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Financial management

Financial management is an important element of a well managed project. Financial management is not a separate function inside a project. It is involved in all phases of the project and it takes place both in Finland and in the partner country. Financial management consists of several separate functions. Financial management brings together budget, accounting, financial reporting, internal control, procurement and auditing. Financial management includes also following the budget and fixed assets control (fixed assets inventories).

Budget

Prerequisite for good financial management is budget. The budget is one of the most important tools for the internal control in the project and should be regularly followed up to actual costs in the project accounts. In budget is set the limits for the project expenditures. Budget is recommended to have detailed budget lines so that it is easy to see where money is to be used (nature of expenditure). At a minimum, budget should provide a two-way allocating the total costs of the project and showing on one axis the nature of project expenditures (e.g. goods, salaries, fixed assets, sub-consultations) and on the other, the project components. Budget is agreed mutually and it is always attached to the agreement. If there are amendments in the budget, it has to be agreed in written. In implementation, the budget is reviewed annually and revised according to need and possibility. The actual expenditures are regularly compared with the budget figures and the progress made.

Accounting

Accurate accounting assures that all projects financial transactions are recorded properly. Each financial transaction has to be based on approved record and records are preserved and classified for easy access so that they provide a proper audit trail to bookkeeping, financial statements and financial reporting. Prerequisite for payment transaction is properly approved voucher. Vouchers are always approved by a person who is authorized to do it. Bookkeeping enables that expenditures are accounted and reported at least by the same accuracy than expenditures and incomes (cost categories) have been agreed in the budget. Accounting (chart of accounts) can also be more detailed and if donor requires financial information in more detailed level, chart of accounts can be agreed as part of strengthening Project Implementing Unit’s financial management.  Bookkeeping requirements vary depending on country, but basic accounting principles are the same.

pdfAccounting Manual for Development Projects (PDF, 21 pages, 49 kt)

Financial reporting

Financial reporting gives information for stakeholders (donor) about costs accrued comparing to the budget. Accurate accounting is the main prerequisite for faultless and error-free financial reporting and budget follow-up. In financial reports submitted to MFA, implementing organization reports actual expenditures accrued for the agreed reporting period. Usually financial reports are submitted quarterly or/and annually and actual expenditures are reported from reporting period and cumulative to date. When reports are submitted quarterly, last quarterly financial report covers the whole fiscal year. Variances between actual and budgeted expenditures are reported in reports. Reports are submitted and discussed in projects steering committee (SC) and steering actions are decided. Financial reports should be prepared and submitted together with the progress reports, so that the two combined provide a complete record of progress. Reporting requirements are written in the project document and they can be agreed differently depending on the used instrument.

Auditing

Auditingis a mean for donors to be sure that reported information is correct and report gives a right picture of the use of funds. Auditor also ensures that the programme financial management is conducted according to the rules and regulations to the programme and funds are used in accordance with the agreement between the financiers and the implementing organisation.

When a project, annual report or final report is audited,it means that an independent and qualified auditor verifies the information that is presented in the financial reports. Auditors give also information of internal control mechanism of implementing agency and assesses and reports the risks that are found in financial management. Auditor’s reports are submitted also for the members of Steering Committee and SC is recommended to make improving decisions according to audit-report.

Auditor is always independent from the audited organization. Independence means that an auditor doesn’t work for the company that is responsible for implementing the project. Exceptions are when project is managed by using countries local systems. In these cases audits are conducted by local state auditors (SAI, Supreme Audit Institutions, e.g. VTV in Finland, NAO in Britain). When SAIs are responsible for conducting the audits, their capacity and qualification must be assessed beforehand in a planning phase. Auditors’ qualification means that he/she has the knowledge and skills to conduct audits. For example Finland has currently three official qualifications for auditors (KHT, htm and JHTT). Auditors’ quality assurance and competence varies among countries and in some countries it can be difficult to find qualified and competent auditors. It is recommended that when auditing is done, it is conducted according to International Auditing Standards set by IAASB (International Auditing and Assurance Standards Board). Reference to IAS’s is good to take into agreement between MFA and implementing organization.

Updated 1/25/2011

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