Introduction: This article reveals one of the negative aspects of the NGO sector in China, as well as in other countries: financial mismanagement. It profiles NGOCN, a popular information-sharing and networking NGO website based originally in Kunming but which has since relocated to Guangzhou. Certainly financial mismanagement is a systemic problem in China and is not unique to the NGO sector. Indeed, because corruption is systemic in China, and because the NGO sector is not very transparent or well-regulated, Chinese NGOs are quite susceptible to this problem. But NGOs, given their not-for-profit nature, are more inclined to be hurt by such revelations of mismanagement and corruption. An example is the spate of scandals that hit the philanthropy sector last year. For this reason, some NGOs and foundations have emphasized the importance of self-regulation and self-discipline in the public welfare sector.
The Details of NGOCN’s Financial Incident
When the former cashier for NGOCN (发展交流网) was being replaced at the end of 2010, the organization discovered that there were discrepancies in the bank account, namely a shortage of funds. Given the seriousness of the situation, NGOCN’s administrative team immediately reported to the board of directors and relevant donors, and quickly began an audit. Upon further investigation, they discovered that the former cashier had secretly removed operating funds under the guise of routine work between January 2010 and August 2010; and by November 4, 2011, “S” acknowledged a shortage of 86224.60 RMB, and in the presence of legal volunteers of NGOCN, S put forth a “Letter of Commitment for Repayment” and a compensation schedule.In December 2010, based on the accountant’s audit, it was discovered that in addition to the original shortage in funds, an additional shortage of tens of thousands of RMB was discovered. Soon after, S agreed to amend the Letter of Commitment for Repayment, and promised to return the initial 86,224 RMB as well as an additional missing sum of 45,555 RMB by January 30th 2011 and hoped that after returning the full amount there would be no further investigation of liability. By January 26, 2011, S had already returned 131,780 RMB according to schedule.
NGOCN is a popular online platform for many public welfare advocates, and despite the controversy from this recent financial incident, their open and sincere handling of this incident and frank attitude has drawn our admiration ((Editor’s Note: The term “public welfare” has become a common way to describe the charitable or nonprofit sector.)). Their actions certainly required courage and a sense of responsibility, but the NGOCN financial incident also reinforces our sentiments about the importance of internal administration and internal control of finances for NGOs
1. The Relationship Between an Organization’s Financial System and Internal Controls
In the NGOCN financial incident, the main party, the cashier, holds primary responsibility; and although this person is exempt from legal liability, he/she will probably no longer have a role in the public sector. The CEO certainly bears responsibility for the poor management and supervision, and due to this incident, has been demoted. The part-time CFO, while not implicated in the incident, also resigned. Looking at the incident as a whole, in order to prevent future financial risks, a financial management system must be in place, and the internal control system must be strong and implementable.
NGOCN’s financial system is relatively sound. The financial management system positions are well set-up; the CEO (responsible for the organization), CFO (chief financial officer), accountant, cashier, and other staff each has their own financial responsibilities. If this system is effective, the lower level receives supervision from the higher level, and the higher level receives a check from the lower level. The probability of a financial incident occurring in this system should be greatly reduced.
Although the NGO incident is just one case, it is not hard to see that public welfare institutions in China are still at an early stage of development, and there are fewexperiences to draw on regarding nonprofit management. Since public welfare organizations are not for profit, the public’s expectations for financial management end up being higher than for other types of organizations. Thus the public welfare organization’s CEO must not only pay attention to errors in financial management, but must also raise awareness of financial risks and strengthen management and delegate where appropriate in order to avoid financial hazards.
In management, appropriate and reasonable delegation can make things run more smoothly, and can motivate the staff. But delegation has to carried out appropriately, and must fully take into consideration conflicts of interest, and the impact on other staff in order to avoid problems. For example, in a public welfare organization, the project director is in charge of the administrative team, and should not be given power over financial approvals. The CEO can decide to give that authority to the CFO or COO. In most public welfare organizations up to this point, the accounting staff is often part-time; and if the CEO places full trust in the cashier and things are overly decentralized and there is a lack of strong supervision, then there are likely to be arrears in financial management. Another type of situation could arise due to limited human resources and funding. For instance, in the early days of a public welfare organization, the founder could be the financial manager as well as part-time cashier, which creates potential risks for financial management, and over time it becomes easy for misunderstandings to arise. Public welfare practitioners must not only be dedicated, but must also become more specialized and professionalized.
If NGOCN’s CFO was full-time, it would be easier to exercise his or her rights and responsibilities, to implement and put into effect a proper financial system, and to provide more suggestions to the CEO on a daily basis, and to require the accountant and cashier to properly carry out their duties, and provide other staff with financial training and supervision beforehand. Then there would be fewer IOUs when reporting reimbursements, fewer accounting inconsistencies, fewer attempts at embezzling funds. In addition, staff would be more accountable to the internal control system, thereby putting the organization at less financial risk. Originally the system was meant to guard against financial risks, and restrict inappropriate behavior. Unfortunately, even though the organization’s financial staff are all accounting professionals, the financial work was carried out in a way that placed a great deal of trust in an individual’s moral self-restraint.
In addition, in the annual assessment carried out by NGOCN, there was only the operating staff’s evaluation of the cashier, and no comments from the CFO or accountant; it is difficult to imagine that such an assessment was approved by upper management! Usually the CFO or accountant’s assessment or comments on the cashier play a decisive role. Even if both these positions are part-time, in today’s information technology age, it should not have been difficult for them to provide an evaluation.
But even if NGOCN’s CFO was a part-time volunteer, if the position’s responsibilities and authority are clear enough for the CFO to understand the importance of the position, and the CEO can help to establish their credibility, then other staff would not have had a chance to take advantage of the situation.
In summary, the CFO of public welfare organizations should be able to clearly identify financial risks and the means to deal with financial crises, and should be able to provide the management team with rational suggestions, and help to strengthen management capacity, clarify the duties and responsibilities of the accountant and cashier, supervise and review their work, and strictly implement the financial system and financial standards. Only by doing the above can one expect financial risks to be nipped in the bud.
Of course, there are some seasoned organizations that do not want to hire a full-time finance officer, and the person in charge understands financial management only to the extent of knowing about cash management. Before a financial incident occurs, they may have never thought about the importance of financial management for the development of a public welfare organization!
A reputation for integrity is not a small asset for a public welfare organization, and if the organization has errors in financial management, and the internal control system is incomplete and not up to standard, then one day this positive reputation risks being destroyed. When that happens, it will be more difficult to rebuild that reputation than running several public welfare projects.
2. NGO Governance and Internal Controls
Based on the NGOCN financial incident, it is commendable that the board of directors took an open and sincere approach and disclosed the entire process to the public, and dealt with the person responsible. They faced up to their own problems, and also apologized to their partners and funders, declaring that “the team would create a new plan for the future, improve internal supervision and the financial system, and earnestly requested that NGO colleagues continue in their support and supervision.” To be able to do this much is already difficult, and it is now possible to bring this incident to a close, but NGOCN’s financial incident should remind us that the governance of NPOs is closely linked to internal controls.
NPO management is often “without precedents to follow, without laws to abide by,” but if the administration does its part, the executive team is responsible and diligent, and avoids errors in financial management in their daily work, improves and carries out internal controls, makes public disclosure of information, becomes more professional, and follows a sustainable path, then it is likely that most organizations will have a bright future ahead of them!