes a budget has to cover more than one.
2. List the project activities (for each separate objective) which will be found in the project
design documents and should have clear and quantifiable indicators.
3. Identify and quantify resources is probably the most important step in creating your
activity-based budget. Each project activity will need to be unpacked, with all the tasks and
deliverables listed so that you can identify the resources needed to run it. The project
design documents will help with this, but it is a good idea to imagine yourself running each
of the various activities to understand what resources will be needed. Be aware of any
hidden project resources such as shared vehicles or project staff. It is helpful to list all the
resources and quantities needed for each activity in a separate document or page of the
spreadsheet. We call this the activity or Project Breakdown Sheet. Note the date or month
when the resources will be used as this information is needed to create phased budgets and
forecasts.
4. Research the cost of resources. Using your project breakdown sheet, find out how much
each resource will cost at the time when the project will be implemented. Wherever
possible, get a unit price or base cost for one item. Your finance team may provide a price
list for items that are regularly purchased or where there are set amounts for budgets, such
as staff allowances or consultancy fees. Don’t be tempted to guess the price! Although
budgets are a best estimate of costs, they must be based on reliable evidence, not on
invented amounts. If you get your unit prices wrong, you will over- or underestimate the
costs, jeopardizing the integrity of your budget.
5. Identify known income sources that will be used to support the project and make a list. For
example, anticipated contributions to costs from services users and communities. Do not
include income that is yet to be negotiated.

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6. You are now ready to compile the budget worksheet. Each activity will be described in a
separate section including its required resources, quantities, and unit costs. Each budget
line item is assigned a budget code from the chart of accounts and, where relevant, a funder
budget code.
7. Review the results and check that the final draft budget is realistic and complete. If possible,
get someone else (a budget buddy) to check it.
8. Summarize the budget in whatever data format you need for internal or external use, or
used by the funder for fundraising.
The Project Breakdown Sheet contains all the information needed to begin building out the activity-
based budget, using a budget worksheet as described in the next section.

Using a budget worksheet in activity-based budgeting

A budget worksheet is a table with pre-set headings and rows or lines for each item in the budget. It
is usually set up in a computer spreadsheet (such as Excel). Each project activity area has its own
section in the worksheet, with a list of all the resources needed and in what quantities, to calculate
the cost of each item needed. This makes it possible to see how much each activity area would cost
to deliver. The full Guide shows a worked example of this in section 4.4.
Typical budget worksheet column headings are: Line reference; Description; Unit Type; Number of
Units; Number of Times (frequency); Unit Cost; Total; Notes; and Account Code. The Unit Cost
should include an allowance for price inflation. Getting the Unit Type right is critical to the
understanding and successful completion of the budget worksheet. There are two special unit
types:
• Lump sum is a special unit type used to include a one-off amount or general estimate, often
for multiple items or services, that are detailed in a supplier quotation or a separate
schedule. It is important to be able to justify lump sum amounts. Some funders ask that this
unit type not be used.
• Compound unit type combines two different units and is used when writing a budget for a
large project with multiple activities.
In-kind donations (or gifts in-kind) are resources donated to a project as materials and equipment
rather than funds. You should include the value of the item as ‘known income’ if it is essential to the
success of the project and you would have had to purchase it.
Sometimes we need to include an extra amount in a budget for unforeseen expenses, called a
contingency. It’s good practice to include a specific and explained contingency line for the specific
budget lines that need a just-in-case cushion. For example, a contingency against fluctuating
exchange rates. It’s bad practice to add an overall percentage to the budget on the bottom line as
it’s difficult to justify and to monitor.
The currency that you choose to use for budgeting depends on several factors, in particular where
your main sources of income come from and the stability of your home economy. As there can be a
significant time lag between the initial submission of a proposal to a funder and a project starting,
before you sign a grant contract, review the exchange rate assumptions in the budget and
renegotiate the rate with the funder if it is significantly different.
Finally, it's important to keep a separate note of any key budget assumptions, such as the inflation
rate and salaries, as well as the line-by-line notes on your budget worksheet.

