By K.Shivakumar B.Sc.,F.C.A.,F.I.C.W.A.,DMA (I.C.A.

) Chartered Accountant Gandhigram - 624 302

-2E-mail: vkshiva@sancharnet.in

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Contents
Contents..........................................................................................................................4 INTRODUCTION..........................................................................................................6 IMPACT OF GLOBLISATION....................................................................................6 Governance ....................................................................................................................7 Good governance ...........................................................................................................7 Functional Governance ..................................................................................................8 Concentration of Board..................................................................................................9 Guidelines to NGOs / Visa-vis board members..........................................................10 framework....................................................................................................................10 Decision-making and accountability............................................................................11 Finance Governance ....................................................................................................11 Finance Committee.......................................................................................................14 Audit Committee..........................................................................................................14 Terms of Reference (ToR) for Audit Committee.........................................................15 Powers of the Audit Committee...................................................................................16 AUDIT COMMITTEE FREQUENCY OF MEETING............................................16 Functions of the Audit Committee ..............................................................................17 The Other useful Committees:.....................................................................................17

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-6INTRODUCTION The second generation reforms combined with globalisation has raised a number of new issues and is demanding structural changes in the NGO sector and one of the main areas of concept which has received the attention is Governance pattern. NGO governance issues have attracted considerable attention, debate and research worldwide. The basic rationale for high standards of NGO Governance stems from the inherent Characteristics of the NGOform of organization. The Government, national and international donors have also envisaged keen interest to know and strengthen about this portion of governance in NGO sector. The NGO governance have been initiated through a mixer of legislation, regulation. The Cadbury committee was appointed in England by the financial reporting council of London Stock Exchange mainly to address the financial aspects of corporate governance, which was followed by other committees including the Indian version Kumara Mangalam Birla Committee report on corporate governance. There are certain common characteristics in NGO sector, where the part of those reports can be conceptual. Similarly, the common wealth foundation has published Guidelines for good policy and practice, which dealt about the practices and guidelines for good policy for the NGO sector. IMPACT OF GLOBLISATION Globalization and Liberalization Policies together with the expectation of international donors, have driven NGOs at present to the dire need of equipping with a well set effective documented governance pattern. The NGOs would do well to adopt themselves to such developments, if they were to survive and flourish amidst global competition. And this precisely because of their sliding level of confidence in financial reporting and slipping on into quick sands in regard to standards of accounting set for that sector. Another arrange of good, being a warranted factor in its capability is a NGO Governance funding with sustainability for good governance is an integral part of sustainability. Evidentially this agenda has, of late, pressed almost embrace the business of recommending their Governance Pattern, composition of Board, financial rules and regulation, offices manual as well as other related matters of Governance with an inside flexibility and to make appropriate changes according to the demands of situated.

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GOVERNANCE The calculation of NGO Governance is not confined to legal compliances alone, but extends its activity beyond, one of the aspects of good governance is its attention paid to transparency in all its dealings calls for in all its to be reflected in dissemination of information, the quality and frequency of financial discussions, responsibility and duties of the NGOs Governing Board towards its members, stake-holders, donors and to the State. The composition and the functioning style of NGO Boards are seldom uniform with references to its composition, organizational styles, and decisions making process and functioning. The NGOs might and strength lies only in such a diversity. All this is road blocks on its track. So inspite of the efforts to define governance as far as it goes with NGOs, their mission / vision focus environment a suggestive model is yet to emerge; which means as of now there is no universally accepted definition; much less a governance frame. GOOD GOVERNANCE However, the elements of Good Governance defined consists of as a system of structuring, operating and controlling: I. Developing and implementing strategic plans with reference to: a. The stake holders beneficiaries? b. The staff with a HRD Policy? II. Building legal regulatory framework and encouraging higher quality accounting practices; III. Creating and maintaining an Information System, on the basis of net working with national and international donors according to their frame of reference. IV. Listing of ethical standards and putting them to action in letter and sprit for effective management. V. Transparency in transactions. The main spring of an NGOs governance results with the Board of Governance. I. Its local stand could be an independent (representative) Board that will take care of the interest of the stakeholders, donors and state. II. Adopting and encouraging transparent practices so as to develop and ensures a sound financial information system.

