ATTACHMENT D - Financial Management Guide.pdf

Inter- American Foundation

Grant Financial Management Guide

Office of Evaluation and Auditing

INDEX

1.0 Purpose

2.0 Safeguarding IAF Funds

3.0 Use of Grant Funds

4.0 Grant Accounting and Financial Management

5.0 Supporting Documentation to be Maintained in the Accounting Files

5.1 Wages or Salaries

5.2 Professional Honoraria

5.3 Group Activities

5.4 Purchase of Fixed Assets and other Assets

5.5 In-Kind Contributions

5.6 Sub-Grant Funds

5.7 Other Expenditures

6.0 Loan Funds

7.0 Grantee’s Internal Controls

8.0 Fraud or Misuse of IAF Funds

9.0 Unspent Grant Funds at Grant Expiration

10.0 Interest Earned on Grant Funds and Program Income

11.0 Preparation of Financial Reports

12.0 IAF Audits

13.0 IAF Independent Auditor Code of Conduct

14.0 Local Regulations

Appendix I Bank Reconciliation Form….................…………………………………..10 Appendix II Documentation Required by the Auditor Appendix III Best Practices for a Successful Audit.……………

To IAF Grantees:

The IAF has developed this financial management guide as a tool for administering grant funds. Adherence to this guide is key to the proper administration of grant funds and successful project audits. If you have any questions regarding this guide, please contact your local auditor, your Foundation Representative (FR) or Michael Campbell, the IAF auditor.

Michael Campbell, CPA Auditor Inter-American Foundation T: 703-306-4385 F: 703-306-4365 mcampbell@iaf.gov http://www.iaf.gov

1.0 Purpose

This guide presents and explains administrative requirements to organizations that receive Inter-American Foundation (IAF) grants. Its purpose is to enhance the Grantee’s understanding of accounting and financial responsibilities related to compliance with IAF Grant Agreements.

Grant recipients are required to comply with the terms and conditions of the Grant Agreement as soon as the agreement is signed. This includes terms regarding the use of grant funds, the establishment of an accounting system to track grant funds (including counterpart funds), and the proper reporting and programming of the budget and the safeguarding of IAF funds.

2.0 Safeguarding IAF Funds

The Grantee is required to open at least one separate bank account in its name for the deposit of all IAF grant funds.

The bank account should be a checking or savings account and is only to be used to pay the expenses set forth in the IAF-funded column of the budget (Annex C).

In some cases, it is recommended that the Grantee open multiple IAF bank accounts to separately manage funds by currency (US$ and local currency) or by activity (micro-credit loan funds). For example, given the revolving nature of loan funds with repayments of principal and interest, we require that Grantees set up an additional bank account to be used exclusively for the management and accounting of loan funds.

Every month the Grantee must reconcile the bank statement balance to the balance in the Grantee’s accounting records.

IAF recommends using the sample bank reconciliation form in Appendix: I attached to this accounting guide.

3.0 Use of Grant Funds

The budget (Annex C), which specifies line items of IAF and counterpart funds, is the most critical financial component of the Grant Agreement. The Grantee is only permitted to use IAF grant funds for those grant activities outlined in the budget (Annex C) and described in the project description (Annex A).

The Grantee may not carry out IAF-funded grant activities before the Grant period begins. Carrying out grant activities before the start of the Grant is a compliance violation. IAF funds cannot be used to reimburse the Grantee (or other parties) for grant-related activities performed before the Grant Agreement is signed by the IAF President.

Once the budget is approved, it can only be changed or reprogrammed as follows:

a. IAF must approve any amendment to increase a line item or budget category (i.e., travel expenses) by more than 25 percent.

b. A line item in the budget may be increased by 25 percent or less by transferring funds from other line items without a formal authorization. However, the line item(s) may only be decreased by

c. 15 percent or less. Larger decreases to a budget line item require a formal IAF reprogramming grant amendment.

d. The Grantee is not allowed to transfer any funds for salaried positions nor may it transfer any money from a sub grant or loan fund without the IAF’s prior approval.