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Budgeting for indirect project costs

When budgeting for projects, we need to consider both direct and indirect project costs. Direct
costs are incurred directly delivering the project, such as the salary of a project officer or equipment.
Indirect costs are the general, shared costs that support and administer an organization’s projects,
for instance: the chief executive, office rent, and accountancy costs. These are known variously as
overheads, central support costs or core costs.
When setting your budgets, your finance team will provide guidance as to what to include in your
budget for indirect costs, usually a bottom-line percentage. It is usual to create a table to show the
apportionment of indirect costs between different project cost centers. This data is then
incorporated into the organization’s consolidated budget, which we look at next.

Budgeting for income: restricted and unrestricted funding

Income that organizations use to cover the costs of their planned projects and activities may come
from various sources. These will either be designated as Restricted Funds, which will have
conditions on what the funds may or may not be used for, or Unrestricted Funds. When planning
for the income that will be incorporated into your budget you need to know the designation.

Summarizing and consolidating project budgets

When the project budget worksheet is completed, the final stage is to summarize the data into
different formats with appropriate levels of detail for different users.
The accounts code column in the budget worksheet makes it easy to summarize budget data. Each
line in the worksheet is allocated a code from the Chart of Accounts. It’s possible to add higher level
codes to a worksheet and map lower level codes to them.
When an organization runs multiple projects and departments, managers can combine, or
consolidate, multiple budgets into one table in order to give a useful overview at the program or
organization levels. This will include Central Support cost budgets and any indirect costs.

Creating budgets for funding agencies

To create a budget for a funder, you will follow the same process described above for internal
budgets. First find out what format the funder requires, then use your activity-based worksheet to
map their accounts codes to yours. Check what can and can’t be included as project expenses and
indirect costs. Funders may also ask you to share any known income or to state match funding.
Finally, be sure to include important budget notes and assumptions, such as inflation rates and
exchange rates used.
When you apply for a grant, a funder will often require that you include a budget narrative to
support the budget in the funding proposal. The budget narrative, also known as a budget
justification, has two purposes: to explain to the reviewer of the funding proposal how the costs
were estimated, and to justify the reason for costs. Budget narratives are especially useful to
explain hidden or confusing costs listed in a proposal budget. The full Guide contains a table with
suggested content for the budget narrative. Finally, get a colleague to check your budget proposal
and narrative to make sure that it is clearly explained and justified.

The phased budget

A phased budget breaks down the project budget into time periods (or phases), usually monthly or
quarterly, to show when the budget will be used up during project implementation, according to the

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activity plan. This to compare the plan with the actual performance of a project during
implementation and to check progress (and take action if it is not on target). Also, to advise a funder
about how you expect to utilize their grant during project implementation. It’s a similar process to
that of creating a cash flow forecast but this time we are looking at when the budget is needed, not
when the cash transactions will take place. Note that a phased budget is NOT the total budget
divided by 12 months or 4 quarters. It must mirror the activity plan!

Using a funding grid

When there are multiple sources of income an internal planning tool called a funding grid is used to
provide an overview of who is funding what at project, program, or organization levels. It is
presented in table format and matches each anticipated source of income with budgeted
expenditure. This reveals where there are gaps in funding, and also any double funding, by budget
line. The funding grid has columns showing each source of income, restricted and unrestricted,
mapped to the internal chart of accounts codes.

Summary
The diagram below summarizes the budgeting process and illustrates the relationship between the
different budgets, as covered in this chapter. Notice that accounts codes are placed prominently in
the center of all the budgets, underscoring their importance in mapping the different budgets to
each other.

5. FINANCIAL MONITORING
In this chapter we look at the third building block of financial management, financial monitoring,
which builds directly on the previous two areas: accounting records and financial planning. Financial
monitoring in projects is all about having regular and up-to-date financial reports to review project
progress and make resourcing decisions. By the end of this chapter, you will be able to:
ü identify who needs financial reports and why
ü describe the different types of financial reports for program management and stakeholder
accountability
ü explain how to use the information in budget monitoring and other management reports
ü outline the main features and purpose of reports to funding agencies
ü explain the benefits of being accountable to project beneficiary communities.