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-8III. Monitoring and controlling of the funding and support to community based organization, and others. IV. The Board could be either active, passive, representative professional and or other. There are various styles of composition and functioning of the Board depending upon the leadership style ranging from authoritarian (autocratic) to democratic leadership, periuly and the absolute and absolute style may also be created like the sleeping partners in partnership know of Rubber Stamp style - Board.

FUNCTIONAL GOVERNANCE Ideally and to a large extent functionally; a board could stand four squares: A strong accountable Board which ensures value creation that will lead the organization towards goal achievement. As an organizational structure, clearly identifying powers, roles and responsibilities at various levels top middle and lower; defining parameters of accountability for members, chairman CEO and also for the staff. The compositions of the board should be a blend of its technical and non-technical other (with reference to its organization and management) with necessary skills, appropriate knowledge and experience so as to helpmeet the problems and challenges of ground relatives rural / urban. The board members after recruitment have to be trained before inducting them into broader understanding of the operation areas; they should be apprised of the various activities of the NGO and be advised to keep abreast of all developments. In the course of training they should be un ambiguously told about what their rules are their, their duties, responsibilities and the expected results in the nature of their contribution to the NGO organization and targeted group activities and their development. In addition the members be encouraged to devote sufficient time and adequate attention to show-case results.

NGO Board should recognize the primacy of strengthening formalities. A good governance pattern requires the subject chosen must be backed up by policies and guidelines formulated for their implementation. The determination of control and reporting activities functions of Board, the fixing of ways and means of exercising and various form of control skilled / operated by the Board should be specified. The role of professional management in the NGO organization, and significance should be highlighted.
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Another area, the board should firm up with, is to ensure effectiveness of meeting by means of carefully planned agenda with adequate factual information and relevant evidences / papers. The board has to be posted with reliable, relevant regular financial and other information in order to enable to play role effectively and monitor their performance, both financial and non financial. The Board should collect and discuss financial information the budgeted details including long term and short term budgets and finalization of planned financial targets. 1. It is essential that the board is apprised of the legal requirements and their compliance. 2. The board should set forth in very clear objectives and appropriate ethical frame work, facilitate transparency responsibility and accountability. The ethical code of conduct having been approved be communicated to the stake holders and staff. The board also should periodically assess the human resource and their performance. 3. The Board should have active members, adequately qualified and capable alongside of a visible track record; also be dedicated and self motivated involved themselves in the activities of the NGO. The Board should meet at regular intervals entrust technical matters to qualified sub committees involving, alongside, Board members and experts in the respective fields.

CONCENTRATION OF BOARD The Board needs to concentrate on policy matter and should undertake necessary details for adequate control; also put into operation self evaluation, including a review of the functioning the Board itself with a focus on: I. The retirement policy of the Board so as to provide functional space to the potentially promising youngsters to show up their metal. II. Periodical performance of the members, their punctuality (attendance) and contribution to the organization. III. The extent of involvement of members in crafting long term policies, plans and programs. IV. Help facilitate decision making on the basis of factual, relevant information; setting prior agenda for the perusal of members so as to effectively participate in the discussions leading to taking decision.

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- 10 V. Forming up democratic decision-making by urging the management to extend adequate time to each member, instead of presenting a monologue. VI. Encouraging discussion as part of the agenda on second line of management personnel in the interest of organizational growth and sustainable development in the upcoming years.

GUIDELINES TO NGOS / VISA-VIS BOARD MEMBERS I. It is essential that NGO conduct a sort of entrance test (programme) to determine whether they adequately qualify to become members of the Board. The performance evaluation should be done by the current board members themselves II. The members should be informed about their duties, responsibilities and powers as per law, and as per the constitution or office manual? III. As members they should be independent, open-minded and feel free and be frank in giving expression to their opinions and stand by them if they appear to the advantageous to the association (organization); they also be urged to utilize their expertise for the association and help shape decisions. In the NGO governance the prime notion is the independence the individual members enjoy as members. They are likely to succumb to external strategic forces, but support operative leaders with expertise and experience. Though no concrete study in available on how independent board members are chosen, research findings in UK seem to be applicable and so conform to Indian conditions: An appropriate bunch of the research funding (UK) is presented below: I. The choice of independent board members for Board membership seems to fall within the adage: You scratch my back, I will scratch yours. The friends of the CEO or connection thro social, golf or other clubs or old school. II. Independent membership are picked by a circle of relatives of the promoters or those recommended by them. III. Further, the pick is exercised by those who are close to CEOs; former employees or a substantial beneficiary. Nevertheless, if good governance practices have to be generated and implemented by the NGO, the following guide-posts to kept in mind: FRAMEWORK

