[aaykarbhavan] NPO ACCOUNTING

Good deeds go well with best accounting practices
Parul Soni
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It's a given: NGOs entrusted with public money are required to have transparent finances. Related
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company information
accounting and audit


standards and benchmarks
accounting standards

With a plethora of regulations governing them, non-profit organisations struggle to comply with conflicting accounting and reporting requirements.

Non-profit organisations, or NPOs, receive contributions from various donors — individuals, government, corporates and others. With NGOs entrusted with public money and the responsibility of social development, it becomes imperative for them to ensure financial discipline and transparent operations.

However, there is no central legislation or legal framework prescribing the accounting and reporting responsibilities of NPOs. With a plethora of regulations governing them, NPOs find it difficult to comply with the varied and often conflicting accounting and reporting requirements.

In general, the accounting and financial operations of an NPO should be guided by these key considerations:

Adopting appropriate basis of accounting: The technical guide on accounting for NPOs issued by the CA Institute requires them to account for revenue, expenses, assets and liabilities on `accrual or mercantile basis'. Similarly, NPOs registered under the Companies Act, 1956, are required to maintain books of account according to the accrual basis of accounting.

However, the Societies Registration Act, 1860, and Bombay Public Trusts Act, 1950, do not specifically prescribe the basis of accounting. Even the Foreign Contribution (Regulation) Act, 2010, governing overseas donations — a vital legislation for NPOs — does not prescribe any fixed method of accounting.

The proposed Direct Taxes Code prescribes cash basis of computation only. Furthermore, donor agencies generally require accounting and reporting of grant expenses on cash basis. Whatever the basis of accounting adopted by an NPO, its accounting system should allow sufficient flexibility to meet the requirements of various stakeholders.

Strengthening controls over the financial accounting software: The accounting software should be able to segregate and report expenses according to each donor category, and facilitate generation of consolidated financial statements at an organisational level. The access should be restricted for each user category, and in no case should the user be permitted to editor modify past accounting data.

Documenting accounting policies and procedures: The accounting instructions should be documented in the form of standard operating procedures/ accounting manual, to ensure uniformity of operations. These should be communicated to the employees involved in the review and approval of expenses.

Adherence to accounting standards: There is an apparent lack of awareness among NPOs on the applicability of accounting standards to them. According to the technical guide on accounting for NPOs, the accounting standards do not apply if no part of the activity of such an entity is commercial, industrial, or business in nature. Today, all NPOs carry out some type of commercial activity, which makes it mandatory for them to follow the accounting standards prescribed by the CA Institute.

Segregation of incompatible duties: NPOs should segregate the incompatible duties performed by staff members by reassigning roles and responsibilities.

Monitoring the budget: In the context of NPOs, accounting of financial data is meaningless in the absence of a formal process for identifying variances between actual and budgeted expenses. The budget monitoring mechanism should clearly specify the periodicity of preparing budget against the actual comparison, responsibility for identifying the reasons for variances, and the documentation requirement. NPOs should invest in building staff capabilities — if not, efforts to streamline accounting operations will be ineffective.

(Parul Soni is Executive Director and Leader-Development Advisory Services, Ernst & Young




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