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Overview of financial reports

Financial reports must be TIMELY, ACCURATE, and RELEVANT. To achieve this, we must have robust
accounting records and good financial planning systems to enable the budget monitoring process.
Below is a list of the key finance reports, outlining who they are aimed at and how they are used for
project monitoring and accountability.
Þ Budget monitoring report is used by project staff and board members to track project funds and
identify any problems so that corrective action can be taken, usually monthly.
Þ Cash flow report is used by finance staff, managers, and project staff to ensure that there is
enough money in the bank to run programs and solve any cash flow problems, usually monthly.
Þ Funder progress report to explain how project funds are being used, compared to the original
plan and targets, and to be able to request changes to the budget or terms of the agreement.
Þ Partner progress report shows how the funds raised for the community projects is being used.
Þ Financial statements (audited) are an annual public record showing the income, expenditure,
assets and liabilities.
Finance teams usually compile financial reports. However, in some field operations or smaller
organizations with no dedicated finance support, project staff may need to compile reports
themselves. The financial statements are the main output of the financial accounting process.

The financial statements

The annual financial statements tell us where an organization’s funds came from (income), how the
funds were used (expenditure), outcome for the year (surplus or deficit), and the net worth of the
organization (assets less liabilities). They commonly include the previous year’s figures for
comparison. They are the basis for the annual external audit and comprise:
• The balance sheet, or statement of financial position, and
• The income and expenditure statement, also known as the statement of financial activities,
statement of activities, statement of financial performance, statement of comprehensive
income or Income statement.

Budget monitoring report: how it works

Regular and timely budget monitoring reports are an essential resource for project staff to review
progress against the original plan and identify any problem areas. They are known by many names
and the format of your budget monitoring reports will vary depending on the audience.
Budget monitoring reports take the budget for the reporting period, preferably the phased budget,
and compare it with the actual income and expenditure for the same period for each accounts code.
These variance figures, often expressed as a percentage, will be positive, negative or zero. Negative
numbers are shown surrounded by brackets.
Another useful measure is the utilization ratio or burn rate. It’s the difference between the actual
spend to date expressed as a percentage of annual budget. This shows how much of the total
project budget has been used up for each accounts code so far. A figure over 100% means that
more than the total budget for the year has been spent at this point in the year.
Commitments (or committed expenditure) refer to significant expenses that have been incurred for
a project in a particular period, but haven’t yet been accounted for, or which belong to a future
reporting period. Commitments are more relevant in a cash accounting system or where there are
time delays in reporting some expenditure, e.g. from remotely based field offices. In this situation
you may add an extra column or notes to your report.

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Analyzing budget monitoring reports

The key to making best use of budget monitoring reports for project management purposes is to
analyze variances. This involves looking at budget monitoring reports to identify significant or
unusual issues, and to understand what has caused them to happen. This helps us plan the next
phase and to take any corrective action. Things to check are:
ü Check the accounting basis of the report, cash or accruals.
ü Look at the bottom line. Is the overall result (surplus or deficit) within budget? If not an
outcome of plus or minus 10% is considered reasonable.
ü Look at sub totals for “family groups”. Is spending overall on target across the group?
ü Check overall expenditure as being broadly in line with the budget within +/- 10%.
ü Check overall income. Is this what we expected? Are there any large sums outstanding?
ü Look for unusual or unexpected results. This could show any miscoding or misuse of funds.
ü Look for significant variances in line items. Underspending suggests there are delays.
ü Check for consistent results across linked line items.
ü Refer to any supporting narrative reports.
Sometimes figures just do not look right. Trust your instincts and follow your concerns.
In all cases, a variance represents a change from the original plan. Variances will be the result of one
or more of the following three change factors (or possibly caused by an accounting error):
• Change in the actual timing of the activity
• Change in the actual price paid or
• Change in the actual quantity of goods or services used.
Variances should not come as a surprise because the budget is only your best estimate. They can be
temporary, caused by a change in the planned timing of an activity, or permanent, caused by
changes in pricing. In the latter case corrective action is needed via an action plan. By highlighting
significant variances, the budget monitoring process will focus on activities that require attention
and ignore those that appear to be running smoothly. It is the cause and significance of a variance
that matters, not simply whether it is positive or negative.
Taking action on variances
Having analyzed the figures in the budget monitoring report, the budget holder must next create an
action plan to get the budget, or more importantly, the project, back on track. They must discuss
recommended actions with their manager and the project funder where relevant. Deciding on
which actions to take will depend on many factors, such as:
• Awareness of external factors: What are the inflationary trends? What dependencies exist
with other programs that influence our ability to meet project targets?
• Internal policies: e.g. rules on budgetary control and flexibilities (or tolerances).
• Funder rules: e.g. for budget variances and flexibility on over- or under-spending budget
lines.
• Significance: How serious is the variance and how urgently does it need to be resolved?
• How controllable: Is it possible to control future spending on the budget items under
pressure?
• Impact: What would the impact be if we take no action?
• Availability of unrestricted funds: e.g. to finance over-spends.