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- 11 I. NGO governance framework should make explicit (particularly the division of responsibilities) between the supervisor and / regulator/ and on the one hand and between both and the implementing authorities. II. The rights stakeholders including those of the staff should be defined and a suitable mechanism be put in place for redressal of grievances in regard to violation of their rights. III. The NGO Policy should provide for disclosure transparency of all financial and other knitted matters. and

IV. The Board should lay bare its strategic plans and monitoring of management, and specify who is who in respect of their accountability.

DECISION-MAKING AND ACCOUNTABILITY In the matter of decision-making and fixing accountability as an essential element of good governance; the Board should take care to see that only relevant and necessarily useful data processed and the irrelevant data are jettisoned so as to focus decision only on important matters without a last minute rush through and a passby; otherwise the Boards precious time be consumed by putting the right foot on the wrong / useless data thereby analyzing not very relevant matters and finally important decisions will be rushed thro and a pass-by. As otherwise relevant matters like audited statements, projects, CEOs remuneration and other important points will hardly receive the Boards prime attention and would be pushed out as last items on the agenda for a minutes rush-through subjects matters off the Board Meeting. It could happen that the CEO and one or two Board members would have discussed in detail outside, and one of them would, therefore be facilitate a pass through the matter. Also the contra could happen too like one member will always throw up questions that might draw irrelevant opinions and spice the deliberations fruitlessly. FINANCE GOVERNANCE In NGO finance governance, the point that can be taken from those reports is how to create a more meaningful relationship between the donors, members, board, beneficiaries, the government and other stake holders. Following from this role classification, compliance and difficult provisions in various status and regulations may have to be revisited. The requirement is to improve transparency with a better disclosure mechanism and timely needed information, and the funds have reached the beneficiaries in time. It is essential to
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- 12 have a structure and fix the targets and ways and means to adhere those objectives with in built mechanism for monitoring. The NGOs have to have high ethical standard thereby ensuring proper values to achieve this. The financial system and procedure adopted should be with as high degree of transparency and accountability. The development of right organizational culture, with right quality of people who will run the financial management is an important part. But there are occasional reports on institutions with financial mis governance, corruption, and manipulation and inadequate transparency and accountability. It is in this context the importance of the system is felt in organizations which have to ensure the adherence of accounting standards. The relevance of the Cadbury committee report and Kumar Managalam Committee report to correct the state of eroding credibility in NGO management arises precisely because the financial reporting and management need to be redefined. There can't be a single model of financial governance which can be transplanted in the NGO sector, but at the same time the sectors has to strive to raise the professional level by creating expert groups to encourage transparency and avoid criticism from the donors, government as also from the people. The financial governance of NGOs needs to be concentrated and improved; 1) They should have a clearly enunciated Vision, arising therefrom an operational mission. 2) There shall be a clear structure to help the decision making process ensuring internal control combined with a good management information system. 3) The financial system should have good planning and monitoring and evaluation tool to analyse the input of funds, to achieve goals with measuring physical and goal monitoring The management should develop a vision and mission for the organization and develop ways and means to achieve the goals. Warren Benis indicate that the vision produces the road map of the organization clearly marked with a wind rose so that every member can see in which direction the organization is going. The communication of the vision generates excitement about the trip. The plans for the journey create order out of chaos and install confidence and trust and finally offer criteria for success. The long term and management programme and/or zero budgetary procedure will financially interpret the vision. It is essential to evolve the budget control mechanism which involves planning, executing the plan, monitoring and evaluating

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- 13 the performance and financially managing the activities of the organization. The system will determine the objective to be achieve over the budgeted period and the policy to be adopted to achieve objectives, and determines the activities to be undertaken to achieve the objectives. The system will also helps to interpret the vision by preparing a detailed plan of activity in physical and financial terms and provides a yard stick for measuring the performance by comparing the plan with the actual performance activity-wise both in physical and monitory terms. The next important aspect is the structure. The NGO's register themselves in one of the legal frames available and the general body and the board are the constant decision making bodies irrespective of different names they have, depending upon the structure. But both the bodies generally are not concentrating the time they ought to spent on financial aspects

