5 minute read 1 Jun 2020
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How small NGOs can enhance their internal controls

David Samy
By David Samy

Consulting - Enterprise Risk Lead for Hong Kong and Macau, Ernst & Young Advisory Services Limited

Consulting Partner. Partners with the Risk Management leader community in advancing a transformation agenda. Promotes governance and risk awareness in both the public and business sectors.

5 minute read 1 Jun 2020
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NGOs are entrusted with managing public funds and resources and therefore need to maintain a sound system of internal controls practices. 

In Hong Kong, most non-governmental organizations (NGOs) are charitable institutions with tax-exemption status which play a critical role in developing the society, improving communities and promoting citizens’ participation in various fields such as healthcare, education, environment and poverty alleviation. 

As at March 2019, there were 9,906 charitable institutions which are exempted from tax under section 88 of the Inland Revenue Ordinance, reflecting an increase of over 13% compared to March 2004. In the year of assessment 2017-18, the approved tax-deductible donations made by corporate and individuals to charitable institutions amounted to a total of HK$12.8 billion1.

Approved tax-deductible donations

HK$12.8b

made by corporate and individuals to charitable institutions in the year of assessment 2017-18.

Why do small NGOs need internal controls?

NGOs generally utilize public funds from government, charitable funding bodies or public donations to serve their beneficiaries. Regardless of their size of operations and funding, all NGOs are faced with risks in various areas of their operation just like commercial companies. Fostering a culture of governance and check and balance in the operations and delivery of services is an important way for NGOs to demonstrate that their resources have been put to good use for achieving their missions.

While small NGOs may not have their own internal audit units, they are still required to be accountable to various stakeholders by sustaining a sound internal control system to manage their risks properly. By implementing internal controls in key areas, small NGOs can minimize fraudulent activities from occurring, use resources transparently and effectively, comply with the necessary laws and regulations, and ultimately build a respectable and trustworthy reputation.

The Internal Control Toolkit for Small Non-Governmental Organizations serves to guide NGOs to improve their accountability and transparency by providing them with insights on common risks faced by small NGOs within four selected processes aligned with the flow of resources and funding. These processes include budget preparation and monitoring, income processing and management, payroll processing and adjustments, and procurement of goods and services.

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Four processes for small NGOs to tackle common risks

What is the relationship between risks and controls?

Risk is the threat from an event, action, or circumstances that may negatively affect the achieving of an organization’s missions. Internal controls are mechanisms or procedures carried out by an organization or rules to mitigate or reduce the risks to an acceptable level. Example of risks and controls include:

  1. Situation at hand – One staff is responsible for maintaining staff master list and the preparation and processing of payroll payment.
  2. Risk – Fictitious employees created in the staff master list could not be identified and are processed for payroll, leading to loss of funds.
  3. Control – Segregate the conflicting duties to ensure the accuracy and completeness of payroll information.

What small NGOs should consider when designing their internal controls?

For typical examples of “what could go wrong” (i.e., risks) and corresponding internal control practices that could be established, please refer to the Internal Control Toolkit for details.

Act Now

Four immediate steps that small NGOs can take:

  1. Revisit the organizational and governance structure, roles and responsibilities of each process owner, as well as policies and procedures established within key processes
  2. Collaborate between the board and staff to strengthen the control environment and communicate the importance of internal controls
  3. Be proactive about addressing emerging risks within the organization
  4. Refresh and enhance the internal controls based on the dynamic change and needs of the society

  • Methodology

    EY collaborated with the Hong Kong Council of Social Service (HKCSS) in the creation and publication of the Internal Control Toolkit for Small Non-Governmental Organizations. The toolkit aims to facilitate small non-governmental organizations (NGOs) to understand more about the principles of risks and internal controls in the context of governance over non-profit organizations, evaluate the risks faced by the organization, and self-check the sufficiency and effectiveness of their relevant internal controls.

    For the purpose of developing the toolkit, our team has worked with the HKCSS to co-organize a series of workshops with representatives from NGOs of different nature and scale since July 2019. During the workshops, we conducted surveys for participants to assess their organizations’ risk levels in different processes and maturity of corresponding internal controls. We also facilitated discussion among the attendants to understand the needs and challenges typically faced by small NGOs. 

    Based on analysis on the survey responses and experience shared by members of the HKCSS, we have refined the approach and contents of the toolkit in the subsequent months by working closely with HKCSS before finalizing the contents of the toolkit. Furthermore, we have also specifically developed bi-lingual versions of the toolkit with larger font size and higher color contrast to allow for easy reading by readers of different age, background and level of vision. 

  • About the Hong Kong Council of Social Service

    The Hong Kong Council of Social Service (HKCSS) is a federation of non-government social service agencies of Hong Kong representing more than 490 Agency Members that provide quality social services through their 3,000 operating units in Hong Kong. HKCSS’s vision is to build a welfare sector that is highly accountable, efficient, effective and responsive to social needs, safeguarding the long-term sustainable development of society and the well-being of citizens.

Summary

Small NGOs need to understand the principles of risks and internal controls, evaluate risks faced by their organizations within selected key processes, and conduct a self-check over maturity of internal controls and determine initial effort to enhance their control practices.

About this article

David Samy
By David Samy

Consulting - Enterprise Risk Lead for Hong Kong and Macau, Ernst & Young Advisory Services Limited

Consulting Partner. Partners with the Risk Management leader community in advancing a transformation agenda. Promotes governance and risk awareness in both the public and business sectors.

Related topics Consulting
Upvote