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The diagram left summarizes possible

actions to take for different categories
of variance, according to whether they
are positive or negative, temporary, or
permanent.
Permanent negative variances are the
hardest to resolve. Check if it is
possible to reallocate funds from
elsewhere in the budget. Formal
approval is only needed is the transfer
exceeds 10% of the budget line. It may
be possible to cut costs or find other
(unrestricted) sources of income.

It is good practice to hold monthly

budget review meetings, with both
program and finance staff, to discuss
results and make action plans to resolve any ‘red flag’ issues. Recommended actions should then be
discussed with managers and project funders, where relevant. To help you monitor your budget the
full Guide includes a budget monitoring action planner.
Sometimes changes to activity plans or project operating context affect multiple lines in a project
budget making a project budget substantially out of date and therefore more difficult to manage. In
this situation, it may be better to rework the whole budget (re-budget) with the approval of your
management team and project funder(s). This is often called a budget revision.

Budget forecast reports

Some budget monitoring reports also include a budget forecast column that predicts income and/or
expenditure for a future period, such as the next quarter, six months, or to the end of the planning
year. This can help project staff identify trouble spots and take necessary action, re-budget, or
undertake fundraising in good time. It’s important to be aware of the likely outcome for your
project as a small deficit or surplus will suggest to stakeholders there’s good overall budget
management.
A forecast is based on current knowledge and past trends, not simply the project budget for the
forecast period. Knowledge of the project is essential. Useful information for your forecast:
ü Income and expenditure for the year so far.
ü Commitments, i.e. outstanding bills or payments for goods and services that have been
purchased or received but not yet paid for.
ü Historical data and trends for previous periods.
ü Activity plans, including any changes or additions for the forecast period.
ü Current pricing information - have any budget items been hit by unexpected price increases?
You need to estimate how much is needed for each budget line. When your forecast figures are
complete, identify any areas of concern and create an action plan to mitigate the risks presented.

The cash flow report

The cash flow report is used to predict any periods when cash balances are likely to be critical. Cash
shortages may potentially hamper the project implementation plans. It looks exactly like the cash
flow forecast we discussed in chapter 4, with the difference that it contains the actual receipts and

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payments plus any new information on future spending or income plans. So, it is partly a report on
what has actually happened, and partly a forecast for the future, including the most up-to-date data.
Cash flow reports are especially important where operations are highly dependent on cash, such as
humanitarian responses or projects operating in remote areas. In these cases, a cash flow report is
needed on a weekly basis rather than the more typical monthly report.
Project staff and finance teams should work together to discuss options for overcoming predicted
cash flow problems.

Reporting to funding partners

Funding agencies require evidence of how their funds are being used before approving the release
of funds. Periodic and annual financial reports fulfil that role. It is important to comply with the
funder’s reporting conditions to establish credibility and to make sure your grant arrives on time!
Where multiple funders are supporting a project or program, it is important to set up appropriate
project accounting systems and coding structures so that the information required by each funder
can be easily retrieved. Setting up separate cost centers for each funding source is particularly
useful here. It is also important to map the funder’s accounting codes referenced in the budget to
your internal chart of accounts codes, adding new codes where needed.
Check the funding agreement to be aware of reporting requirements and any budget restrictions.
The frequency of reports can vary from monthly to quarterly or even just once a year. Reports are
typically required to coincide with release of grant instalments, so it is important to meet the
reporting deadlines. Most funders require some form of a budget compared to actual report and/or
a grant utilization (burn rate) report, based on the project budget that accompanied the original
funding application.
In most cases, a report to a funder will include financial data accompanied by a short, written
progress report. The narrative report will include comments on the following:
ü Activities and targets achieved during the reporting period, compared to the plan
ü Any challenges experienced and lessons learned
ü Plans for the next period
ü Requests for budget realignment and transfers.
Funders often disburse funds in their home currency, not the project’s local currency, and
require budgets and reports to be prepared in this currency. However, the organization may
have converted these funds into other currencies to pay for goods and services and must have a
system to re-convert for reporting purposes. Exchange gains and losses are a natural product of
operating in different currencies. These gains and losses need to be tracked for the purpose of
reporting to funding agencies.
The top tips for reporting to funders:
ü DO meet reporting deadlines (or request an extension).
ü DO produce accurate and verifiable figures.
ü DO NOT conceal underspends or overspends.
ü DO explain any significant variations.
ü DO keep the funder informed of any potential problems.
ü DO remember that staff from funding agencies will have a lot of experience of working with
groups such as yours. They will almost always respond positively to requests for advice.