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- 14 FINANCE COMMITTEE The board of trustees, have little time to concentrate and discuss on financial matters. The board members normally express inadequacy of time since they have to discuss many points and frame policies and they are left with a limited time for discussions about budgets and other financial matters. The budgets and other statements are not sent in time and they do not have time to go throughout it in detail, nor some of them are not experts to study this before they go to the meetings. Since the board is not able to discharge the financial duties properly there is a need for a definite structure and a smaller group of experts which will look after the financial matters in a more effective way. A Finance Committee with the following terms may be formed: I. Preparation of long term financial strategy which dovetails into long term vision; II. Preparation and discussions proposals/continuation of old Projects. on new project

III. Preparation of budgets, operational plans and effective implementation of budgetary control system, including capital budgets and updates; IV. Cash requirements and funds flow analysis; V. Shaping of investment policies, creation of corpus, and investments of corpus fund; VI. Analyzing income generating activities/new generation projects/strengthening of existing IGP's; income

VII. And other financial important points, which may be discussed. In the long run it will be beneficial and advisable for NGO's to have a finance committee which would meet at least twice or more depending upon the need, in a year. The committee may consist of two members from members of Board who are well-versed in finance and who can shape financial policies of NGO's. Those members will be the spokesmen of the finance committee in the board and they will explain the details of discussion of the finance committee to the board. There will be two experts in the field of finance/programme with experience who can help to develop policies. The auditor of the NGO will be an ex-officio member. AUDIT COMMITTEE One of the tools, which will reflect on the good governance, is the audited statement and the reports. The audit report normally expected to review about the utilization of the funds for the

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- 15 activities. Since the board has to discuss many points within the stipulated period and since the auditor has certified the statement the concentration on the statement and the report will be little. In the present system of governance, there is a gap between the Board, the Statutory Auditor and Internal Auditors. The financial reporting process and the disclosure of financial information needs changes. Hence it is essential to have an independent audit committee with financially literate members. The framework and the structure of the audit committee should be complete independence but should ensure that they have a clear relationship with the board to whom they are answerable and to whom they should report regularly. There should be minimum of three members An independent expert member from the board who will be the chairman for the audit committee and who will present the audited statements and the reports along with the discussions of the audit committee to the board and also in the annual general meeting. One or two independent experts in finance/programmes. One or two from the beneficiaries/staff who are well-versed in financial matters. The internal auditor and statutory auditor will be ex-officio members of the audit committee.

TERMS OF REFERENCE (TOR) FOR AUDIT COMMITTEE The audit committee should be given clear terms of reference and role expectations, with explicit authority to investigate matters within its terms of reference. I. Improve the quality of financial reporting by reviewing the financial statements and to ensure that the financial information presented is sufficient and correct. II. Reviewing the annual financial statements before submission to the Board, focusing primarily on: a. Any changes in accounting policies and practices; b. Qualifications and opinion of the external auditors and their reports. c. Significant adjustments/alterations in the statements, arising out of audit, if any; d. Review of the reports of the internal auditors any significant findings and follow up there on; e. Reviewing the adequacy of internal audit, their frequency, and internal check and control procedure

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- 16 f. Compliance with accounting standard and suggested changes, if any. III. Help the Director/Chief Functionary by providing a forum in which he can raise issues of concern and which he can use to get things done which might otherwise be difficult; IV. Strengthen the position of external auditor by providing a channel of communication and forum for issues of concern, V. Provide a framework within which the external auditor can assert his independence in the event of dispute with the management; VI. look at user maintenance of existing programmes to ensure that ownership is taken and the asset is sustained and prolongs over longer period. VII. Strengthen the position of internal audit function by providing a greater degree of independence from operating management; VIII. Increase public confidence in the credibility and objectivity of financial statements. IX. Review the adequacy of internal check or control system on the basis of reports of internal and external audits. X. Looking at the long term sustainability and strengthening of networking. The audit committee may make recommendations on the appointment and removal of internal or external audits with management letters or scope. POWERS OF THE AUDIT COMMITTEE The members on the recommendation of the Board, should delegate powers to the Audit Committee which will include: i. ii. Powers to investigate as per the terms and conditions laid down by the Board; Authority to obtain expert legal opinion as well as opinion from other experts on matters recommended by the Board; as and if needed, to invite them to attend audit Committee meet as special invitees.