Example: 1

The budget is made up of line items and sub-line items. The above rules apply at the line item or category level. If a reprogramming is desired at the sub-line item level within the same line item or category level, the above thresholds do not apply. Using the example budget above, the line item levels would include Administrative Costs ($1,500) and Training ($7,000). The sub-line items would include Office Space ($500), Office Supplies ($1,000), Facility Rental ($3,000) and Manuals ($4,000). A reprogramming at the sub-line item level to transfer $2,000 from Facility Rental to Manuals would not require a formal amendment process since the transfer is within the “Training” line items (category). Or in other words, the transfer is occurring among sub-line items (Facility Rental and Manuals) of the same category line item (Training). The above threshold requirements would apply if the Grantee wanted to transfer (reprogram) $1,000 from the “Training” line item (category) to the “Administrative

Costs” line item. The reduction of $1,000 to the “Training” line item would fall under the 15 percent threshold, but would increase “Administrative Costs” by 67 percent. Since this increase is above the 25 percent threshold, this transfer would require formal Grant modification.

Auditors will verify whether the Grantee is complying with these requirements including whether or not the Grantee has obtained appropriate written approval from the IAF when necessary.

4.0 Grant Accounting and Financial

Management

The following key accounting guidelines should be followed in order to ensure accounting accuracy and compliance with the Grant Agreement:

1. IAF funds, including any interest gained on IAF funds, can never be transferred or loaned to other projects, organizations or individuals.

The unauthorized (outside of the Grant Agreement) loaning of IAF funds, even on a temporary basis, is strictly prohibited.

2. An accounting system must be utilized by the Grantee to ensure the full and complete accounting of all IAF funds including deposits, withdrawals, bank (or loan) interest earned, expenditures and other

BUDGET CATEGORY

1) Administrative Costs 1,500

a) Office Space 500

b) Office Supplies 1,000

2) Training 7,000

a) Facility Rental 3,000

b) Manuals 4,000 income (see description below of supporting documentation examples).

IAF recommends that the accounting be performed using a simple Excel spreadsheet.

3. The IAF requires separate accounts for counterpart funds, distinct from IAF funds and Grantee funds. The accounts for the counterpart funds should be supported by journal entries, and backed up with photocopies of the original documents (the originals remain in the files of the Grantee). Counterpart funds often include in-kind contributions such as labor, materials and rent. In-kind contributions must be accounted for in the same way as cash contributions and Grantees are encouraged to collect and request documentation that substantiates the value of in-kind assets.

5.0 Supporting Documentation to be

Maintained in Accounting Files

As part of an effective and complete accounting process, the Grantee is required to maintain and archive key documents, receipts and invoices as evidence to support grant expenditures and income. As part of the IAF annual audit, Grantees must make available all accounting files containing this documentation. The supporting documentation for both IAF funds (which should always be originals when possible) and counterpart funds will vary according to the line item of the budget.

The following are some examples:

5.1 Wages or Salaries

Typical supporting documentation includes payroll receipts signed by the recipient indicating that he or she has received payment, a signed contract with the Grantee, or a copy of the check signed “received” by the recipient.

5.2 Professional Honoraria

A typical contract between a consultant and the Grantee must include details about the services being contracted out.

The auditors will verify the results by looking at the reports written by the consultant or by some other means.

5.3 Group Activities

Reports on training or workshops must include agendas and copies of any handouts or materials used as well as dates the events were held, a list of names and signatures of all participants, a description of the program carried out during the activity, and any other documentation of extra expenses incurred (i.e., refreshments, etc.). Any consultant hired as a trainer or workshop presenter must have a signed contract with the Grantee as previously outlined.

5.4 Purchase of Fixed Assets and

other Assets (Inventory) Grantee must provide original supporting documents and check copies. Auditors may perform a physical inventory to verify the purchase and the physical existence of the items as well as verify that the items are being used as defined in the Grant Agreement. Grantees must obtain three written quotes prior to purchasing goods and services valued at $2,500 or more. It is also recommended that grantees obtain quotes (verbal or written) for purchases greater than $1,000.

5.5 In-Kind Contributions

In-kind contributions must be properly quantified, documented and registered in the project’s accounting records.

5.6 Sub-grant funds

Grantees must report on sub-grant activities using Annex I (provided to the Grantee with the Grant Agreement) and maintain documentation that provides evidence that the Grantee has followed sub-grant policies in handling requests and proposals for sub-grants. For each approved sub-grant, a file should be maintained containing documentation related to the sub-grantee including the selection and eligibility criteria for disbursing funds.