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Reporting to partner communities

Most organizations recognize the need for downward accountability, which means reporting back to
communities about what has been achieved with funds that were raised on their behalf. To
participate fully in an organization’s work, partner communities need access to information about an
organization’s plans, programmatic as well as financial; resources; and activities. This has many
benefits:
• Strengthening trust and respect between staff and partner communities
• Improving the quality of program decisions, as beneficiaries provide feedback on how funds
are being spent
• Empowering people to make their own decisions on their own behalf
• Reducing the risks of inefficiencies and fraud
• Encouraging finance staff to get more involved with field work.
Financial reports to the communities that an organization serves should have content which is brief,
easy to understand and relevant to the local community. Publish reports in local languages and
media, and hold face-to-face sessions. Include pictures and/or non-complex graphs

6. INTERNAL CONTROL
The final block in the model of financial management is internal control. Simply stated, internal
control systems help deter opportunistic theft or fraud, and detect errors and omissions in the
accounting records. By the end of this chapter, you will be able to:
ü explain how the four-actions model of internal control protects projects against the risk of
losses due to errors, theft or fraud,
ü use procedures and practices from each of the categories of the four-actions internal control
model,
ü define corruption and list illicit actions that contribute to corrupt practice,
ü identify warning signs of potential fraud in your projects,
ü employ strategies to counter bribery in project implementation.

Why internal control matters

Internal control systems are designed to protect an organization’s financial resources from everyday
internal risks. Internal controls use practical and common-sense checks and balances to ensure an
organization’s resources are used for the purposes intended, and to the best effect. A strong system
of internal control benefits all stakeholders who are involved in a project and its operations:
• Project level: Actively manage the risk to project resources with appropriate policies,
procedures and checks, to minimize losses and detect errors in accounting records.
• Organization level: Improve the reliability of financial information and reports with timely
feedback, and compliance with rules and regulations.
• Funder/contributor level: Increase accountability and transparency for donated funds, and
ensure sure funds entrusted to a project or organization are used effectively.
• Community level: Help to ensure that scarce project resources go where they are most
needed, where they can be most effective, and to those who need them most.
• Individual level: Finally, and arguably most important of all, internal control systems protect
staff involved in the financial affairs of a project or organization. They can prevent the
temptation or opportunity to misuse resources, and protect staff from mis-placed suspicion
of abuse of funds.

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The four-actions model for internal control

A strong system of internal control is intended to minimize the everyday risks to financial resources,
such as errors and omissions in accounting records, or theft and fraud. To manage these risks in
your projects, you need to set up systems to support day-to-day operations, such as the Four Action
model:
Þ DIRECT: Set clear guidance, policies, and expectations for good financial practice. These actions
generally take place before project activity begins.
Þ PREVENT: Establish systems that remove the opportunity for theft and minimize the risk of
losses due to errors and incompetence. These actions happen during project implementation.
Þ DETECT: Implement processes and procedures that identify if and where activities have gone
wrong. These actions identify problems after the improper activity has taken place.
Þ CORRECT: Update and improve internal control systems as the project team learns from
experience. These actions are ongoing and aim to provide continuous improvement to the
system.
We’ll now look more closely at each of the four-action categories and explore some of the key tools,
procedures, and practices a project team can use to minimize losses due to errors, theft and fraud.