AUDIT COMMITTEE FREQUENCY OF MEETING The Audit Committee should meet atleast twice a year, one for discussing the statements of accounts and two at the time of presenting the budget. The Audit Committee has to review the
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- 17 action plan report of half yearly audit results. They have to monitor the status of compliance of the policy decisions. FUNCTIONS OF THE AUDIT COMMITTEE I. Review annual financial statements and to recommend adoption by the Board after scrutiny and verification of the following with special reference to: a. Correctness and credibility of statements, as well as major entries made in the statements. b. Spot lighting any changes in the accounting policies and procedures. c. Qualifications of Audit report along with the views and entries if any, together with adjustments/ passed as per the recommendation of the auditor. d. Compliance with accounting standards. e. Presence of any elite party transactions of the promoters / members of the Board. f. Image creation and building credibility of the organization. II. Recommending the appointment of Statutory and Internal Auditors on terms and references pertaining to their specialized areas as well as fixing their fees; their status and role be hierarchically defined and the communication channel set as a step towards protecting their independence for effective management (governance). III. Reviewing with the management Internal and External Auditors views about Internal Check and Control systems and reviewing important aspects of report, and instituting necessary follow-up action. IV. Compliance with legal obligations/ requirements. V. Reviving the NGOs financial and risk management policies. THE OTHER USEFUL COMMITTEES: I. Remunerations / compensation / staff development committee This committee should develop a compensation package for the working staff as rewards for their effective performance. Such a course of action would help generates a strong second line of support management for assigning responsibilities planning of succession of the office bearers, and other essentially related matters. II. Program Committee: This will set target and indicators for periodical evaluation of the program. III. Resources mobilization committee

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- 18 In addition to the above two committees, it is essential to have a Resource Mobilization Committee which will be working with the main vision of making the organization sustainable. The main objectives of the committee will be: a). To work out modalities for increasing the present resource structure b). to find out ways and means for mobilizing the resources for the organization and make it a sustainable entity to stand on its own legs instead of depending on external resources; and working out modalities and implementation resources mobilization progrmmes for the creation of Corpus and other specific Funds c). To analyze the activities of income generating activity of the organization, their policy pattern and market programs and suggest new income generating projects. Normally the donors, more so in the case of International Donors wants their resources to be fully utilized to have maximum output and with this view they will include the financial evaluation as one of the conditions at the time of sanctioning the grant. Many NGOs have a policy of built in evaluation and monitoring system as a matter of course. As a part or good financial governance, the external financial evaluation system maybe done once in three years or depending upon the need and funds. The NGOs annual report and financial statements will not reveal the correlation between the input and output and the cost related performance factors. But the financial evaluation will assess the real NGO performance Vs the funds spent and also will bring into light the deficiencies, if any, in the system. There are many other parameters to study the cost effectiveness of the programme. In the case of pilot projects and list projects for replicability, it is essential to have the cost effectiveness or cost benefit analysis done before extending in a large scale. The positive factors of input funds with target achievement comparison will give encouragement for extending the project whereas the negative factors will allow too take remedial actions. The above recommended structures with normal internal auditing and statutory auditing procedures certainly will run the risk of being branded as high cost and more bureaucratic system with additional work load. But a start has to be made so that NGO sector will not be branded as following out moded system and not transparent especially in the present external reform process and has to adopt good financial guidance practices.

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- 19 The NGO governance frame work in India needs to brazen out voluntarily, the internationally accepted norms to the satisfaction of the national and international donors. The international and national donors would out rightly expect the NGO managements attempt to reach out to international standards of governance; the same time show up evidence in that regard; the notion of a good governance system, if ignited in the minds of national and international donors would inspire the stakeholders with confidence, creativity and action. Nevertheless, as a precaution, allowance must be made for legal remedies to the stakeholders in case of mismanagement; and this aspect has to be brought into time light. There is no single regulatory institution/ mechanism for the NGO Sector. The NGOs voluntarily may assume seriously a self-regulatory bearing in creating and managing and upright posture and keeping it as a totem to institute in their organizational frame work world class norms indicative of good governance; because the key to a significant increase in NGO-acceptance by international donors lies in their becoming globally accredited. But basically this would demand a trained and disciplined human resource within its parameters of action. *********

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