16 September 2008 Presented by Ms Woo E-Sah, Partner Growth vs Governance in NPOs – Striking the Balance

Difficulties faced by NPOs Expectations of the NPOs 1)Transparent, efficient, accountable 2)Get appropriate people to effectively run the systems (Competent? Experienced? Committed?) 3)Financial management -public accountability in financial reporting -Sound/ good in-house procedure -Corporate governance – provide clear and concise responsibilities, together with appropriate authority and subsequent consequences. - Better stewardship of funds (investment function)

Difficulties faced by NPOs One of the challenges in financial management is to manage the reserves of the NPO i.e., growing the reserves -to provide additional source of funding -to ensure no disruption of services So “how much” to invest depends on the -Cash inflows (i.e., sources of funds) -Cash outflows (i.e., cost of services)

Investment Governance Structure Prudent Man Rule “Those with responsibility to invest money for others should act with prudence, discretion, intelligence and regard for the safety of capital as well as income” Judge Samuel Putnum in 1830

Investment Governance Structure Code of Governance 6 FINANCIAL MANAGEMENT AND CONTROLS 6.3 Asset Management The charity may invest its reserves, if the governing document permits and it is in accordance with an investment policy approved by the Board. It should obtain advice from qualified professional advisors There should be a policy to ensure that the facilities and assets of the charity are efficiently utilised for maximum value to the charity.

Investment Governance Structure Accounting Standards Council (ASC) – draft accounting proposals and reporting requirements pertaining to Charitites/ IPCs (issued 4 August 2008 for feedback) Among others, proposing: Additional Requirements for Annual Report

Investment Governance Structure Structure, Governance and Management (i) Organisation structure of charity (ii) Methods adopted for recruitment and appointment of new trustee (iii) Transactions and benefits between charity and related parties (iv) Grant-making policy (v) Policy towards contribution of volunteers Achievements and Performance ( i) Investment performance

Investment Governance Structure Financial Review (i) Policy on reserves and level of reserves (ii) What the reserves are being held for and when they are likely to be spent (iii) Funds in deficit (with details) (iv) Investment policy (v) Principal funding sources (vi) How expenditure in the year supported the key objectives Custodian Trustee (i) Funds held on behalf of others (where appropriate)

Investment Framework 1)Form the Investment/ Finance Committee Composition Duties and Roles Investment policy statement

Investment Framework 2) Establish the amount to invest and determine the investment goals Cash flows planning Tie to the investment policy statement Duration of investment (LT? ST?) Risk appetite Outsource or in-house?

Investment Framework 3) Select the investment vehicle –Types of investments (Government Bonds, Fixed Deposits, Corporate Bonds, Funds, Equities, Hedge Funds) –Fund managers (selection of investment advisors, Guarantees from investment advisors?) 4) Monitor progress and review –Timely review –Reassess based on needs changes

Best Practice internal control techniques Typical investment controls 1)Full records (details of those sold or purchased) kept by the NPO 2)Trustees or Investment Committee responsible for the formulation of investment policy and ensuring that this is implemented accordingly 3)Trustees or Investment Committee should take professional advice before selecting or disposing investments 4)Trustees or Investment Committee should inspect the statements of investment performance regularly 5)Controls should be in place to ensure all dividends or interest payments due are promptly received and all purchases and sales of investments are properly authorised and accounted for 6)Wherever possible, investments should be diversified to ensure the failure of one investment does not have a major impact on the NPOs (extracted from a Report on a Survey on NPOs conducted by pricewaterhouseCoopers in Ireland)

Conclusion Cash Management is important Knowing the types of investment products in the market is crucial Adopt the Prudent Man Rule

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