5.7 Other Expenditures

Auditors will request original supporting documentation and a copy of the check.

6.0 Loan Funds

All loan funds, especially micro-credit revolving loan funds managed internally, are generally more complicated transactions requiring significant supporting documentation and accounting. For each loan, a separate loan file should be maintained to include all the required loan documents and approvals. IAF requires that the Grantee establish a separate bank account for loan funds. Auditors will request detailed information supporting the Revolving Loan Fund financial report (Annex I of the Grant Agreement). A detailed summary report of the loan portfolio should be maintained to include the following additional information:

1. Name of Borrower (Beneficiary).

2. Date the loan was made (Loan Date).

3. Amount of Loan

4. Loan payments with dates and amounts.

5. Amount of loan remaining to be paid

(Outstanding) at the end of the reporting period.

6. Amount of loan in arrears

(Delinquent). This includes the remaining loan amount plus any interest.

7. Interest accrued at the end of the reporting period.

In addition to requesting the above information, the auditors will also review the required credit policy and regulations and, based on those regulations, verify the information in selected loan files. On a sample basis, they will look at the following documents, which should be present in each of the loan files (if applicable):

8. Application signed by the beneficiary presenting financial information about himself/herself. The loan purpose should be stated clearly.

9. Any credit investigation on the applicant should be retained and signed by the person who conducted the investigation.

10. Signed loan approval report (in some cases signed by a loan committee)

11. Contract signed by both parties

(Grantee and Borrower) specifying the amount loaned, the conditions for the repayment of the funds (form of payment), the type of guarantee presented (mutual guarantee, collateral security with or without repossession, or mortgage security). This contract should meet the legal requirements for financial documents of each country (notarized, etc.).

12. The guarantee should meet the legal requirements for financial documents in the country (i.e., notarized, etc.), if applicable. If the guarantee is a title, it should be in the hands of the Grantee organization.

13. A signed promissory note.

14. An amortization table showing the payments the client has made on the loan and the amount that is still left to be paid.

15. If the loan has run into collection problems, there should be documentation indicating the steps taken to recover the loan (including reports of the legal actions taken).

7.0 Grantee’s Internal Controls

Grantees should strive to perform a series of internal checks, otherwise known as internal control activities, that safeguard the assets and activities of the program. Auditors will evaluate the internal control environment they encounter at the time of their visit. The following activities are considered valuable accounting internal controls:

a. Maintenance of well-organized accounting files that include complete and accurate supporting documentation.

b. Performance of monthly cash account reconciliations that are reviewed (with physical signature and date) by a supervisor.

c. Stamping of supporting documents

(invoices, receipts, etc.) as “PAID” once they have been processed for payment. Stamp should include IAF project number.

d. Supervisory review (with physical signature and date) of all expenditure and check requests.

e. Performance of other procedures designed to ensure (and leave evidence that can be observed by auditors) that grant activities are being conducted, evaluated and monitored on a timely basis.

f. Supervisory review (with physical signature and date) of required financial reports (Annex E).

8.0 Fraud or Misuse of IAF Funds

Grantees should keep in mind that when they sign an agreement with the IAF, they are agreeing to comply with a series of requirements specified in the annexes. These requirements are evaluated at the time of each audit visit. Any intentional, illicit or fraudulent use of IAF funds will likely result in either the suspension of future disbursements, the termination of the grant, or other serious repercussions.

9.0 Unspent Grant Funds at Grant

Expiration

If all grant funds will not be spent before the end of the grant period (see guidance in the Grant Agreement‘s Annex B, Section VIII – Return of Unused Grant Funds Upon Expiration of the Agreement), the Grantee may request an extension of the grant period from the IAF representative. However, the request needs to be made six months prior to the grant close date. If no extension is authorized, the funds that remain at the end of the grant period are to be returned to the IAF in accordance with the Grant Agreement (Annex B).

10.0 Interest Earned on Grant Funds

and Program Income

The interest earned from grant funds, including interest earned from rotating loan funds, is to be used strictly for project activities. Other more stringent conditions and restrictions with respect to loan funds may apply as specified in the Grant Agreement and budget.