Direct actions
Direct actions include setting clear guidance, policies and expectations usually before an action
occurs. Many actions fit into this category including:
• The finance manual sets out principles, policies, and practices on matters that affect the
operations of an organization. It includes guidance on ‘HOW to do it’, as well as ‘WHY we do
it’. Policies outline the reasons why things are done the way they are, and the procedures
explain how things are done on a day-to-day basis.
• A delegated authority document clarifies who has the authority to make decisions, commit
expenditure within specified limits, and sign legal undertakings on behalf of the organization
so that there is no confusion about responsibility or conflict of interest. It will also cover
deputizing arrangements due to the absence of key staff. It may be necessary to make

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temporary changes to the document for an emergency response project or to meet funders’
conditions.
• Other direct actions include having a code of conduct and a disciplinary policy, having formal
job descriptions, induction training, standard forms, and budgets.
Prevent actions
While the direct actions are intended to encourage people to do the right thing, prevent actions are
intended to remove or limit opportunities to misuse resources or commit theft. Prevent actions, like
direct actions, are proactive and address risks before they become an issue that needs to be
corrected. These include:
• The concept of separation of duties (or segregation) is to share around, to as many people
as possible, the responsibilities for: authorizing transactions, receiving goods, custody of
assets, entering transactions into the accounting records, reconciling, and verifying
transactions. By sharing the various duties in a finance procedure around a team, it protects
those involved and removes the temptation and opportunity to misuse funds.
• Organizations working in the development and humanitarian sector often work in
environments where cash is used extensively or is the preferred, or the only, way to pay for
goods and services. Cash control is all about preventing loss and misuse of cash. The seven
golden rules for handling cash are:
1. Keep money coming in separate from money going out
2. Always give receipts for money received
3. Always obtain receipts for money paid out
4. Pay surplus cash into the bank
5. Have properly laid down procedures for receiving cash
6. Restrict access to petty cash and the safe
7. Keep cash transactions to an absolute minimum.
• Physical controls include many common-sense prevent actions intended to safeguard
project assets. Physical controls apply to all of the valuable assets used by your project:
from cash to building supplies, from valuable documents to vehicles, and everything in
between. Use a safe to keep cash and safeguard fixed assets by:
o Maintain an asset register
o Document a building and equipment maintenance policy
o Obtain insurance cover
o Establish a vehicle policy
o Maintain vehicle logs

Detect actions
Direct and prevent actions cannot stop all problems before they occur. Detect actions implement
procedures and practices designed to identify if and where things have gone wrong after the activity
has taken place. They are intended to identify irregularities, errors, fraud, and theft, and include:
• Reviewing records checks procedures are being followed correctly and transactions are valid
• Audits are an independent examination of records, procedures, and activities of an
organization, resulting in a report on the findings. There are three main types of audit:
internal, external, and funder (or donor). Audits are important for organizations as they
demonstrate a commitment to transparency and accountability and bring credibility.
• Other detect actions include doing fixed asset register checks, stock counts, budget
monitoring, payment vouchers, checking vehicle log books, cash counts, and bank
reconciliation.

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Correct actions
Correct actions update and improve internal control systems as the team learns from experience, to
reduce the chance of the loss happening again. Illustrative actions in the correct category include:
acting on audit recommendations, correcting errors in the records, revising policies and procedures,
taking disciplinary actions, conducting refresher training, and processing insurance claims.

Deterring and detecting corrupt activities

One of the areas where internal controls are especially helpful is in deterring and detecting corrupt
activities. Corruption takes place all over the world and affects all levels of society, particularly in the
developing world, and poses a significant project risk. Forms of corrupt practice are:
• Bribery: Offering or accepting an inducement for an action which is illegal or unethical.
• Collusion: A secretive agreement to limit open competition, such as price fixing.
• Cronyism: The appointment of (unqualified) friends and associates to positions of authority.
• Embezzlement: Fraudulently acquiring funds entrusted to your care owned by someone else.
• Extortion: Obtaining something, especially money or property, through force or threats.
• Facilitation payments: A form of bribery by government officials to facilitate services.
• Fraud: Wrongful or criminal deception intended to result to financial or personal gain.
• Nepotism: Favouring (unqualified) friends or relatives in giving them jobs.
• Sexual exploitation: Where someone uses their position to gain sexual favours.

