Effective control and authorisation of expenditures.
Organisations should ensure that their use of resources is properly authorised and controlled. Effective control over expenditures must be maintained at all stages and supported by an appropriate accounting system. Quality controls should be appropriate to the scale of the assets at risk and the potential loss to the company or organisation.
PURPOSE & LINK TO INTEGRITY
Clear payment procedures give guidance on the basic principles and safeguards associated with authorising expenditures and making payments. Supported by an appropriate accounting system, they can reduce misappropriation of funds, theft of inventory, and petty corruption.1
- Does your organisation have a clear organisational structure in place from which the payment authorisation procedures can be derived? (Also check tool Corporate governance structure)
Expenditures should be authorised in the operational area which entered into the commitment, with due consideration to separation of duties. No one person should be able to control all aspects of the payment authorisation procedure, and different people should be responsible for ordering goods and services, for approving payments, and for processing payments. Where this is not possible due to limited resources, alternative arrangements should be agreed with the organisation’s central finance function.2
Essentials of systems for committing and paying funds are as follows:3
- Internal controls to provide authority for acquiring the goods or services to be purchased.
- System access to make and authorise changes should be carefully restricted and password-protected.
- Authorisation for payments should be separated from the process of making payments, with appropriate validation and recording at each step. This separation of duties should also be maintained for receiving goods and services, a function that should be separate from the process of making the payment.
- The “four eyes” principle should be obligatory for payments above a certain threshold. This authorisation by a second person reduces the likelihood of illicit behaviour.
- There should be checks to ensure that the goods or services acquired have been supplied in accordance with the relevant agreement(s) before payment is made.
- Payment terms should be chosen or negotiated to ensure good value.
- Invoices should be paid accurately and on time.
- A balance of preventive and detective controls should be made to deter and tackle fraud.
- There should be clear audit trails that can be checked readily and reported upon both internally and externally.
A clarified payment procedure must further ensure that:4
- Where necessary, the expenditure has been approved and the proposed payment is in accordance with the approval.
- The payment is properly due, supported by invoices, goods received notes or other vouchers and (if appropriate) certified.
- The claim or invoice is arithmetically correct, in accordance with contract or other commitment (e.g. conditions of grant) and properly discounted.
- Where payment is made by instalments (e.g. interim or part payments), the proposed payment is within the approved total cost.
- The claim or invoice is not a duplicate, is not a statement, and has not previously been passed for payment.
- Any increase in cost over the order price is permissible and has been agreed upon.
- Checks for duplicate invoices are carried out periodically.
- Amendments and deletions to accounting records are independently authorised. These should be evidenced by signature, together with name and grade.
- There should be independent checks to ensure amendments have been carried out correctly. These should be evidenced by signature, together with name and grade.
- Knowledge of transfer codes (and passwords if payments are initiated by computer) is restricted to approved individuals. Passwords should be changed frequently and always when a staff member leaves.
- Expenditures are authorised by an approver to confirm that spending is in line with budget and is appropriate.
- An alternative approver is established so employees cannot authorise their own or their direct superior’s reimbursements.
- Signature authorisations are cancelled or changed with staff rotation.
- The checks on payments should be reviewed on a sample basis to ensure they have been performed satisfactorily.
KEY GUIDING DOCUMENTS
Halpern, J., Kenny, C., Dickson, E., Ehrhardt, D. & Oliver, C., 2008, Deterring Corruption and Improving Governance in the urban Water Supply & Sanitation Sector: A Sourcebook, Water Working Notes, Note No. 18, International Bank for Reconstruction and Development &The World Bank
Blink UC San Diego, 2012, Expenditure Accountability Checklist, Blink UC San Diego, http://blink.ucsd.edu/go/accountability, accessed 29.10.2015
MANGO, 2012, Financial Management Essentials – A Handbook for NGOs, Management Accounting for Non-governmental Organisations (MANGO), UK
Heriot-Watt University, 2008, Managing the Risk of Fraud – Policy Support Paper. Risk and Controls in Specific Systems, Heriot-Watt University, UK
The Scottish Government, 2012, Expenditure and Payments, The Scottish Government, http://www.scotland.gov.uk/Topics/Government/Finance/spfm/payments, accessed 02.12.2015
- Halpern, J., Kenny, C., Dickson, E., Ehrhardt, D. & Oliver, C., 2008, Deterring Corruption and Improving Governance in the urban Water Supply & Sanitation Sector: A Sourcebook, Water Working Notes, Note No. 18, International Bank for Reconstruction and Development &The World Bank
- Independent Commission Against Corruption, 2011, Investigation into Corrupt Conduct, Independent Commission Against Corruption, Australia
- Blink UC San Diego, 2012, Expenditure Accountability Checklist, Blink UC San Diego, http://blink.ucsd.edu/go/accountability, accessed 10.2015
- MANGO, 2012, Financial Management Essentials – A Handbook for NGOs, Management Accounting for Non-governmental Organisations (MANGO), UK