Financial Management & Systems, including Risk Management

Financial Management & Systems, including Risk Management

Financial Management

Financial management and systems capacities are required to plan, direct, and control financial resources so that organisational objectives can be effectively and efficiently achieved.  Financial management must therefore be integrated into the overall management of the organisation, with close coordination between financial planning and budgeting, and between the planning and delivery of programmatic results.

The Global Fund defines strong financial management and systems as having the capacity to:

  1. Correctly record all transactions and balances, including those supported by the Global Fund.
  2. Disburse funds to Sub-Recipients and suppliers in a timely, transparent and accountable manner.
  3. Maintain an adequate internal control system.
  4. Support the preparation of regular reliable financial statements.
  5. Safeguard assets.
  6. Set up acceptable auditing arrangements for the PR itself and for Sub-recipients (if applicable).

Financial Management Systems should be able to provide timely and reliable information that can give early warning of any problems in programme implementation and allow national entities, the Global Fund, LFA and partners to monitor progress toward agreed objectives.  The financial capacity assessment and plan should focus on all areas noted below, highlight strengths and any major risks and identify prioritised capacity development activities for addressing such risks.

An important element of the Financial Management Systems capacity assessment is to evaluate the robustness of the systems and controls to track the use of funds and to safeguard grant funds and assets against fraud and misuse. The assessment should identify and assess high-risk activities and transactions, such as training, cash payments, per diems, payroll etc. and identify the adequacy of the controls in place. Where weak controls are identified, the action plan should propose interim alternative arrangements and have the long-term goal of strengthening the overall financial systems, to reduce the risk of fraud.

Essential Capacities required for Principal Recipients

Financial Management

Capacity Area and Scope

Capacities

Indicators

Organisation of the Financial Management function – ensuring that there are clearly defined organisational structures for accounting and finance; leadership with adequate skills and experience; documented roles and responsibilities; sufficient segregation of duties; staffing sufficient to absorb grant funding; adequate policies and procedures.

  • To have in place Financial Management Manuals, which allow the PR to meet the national and Global Fund requirements.
  • To have clear Financial Management Standard Operating Procedures with templates and guidelines.
  • To ensure that the PR and SR SOPs are harmonised e.g. with dates for completion of the Project Updates/Disbursement Requests.
  • To ensure dissemination and roll out of manuals and SOPs, including training and support.
  • To conduct a functional analysis to identify the optimal Financial Management structure required.
  • To have in place a structure and TORs for Financial Management specialists with clear accountability and reporting lines, roles and responsibilities, clear segregation of duties and review the mix of consultant versus fixed staff.
  • To have supporting Human Resource policies and procedures.
  • To have in place a recruitment plan for key Financial Management positions to provide sufficient absorptive capacity for the PR, together with an oversight mechanism for the recruitment process, as well as the possibilities to enhance staff retention. 
  • To develop a training needs analysis and deliver training programmes for financial specialists with opportunities to obtain recognised qualifications.
  • % of Financial Management Manual and Standard Operating Procedures completed.
  • % of staff trained in procedures.
  • % of staff required in place.
  • Percentage increase or decrease in Financial Management staff turnover per year.
  • The %  of staff with development plans prepared and approved.
  • Percentage of staff who are on schedule with their individual staff development plan.

Budget System – that includes robust procedures to create, review and update budgets; policies to track expenses; the ability to prepare accurate financial reports used for management decision-making; and systems for cost-sharing arrangements.

  • To utilise national budget systems and procedures to enable budgeting for the PR and Global Fund to be conducted linked to the programme documents.
  • To have in place a system for monthly management reports for financial monitoring internally, for monitoring SRs and to inform decision-making.
  • To have a system with guidelines to carry out budget variance analysis and corrective action of SRs.
  • To have budget reporting procedures and templates to meet the needs of the CCM, the national system and the Global Fund including producing clear rationales and justifications for budget allocations and variances.
  • To design and implement a systematic approach for fair cost allocation that can also be adapted by SRs where required.
  • To put in place and utilise an approved Travel and Subsistence policy with per diem rates in line with the policy.
  • To put in place and utilise, with acceptable levels of compliance a cash forecast information system and template for SR disbursements requests with relevant training.
  • Frequency and review cycles for financial budgets.
  • % of financial reports submitted (eg: from national, provincial teams, district teams).
  • % of financial reports submitted on time (eg: from national, provincial teams, district teams).
  • % of SR disbursement requests received on time and correctly filled in.
  • Budgets integrated with programmatic and financial results.
  • Integration of planning and budgeting processes.
  • Level of integration of Global Fund budgeting into national procedures and systems.
  • Availability of budgeting guidelines and procedures.
  • Ability to provide variance analysis by period and cumulatively.
  • Ability to present the budget by cost categories, by programme activities and by implementing entities.
  • Degree to which financial reporting for the Global Fund programme uses national systems and procedures.
  • Degree to which financial reporting for the Global Fund programme is aligned to national budget cycles.
  • Procedures to ensure that grant funds can be distinguished from other funds and accounted for separately.