Any income earned from income-generating activities is also to be used strictly for program activities (reinvestment). These funds should be considered as additional grant funds to be used only for grant activities outlined in Annex A and in the budget.

11.0 Preparation of Financial Reports

Financial reports include the Grant Agreement’s Annex E: Financial Report and additional annexes such as Annex I:

Revolving Loan Fund or Sub-Grant Reports and are due to the IAF Foundation Representative at the end of each reporting period as stated in the Grant Agreement. The financial reports must be prepared and submitted to the

Example: 2

Foundation Representative prior to the commencement of the audit.

Financial reports should be created using U.S. dollars (for both IAF and counterpart funds). For conversion rates, the IAF suggests that average exchange rates be used in most countries. This rate can be determined by adding the total of all funds received in local currency and dividing it by the amount in U.S. dollars disbursed by IAF.

In example 2 above, the average exchange rate of 0.33 can be obtained by dividing the $125,000 received from IAF by 379,000 local currency. This number will be used to convert the amounts that are presented in local currency in the various line items of the budget to US dollars each time the financial reports are prepared.

Disbursement Date Dollars Local Currency 1st Sept 23, 2006 $50,000 156,000 2nd May 12, 2007 $75,000 223,000

Total $125,000 379,000

Exchange rate equals $125,000 divided by 379,000 or .33

The daily accounting for a grant project can be performed in local currency with the amounts converted into dollars only for purposes of the financial reports. The information regarding the amount of dollars received from the IAF should be retained since often only local currency is noted in the amount detailed on bank deposit slips. The IAF recommends that Grantees who are located in countries with high rates of inflation exchange grant funds in dollars to local currency on an as-needed basis. This step should reduce the inflationary effect on project funds.

12.0 IAF Audits

The IAF requires audits to be conducted every 12 months from the date the Grant Agreement was signed. The audit periods have been designed to coincide with the financial reporting periods. The IAF’s contracted auditors perform audits to ensure that the Grantee is complying with the terms and conditions of the Grant Agreement and thus give the IAF assurance that IAF funds are being well spent. The IAF auditors will contact appropriate Grantee management prior to the end of the audit period in order to plan for and schedule a time for the field visit.

Audit fieldwork refers to the time the auditor spends at the Grantee’s location testing and evaluating the accounting books and records in order to determine grant compliance. In order to allow the Grantee to properly complete their financial reports as well as ensure the accounting books and records are up-to-date, the auditor will generally schedule the audit fieldwork to occur 3-4 weeks after each financial reporting period ends. The following calendar in example 3 gives an example of the sequence of reports and periods of audit.

Prior to the audit visit, the auditor will request that the Grantee make available project records, including accounting and other administrative documents. Having this documentation up-to-date and readily available will make for a more efficient audit. See Appendix II of this guide for a listing of commonly requested items.

Audit Reports Foundation Representatives use audit reports to gauge the financial health and progress of the Grant. The financial reports and schedules presented within the audit reports validate the financial information included in the six-month financial reports presented by the Grantees (Annex E of the Grant Agreement). The audit reports give the Foundation Representative assurance that the grant funds are being used as intended.

Auditors are expected to discuss draft audit reports with the Grantee organizations, and Grantees are requested to comment on any audit findings documented by the auditors.

Auditors will document the basis of any

Identified audit finding. As part of an exit conference meeting at the end of each audit, the auditor presents any material audit findings to the appropriate Grantee officials and requests a response, at which time the Grantee can clarify any questions or inaccuracies. Grantees should provide a response to the audit finding(s) in a timely manner (no more than two weeks) so that the audit report may be promptly finalized by the auditor and sent to the IAF for review. The Foundation Representative will send the Grantee a copy of the final audit report.

Once the IAF receives and reviews an audit report, the Grantee may be requested to provide additional information. See Appendix III of this guide for best practices that should result in a successful audit.

Example: 3

13.0 IAF Independent Auditor Code of

Conduct

The independent auditor, together with the local liaison (LLAS) and the data verifier work with the IAF on the important grassroots development activities the Grantees are carrying out with funds provided by the United States Government. Therefore, the Grantees can trust that the auditor will duly represent the Foundation in his/her interactions with the Grantees, treating them always with dignity and respect.

The independent auditor will:

1. Communicate with the Grantee with enough advance notice before the planned auditing visit to coordinate a time convenient to both.

