Know All About NGO Audit

NGO Audit

Non-Governmental Organizations (NGOs)/ Not-for-profit Organizations (NPOs) are separate legal organizations which are involved in several acts for the protection of the interests of society at large. These are independently established organisations consisting of various voluntary groups working for social purposes such as activities of charitable nature, welfare and benefit of the people. The word “Charitable purpose” includes any activity which aims at providing relief to the people deprived of good quality education facilities, medical services, yoga, conservation of the natural environment, monuments and historical places. This word has been defined under Section 2(15) of the Income Tax Act, 1961. These organizations are not established with the sole motive of earning profits like that of the other organizations. Therefore, the funds received by the NGOs are not distributed among its members but are used for the welfare, growth and development of the people in need. In this blog, we will discuss NGO Audit.

There are several ways in which an NGO can be formed. Under the Companies Act of 2013[1], NGO is formed under Section 8, under the Societies Registration Act, Trade Union Act, Indian Trusts Act, and Cooperative Societies Act.

What is Audit?

Audit of the financial data involves a process where the auditor analyzes the financial data, makes multiple reports stating their conclusion and then compares it with the information provided by such organization to the general public. These reports ensure that the information is true and does not conceal any fact relevant for making any rational investment decision. It also helps uncover if the organization is involved in any fraudulent practices. This process is performed either through outsourcing to the auditing firms or is performed by the professionals present within the organization itself.

Role of NGOs in Indian Democracy

There are almost 3.4 million non-governmental organisations (NGOs) in India having different aims and goals to help out people in need. NGOs play an important role in Indian society which can be defined as:

  • NGOs help in connecting people to government schemes and programmes made for such people who are not aware of the schemes. This can be done through the organisation of awareness camps, etc.
  • The people working in the NGOs play a vital role in economic development.
  • There are some political NGOs that consider and collect public opinion made against policies made by the government.
  •  To the extent such NGOs can inform the public and put pressure on public policy, they act as vital pressure groups in a democracy.
  • These NGOs have motivated people to speak about their rights and the protection of the environment.
  • In India, most people are still steeped in superstitions, beliefs and customs, and NGOs act as catalysts.
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NGO Audit – Meaning

Annual NGO Audits are one of the basic responsibilities of Non-profit organisations which helps them to depict the transparent status and to fulfil tax obligations. By the fulfilment of such organisations, the NGOs are entitled to several tax benefits given under the tax laws in India.

NGOs receive grants and other financial assistance from the government, and foreign and Indian donors as they also have a social responsibility towards society. Thus, it is important to have information about the utilization of such funds. So, NGO audit can draw attention to the transparency of organisations, too, which is important.

What are the types of NGOs?

There are 4 broad categories in which the financial audit on an NGO has been divided to verify that the information being provided by the NGOs is best, true and as per the prevailing law and regulation. The types are:

  • External NGO audit: Independent auditors are appointed for performing external audits so that they can give their opinion after carefully examining the financial statements provided by the NGO. The Auditor’s report will help the stakeholders (trustees, donors, etc) to understand the financial status of the NGO. It also enhances reliability and transparency on the part of the organisation.
  • Internal NGO audit: Every organisation is required to establish a certain set of rules and procedures in accordance with the law. Internal audit is performed by a member of the NGO or a qualified professional appointed for audit. The report provided by the internal auditor indicates that the organisation is working efficiently and is following all the appropriate measures of accounting and auditing.
  • Donor audit: A donor audit is usually performed by the donor himself or by an external auditor of the NGO. This develops a sense of confidence amongst the donors that the money invested by them in the NGO is being utilised properly and for the purposes for which the NGO has been established.
  • Investigative audit: Whenever the higher authority of the organisation or the competent government body has a suspicion that any wrongful activity (such as concealment of information, fraud, etc) has taken place by the members of the NGO, then an investigative audit is performed by the Auditor to identify the people who have committed such wrongful activity and punish them accordingly.
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Points to be considered by the Auditor:

  • The Auditor has to determine the main document called the memorandum of association of the NGO. A deep understanding of the documents of the organisation provides an idea to the auditor about the activities and programmes being performed by the NGO for the welfare of the public at large. It also helps in ensuring that the NGO works towards the goal for which it was formed.
  • Auditors must consider that there has been no non-compliance with the procedure during the formation of an organisation and its compliance under laws such as Labour Laws, Tax, etc.
  • Auditors should confirm & make sure that all the incomes received by NGOs such as Government grants/subsidies, donations etc are from a legitimate and reliable source.
  • As per the laws prevailing in India, there has to be a separate bank account maintained by the organisation for receiving government grants which makes it easy for the auditor to record transactions related to the grants.
  • For fulfilling the social causes for which an NGO has been established, it is important to keep a check upon all the expenses incurred whether be it capital or revenue expenditure.
  • Auditors need to confirm whether several deductions and exemptions available to donors under the Indian taxation system are being provided to them or not.
  • It is the auditor’s responsibility to verify the details of all the stakeholders such as members, employees, senior-level managers, etc.

Need for NGO Audits

Looking at the current scenario, it is very important to have verification about the financial statements of an organisation as people find several ways to commit wrong with the help of such NGOs. As per the reports of several investigation companies, it has been found that in order to safeguard one’s wrong or illegal activities, people have started forming NGOs claiming to work for the growth and development of the poor. Such activities decline the reliability over NGOs. Such actions set a negative impact and also harm the image of the NGOs actually working for real social causes. Some of the major acts involve tax evasion, money laundering, illegal foreign transfers, etc for misusing the several exemptions and deductions available to NGOs under the Indian legal system. An NGO named Srijan Mahila Vikas Sahyog Samiti was questioned by Enforcement Directorate when they found that illegal activities are being taken place in the NGO.

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It is very important to have a proper and well-established legislature governing audit regulations of the NGO to ensure transparency and reliability over the organisations working towards a social cause. There is a need to reform the regulations established for maintaining public trust, accountability and transparency. All the important financial data and reports by the Auditor should be open for public access. It is also important to look at the aspect of NGOs working internationally. Government should also motivate the globalisation of NGOs unless it involves overseas illegal activities or foreign donations are being used for fraudulent activities.

Read our Article: What Are The Basic Principles Of Auditing?

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