Accounting System – with the ability to absorb any potential increase in transactions; Chart of Accounts, with necessary levels of detail to monitor expenditures; integration of accounting and financial systems; reliable budget control and analysis; and the suitability of accounting software.

  • To have an accounting system in place to record and monitor actual spending against budgets and work plans and analyse variances, taking action where needed.
  • To have accounting software that is suitable for the requirements of national programmes, and the requirements of the Global Fund and other donors; and enable the production of consolidated reports.
  • To be able to design, put in place and utilise a Chart of Accounts (COA) and reporting system that can report against service delivery areas, project components, and implementers; including budget lines with identification codes to meet national and Global Fund requirements.
  • To have a system to back up accounting data and to allow storing off site.
  • To have in place an exemption from taxes for all grant funds.
  • To ensure storage of all accounting and supporting documents retained over the lifetime of the grant and for a sufficient and specified time afterwards.
  • To have in place systems to produce financial reports for decision-making (e.g. monthly management accounts and commentary).
  • To have in place a system for tracking disbursements to SRs through the accounting software (advances, cash balances and expenditures).
  • Accuracy and timeliness of financial transactions and reporting data.
  • Degree of use of accounting and financial software systems.
  • Number of non-computerized financial data-capture and reporting systems.
  • Number of licensed Financial Software packages installed.
  • % of staff trained in the software.
  • % of monthly management accounts produced.
  • Level of integration of Global Fund data and transaction recording into national procedures and systems.
  • The level of use of financial data ebing used to inform decision making.

Treasury System – ensuring the ability to absorb planned increased payment activity; appropriate controls over management of cash; adequate cash forecasting; appropriate controls in banking arrangements; appropriate checks prior to payment; and the ability to account for, and distinguish between, specific grant funding.

  • To have a treasury system to support the production of cash forecast information for disbursement requests.
  • To have separate bank accounts for the Global Fund programme for both PR(s) and SR(s).
  • To ensure sound management of petty cash.
  • To ensure that all cheques and transfers are double signed.
  • To prepare monthly bank reconciliation statements that are reviewed and approved.
  • To utilise payment vouchers which will have details of payments, Chart of Account (COA) with the project to be charged and signatures of the preparer, officer certifying payment and officer approving payment.
  • To put in place monitoring and supervision to ensure that payment vouchers are being used.
  • Ability to provide cash forecast information for disbursement requests.
  • The frequency and length of time for bank reconciliation statements to be reviewed and approved.
  • Level of integration of Global Fund treasury and disbursement into national procedures and systems.
  • The length of time required to process and make a payment.
  • Availability of financial disbursement guidelines and procedures.

Purchasing System (for non-health products) – to ensure adequate processes, procedures and oversight for procuring non-health products.

  • To have in place processes including:
    1. A code of conduct to avoid occurrence or perceptions of conflicts of interest.
    2. Methods of procurement and when different methods should be applied.
    3. Procedures for requests for tenders.
    4. Procedures for bid evaluation.
    5. Procedures that are transparent and competitive, with acceptable levels of compliance.
    6. To put in place and utilise with acceptable levels of compliance a purchase order system for accountability, tracking of commitments and ensuring specified goods and services are received.
  • To put in place and utilise with acceptable levels of compliance a system of contract management with sufficient description of the work to be performed.
  • Average number of bid responses per advertisement.
  • Average time from advertisement to selection.
  • Trends in average pricing per item or category
  • Availability of non-health procurement policies and procedures
  • Certification levels of procurement staff.

Assets Management System – to ensure adequate safeguards to protect assets; current fixed asset and inventory registers and periodic physical inventories.