2. Explain in advance the documentation and materials that the Grantee must make available for the auditor.

3. Answer questions the Grantee has about the audit.

4. Carry out the audit in a way that causes a minimum of inconvenience to the activities of the Grantee with respect to the project.

CALENDAR OF AUDIT REPORTS

Grant Date September 24, 2007

1st Financial Report Period Six months September 24, 2007 thru March 30, 2008

2nd Financial Report Period Six months April 1, 2008 thru September 30, 2008

1st Audit Period One Year September 24, 2007 thru September 30, 2008

2nd Audit Period One Year October 1, 2008 thru September 30, 2009

5. Always be respectful and professional in interactions with all Grantee management and staff.

6. Communicate audit findings in an honest, open, and non-confrontational manner while providing constructive, well-written and efficient resolution recommendations.

14.0 Local Regulations

The IAF’s Grantees must comply with the laws and regulations of their country, particularly those related to taxes and other fiscal matters.

If there are any questions about this guide, please contact your local IAF auditor, your

Foundation Representative, or Michael Campbell, General IAF Auditor, via telephone (703-306-4385) or e-mail

(mcampbell@iaf.gov).

APPENDIX I: Sample Bank Reconciliation Form

Bank Reconciliation (Pesos) As of August 31, 2007

Account Name: IAF Azteca Project Account Number: 000-00-000

Balance per Bank $20,000

(+) Deposits in Transit $2,000

(-) Checks in Transit 5,000

Reconciled Balance per Bank $17,000

Balance per Books $16,700

(+) Interest Earned $400

(-) Debit Notes $100

Reconciled Balance per Books $17,000

CHECKS IN TRANSIT

DATE CHECK NO. NAME AMOUNT

25/08/07 25 Carlos Santana $2,500

26/08/07 26 Alicia Sanchez $2,500

Total Checks in Transit $5,000

Prepared by _____________________ Date______________________

Reviewed by ____________________ Date______________________

APPENDIX II: Documentation Required by the Auditor

The following information and documentation should be provided to the auditor prior to the visit:

1- Coordination with Grantee

- Date, time, and place of audit agreed to four weeks in advance

- Written confirmation

2- Documentation necessary for audit

- Grant Agreement

- Amendments to the Grant Agreement

- Up-to-date bank reconciliations or check register

- Sub-Grant Agreements

- Financial Reports (listed by the budget line item entry as in Annex C of the Grant

Agreement) in local currency and US dollars

- Currency exchange rates

- Prior audit reports

- Credit regulations (credit fund)

- Credit manual (credit fund)

- Updated accounting registers (grant funds, counterpart, and credit funds)

- Cash flow statement (comprehensive reconciliation of funds)

3- Grantee personnel available to assist in the audit

4- Well-organized income and expense files (Grant and counterpart funds)

5- Complete beneficiary files for credit fund loan holders

6- List of fixed assets acquired with Project funds including acquisition cost

7- Acts of Organization, with amendments

8- Organizational chart

9- Organization manual (if applicable)

APPENDIX III: Best Practices for a Successful Audit

1. Spending all line item amounts as per the grant budget (Annex C of the Grant Agreement).

2. Establishing a separate bank account for the revolving fund account.

3. Having an attendance sheet signed by all participants at Grantee-provided workshops.

4. Having adequate documentation to substantiate counterpart contribution.

5. Stamping supporting documentation as “paid” once incorporated into the accounting system.

6. Keeping accounting records up-to-date.

7. Preparing bank reconciliations in a timely manner.

8. Having second party review of bank reconciliations.

9. Having bank reconciliations prepared by a person other than the individual that signs checks.

10. Submitting timely semi-annual financial reports (Annexes E and I of the Grant

Agreement).

11. Maintaining proper documentation in loan fund files.

12. Using grant funds for project activities only.

13. Withholding taxes from employee pay when required by host country statutes.

14. Making only budgeted expenditures with project funds.

15. Properly classifying project workers as contractors or employees.

16. Performing surprise cash counts of the petty cash fund.

Inter-American Foundation Office of Evaluation and Audits 901 N. Stuart Street, 10th Floor

Arlington, VA 22203 (703)306-4385 www.iaf.gov