Addressing fraud
Fraud is defined as intentionally lying or cheating to gain an advantage or to cause someone else to
make a loss. These are serious and illegal offences, and include the theft of goods or property,
falsifying expenses claims, or the falsification (or destruction) of records to conceal an improper
action. Fraud has a damaging effect on an organization with wide-ranging consequences if it’s not
properly managed. Some ways to take action to prevent fraud before it happens include:
ü ensure that robust internal control systems are in place
ü establish schedules for regular project visits, so that the project team can monitor project
expenditures and check they are in line with implemented activities
ü share financial reports with beneficiaries, and ask if they think the project is achieving value
for money
ü hold regular meetings with staff at all levels and with partners, to discuss financial reports
and make budgets and reports openly available to ensure transparency
ü take time to help non-finance staff and managers to improve their financial skills.
Warning signs of fraud in accounting records:
• Lots of corrections to accounting records e.g. with white-out or blocked-out figures
• Pristine documents could indicate rewritten or duplicate books
• Delayed banking of received cash could be unauthorized ‘borrowing’ of cash
• Records not kept up to date, or are deliberately delayed, could be false accounting
• Supporting documents are missing, e.g. bank statements or lost receipts
• Payments have been made but are not accounted for on a budget line
• Handwritten supporting documents that include errors and corrections could indicate
changes made after goods or services were purchased.
• There is a cash shortfall in a safe or cash box, but next time you count it, the amount is OK.
Warning signs of fraud in reports:
• Budget monitoring reports reveal inconsistent behaviour between line items
• Vehicle logbooks are not maintained in an appropriate level of detail

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• Delayed budget monitoring reports could be covering up unauthorized activities.

Warning signs of fraud in non-financial areas:
• Look out for irregular work patterns, e.g. if someone is first in, last out of the office
• A staff member who never takes holidays could be needing to cover up irregular activities
• A significant change in lifestyle or spending patterns that doesn’t match a person’s income
• Creating a smoke screen by making a false accusation about another team member.
If you suspect that fraud or other irregularities are taking place, think before you act so that you can
deal with the situation appropriately and confidentially. Your organization may have a fraud policy
or whistle-blowing (speaking up) procedures that you need to follow. If unsure, it’s important to
involve your line manager.
When an incident is reported, it must be dealt with quickly and sensitively. Look for corroborative
evidence before starting a formal investigation. If all the evidence points to an irregularity, the
individual(s) involved should be formally interviewed with a third person present to take notes.
Depending on the nature of the irregularity, an investigation could be conducted by a senior
manager or board member, the internal auditor, the external auditor or, in more serious cases, the
Police. Finally, don’t underestimate the long-term and less tangible impacts of fraud. It will involve
a lot of management time during the investigation and afterwards. In particular:
Þ People will be distressed by the experience and need to be supported.
Þ New staff may need to be recruited and trained.
Þ The media may get hold of the story and ask for information.
Þ Funders will need reassuring that their resources are safe and the project will not suffer.

Managing the risk of bribery

Bribery is the offering, promising, giving, accepting, or soliciting of an advantage as an inducement
for an action which is illegal, unethical, or a breach of trust. Like fraud, it is a form of corruption. It
is often endemic in the countries where we operate. It is commonly in the form of facilitation
payments to corrupt officials in exchange for providing services for which there are no fees payable,
such as speeding up a customs clearance.
In many countries is illegal to receive and pay a bribe with severe penalties. Project teams therefore
need to aware of the bribery risks and have a strategy the minimizing it. Bribery is a two-way
transaction: there has to be a payer and a receiver. Therefore, if we cut off the flow of bribes,
bribery cannot happen. This is the basis for the argument for a zero-tolerance approach to bribes,
for which there are seven principles:
1. High-level commitment by the board and senior management to a policy of zero-tolerance.
2. Risk assessment for bribery should form part of each organization’s risk management process.
3. Devise and implement robust anti-bribery procedures proportionate to the risks faced.
4. Due-diligence assessment of partners, agents, and contractors.
5. Dissemination and communication of policy and procedures to staff and partners.
6. Monitoring and evaluation reporting should include a review of anti-bribery procedures.
7. Collective action to prevent bribery and sharing information.
To put these principles into practice there are five key tactics you can follow to minimize the risk:
1. Assess the risk of encountering bribes in your projects and programs.
2. Resist paying bribes by training staff to give them confidence to resist bribes safely.
3. Avoid paying bribes, for example by removing urgency by building in longer timescales.
4. Report: Share information about corrupt practices and officials with other organizations.
5. Collaborate: with other organizations to publicize and fight against well-known corrupt practices.

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