  • To have in place systems and procedures to check that the PR and all SRs have a system of adequate safeguards to protect assets.
  • To have in place systems and procedures to ensure that both the PR and all SRs have periodic physical inventories of fixed assets and stocks that are reviewed and compared with the fixed asset register and inventory list.
  • To strengthen/put in place and utilise, with acceptable levels of compliance, systems and procedures to ensure that all assets are insured.
  • Availability of asset management policies and procedures.
  • Availability of fixed asset lists.
  • Availability of inventory management plan.
  • Level of integration of Global Fund asset management into national procedures and systems
  • Number of external reviews of inventory and assets.
  • Insurance documentation.

Audit Arrangements – with sufficient external audit arrangements; adequate processes for management responses and actions to address external financial audit issues; effective internal audit arrangements, such as clear structure, staffing, independence, reporting and plans.

  • To ensure annual external audits by a certified public accounting firm.
  • To put in place an internal audit function within the organisation with qualified staff, with clear reporting lines, and the mandate to carry out their duties.
  • To develop an annual audit plan.
  • To identify high risk areas within the planning process and emphasise these areas in the annual audit plan.
  • To follow up on audit findings in a timely manner.
  • To ensure financial oversight and accountability by the Country Coordinating Mechanism and national managers, clarifying lines of oversight and accountability in organograms or TORs, and ensuring no conflict of interest.
  • % of activities complete from Internal Audit Plan.
  • Percentage of independent audit report recommendations addressed.
  • Accuracy and timeliness of bank reconciliations
  • Level of sufficiency of controls built into banking arrangements – including, for example, proper authorization of disbursements and double signatures on cheques and transfers.
  • Schedule of external reviews of accountability and oversight mechanisms
  • Clear financial management accountability structures from national and regional to district/local levels.
  • Number of enforcement actions per year.
  • Number of partners and stakeholders involved in financial oversight.
  • Number of financial oversight reviews per year Percentage of financial audits and reviews completed versus those planned.
  • Documented audit and accountability policies and guidelines.

Sustainable Financing – enabling periodic costing reviews to get a clear picture of the current levels, sources and areas of expenditure, identification of priority areas for investment, opportunities to maximise cost savings and the implementation of Value for Money approaches.

Sustainable Financing – enabling periodic costing reviews to get a clear picture of the current levels, sources and areas of expenditure, identification of priority areas for investment, opportunities to maximize cost savings and the implementation of Value for Money approaches.

  • To design and conduct periodic costing reviews to get a clear picture of the current levels, sources and areas of expenditure, including determining the costs of delivering services, areas where there are potential savings, as well as how and where to reinvest savings.
  • To put in place and utilise processes for the identification of priority areas for investment and the production of investment cases, as well as identifying current and future funding shortfalls.
  • To be able to consider the best ‘blend’ of financing to deliver services and consider the options for government financing and partners, to make the optimal investment in National Programs.
  • To be able to continually identify opportunities to maximize cost savings and the implementation of Value for Money approaches.
 

Essential Capacities required for Principal Recipients

Risk Management

This capacity area includes ensuring the ability to identify and manage risks, and have in place the policies and systems for mitigating the risk of loss through fraud or corruption, as well as programmatic risks that hamper the achievement of programme impact.

Risk management is the process of identifying, assessing and prioritising risks, followed by measures to minimise, monitor and control the probability and impact of uncertain events.

Fraud and corruption both involve the taking or conversion of money, property or valuable items by an individual who is not entitled to them. Generally within the health sector, the following processes have a high inherent risk of fraud and corruption:

  • Human resources management
  • Drug selection and use
  • Procurement of drugs and medical equipment
  • Distribution and storage of drugs
  • Regulatory systems
  • Budgeting and pricing

Within the context of implementing grants, areas of risk identified by the Global Fund as ‘red flags’ for possible fraud are:

Training Overlapping or excessive training events; lack of a training plan.
Per Diems Indiscriminate cash payments for per-diems; excessive per-diems; high per-diem rates; lack of procedures.
Retention Schemes Lack of policies for salary levels and top-ups; lack of evidence of staff being paid; higher than average rates.
Vehicles Excessive number of vehicles; vehicles not used for intended purpose; vehicles inappropriate for intended purpose; fuel allowances inconsistent with logbooks.
Operating Costs Recurring cost such as rent, utilities, insurance, fuel, telephone, etc. indiscriminately charged to grant; inappropriate apportionment of shared costs.
Consultancy Fees Lack of consultancy hiring policies; lack of transparent selection process; lack of transparent process for determining fees.
Travel Lack of travel policies; travel to inappropriate or non-grant events.
Interest Interest on grant disbursements - holding disbursements to earn additional interest; transfer of funds to earn interest; lack of transparent reporting on interest earned.
Overheads Overheads charged under lump sum amounts; lack of transparency of detail in lump sum amounts.
SRs High profile SRs that manage a high percentage of the grant; SRs with known capacity gaps.
Procurement Recurrent small-scale procurement can involve a lack in transparent and clear product selection processes.

 

It is equally important to pay attention to Programmatic risks. These include risks that are related to programmes having limited relevance, programmes not achieving short-term goals or longer-term impact, being unsustainable or being assessed with inadequate monitoring and evaluation or data quality.

Governance, Oversight and Management risks should also be considered to assess how poor governance, inadequate oversight and monitoring, or poor programme and grant management can impact on in quality, timeliness, and efficiency in achieving results.

Drug theft can be a significant problem compromising the ability to save lives. The theft of anti-retroviral (ARV) drugs is a particular concern because of their black market value and critical importance to patients in need. Procurement is a major risk area for corruption in institutions around the world and the theft of pharmaceuticals along the supply chain is a common problem in many countries, especially where supply chain information is difficult to obtain and not effectively verified.  A thorough assessment and development of procurement capacities is an important deterrent to corruption and strengthened drug management systems supplying information on drug allocation, storage, and delivery are crucial to provide mechanisms to identify areas of theft and mitigate risk.

Essential Capacities required for Principal Recipients

Capacity Area and Scope Capacities Indicators
Risk Management – with policies and procedures to identify, assess and plan for programme risks; clear responsibilities for managing and monitoring risk; regular review of risks and mitigation; implementation of risk management actions; effective systems to provide internal and external transparency of operations.
  • To develop and conduct a risk identification process to map risk and possible fraud/corruption in all key areas such as: governance/strategy; programme management; sub-recipient management; financial management and Procurement and Supply Management.
  • To map the probability and impact of the risks identified
  • To put in place and utilise a process to identify risk mitigation actions.
  • To put in place and utilise a prioritised risk management action plan.
  • Frequency of risk management planning.
  • Integration of Global Fund risk management, anti-fraud and anti-corruption functions into national procedures and systems.
  • Financial and material loss per year from fraud and corruption.
  • Number of fraud and corruption allegations reported per year.
  • Number of fraud and corruption enforcement actions per year.
  • Availability of risk management, anti-fraud and anti- corruption policies and procedures.
  • Integrated risk and management reports.

Key Considerations when assessing and developing capacity in Financial Management and Risk Management

Integrated Budgeting and Reporting Results-based budgeting and reporting require the integration of programmatic results information with budget and expenditure information to better inform management in decision-making.
Cross-Ministry Financial Management In some cases, the breadth of financial management and systems capacities are the responsibility of more than one Ministry or organisation. While national disease responses are most often governed by the Ministry of Health, the financial management and systems capacity area may be, in part, the responsibility of the Ministry of Finance or another nominated government entity. In these cases, capacity development support may be required for more than one national entity.
Increases in Grant Volume In assessing and planning the development of financial management capacities, the volume of transactions and grant amount against current levels should be considered, to determine what additional capacity support might be required.
Budgeting Global Fund PRs must report expenditures against the grant agreement budget's programme areas and include explanations for deviations from this budget. The budget must be detailed enough to input into the Global Fund Enhanced Financial Reporting.
Financial Systems The use of financial software systems is fundamental to accurate financial data capture and transaction recording, disbursements, financial controls, and reporting. This is a target area for financial management capacity strengthening when manual or individual computer-based systems are in place.
Accountability To increase accountability and transparency, avenues for civil society and public oversight are important. At a minimum, these should oversee procurement and drugs selection at facility level and health delivery at community and local health board level.
Partner Coordination In some cases, fraud can occur when multiple donors or grants are used to pay for the same item or items, and donors are unaware of the duplication of funding. Open review of integrated budgets and activities by coordination working groups are recommended.
Disclosure The disclosure of assets and political contributions by senior managers prevents corruption by identifying potential conflicts of interest, and the disclosure provides a baseline to assess whether assets have been acquired through corruption.