Related Party Transactions in NGO
As stated in the Building Bridge – Bread for the World, Issue No. 1, 2020 – an update for auditors auditing projects funded by Bread for the World, the “Related party transactions (RPTs) are a major source of fraud and misuse of funds in the NGO sector”.
From our experiences in delivering the external audit services to NGO projects or NGO itself in Vietnam, Laos, Cambodia, and Myanmar, the audits mainly have been conducted in accordance with International Standards on Auditing (ISA). It’s required by the donors in the Audit Term of Reference. Relating to audit RPTs, the standard that auditors must refer to is ISA 550 “Related Party”. However, ISA 550 seems business focus rather than NGO sector. As the result, the guidance to auditors in this area has been relatively limited.
Auditors commonly commence the audit RPTs with the disclosure of the management on RPTs. The methodology approach concentrating on verifying the disclosed RPTs rather than identifying the undisclosed RPTs has led to the failure of auditors in this area. Therefore, in order to reduce the risks of performing inappropriate approach for these transactions, the auditors should design a program that is able to identify the undisclosed RPTs.
The auditors should look beyond the suggested common related party relations by ISA 550 (Building Bridges, Issue No. 1, 2020). The relationships could be extended to the project’s employees, NGO (local partners)’s employees, donors’ staff, consultants, organizations/ business entities located/ registered on the same premises, etc., The items might contain high risk namely salary payment, consulting, rent and unusual items such as over-priced goods/ services.
Audit RPTs in NGO is tough, especially in Vietnam, Laos, Cambodia, and Myanmar where the information for reference check is quite limited. The work should carry out by experienced auditors who have good knowledge of the NGO sector (i.e. industry) and understand the operation of the organization itself.
The article expresses the author’s opinion.
Building Bridges Issue No. 1, 2020 – Building Bridges – an update for auditors of Bread of the world-funded projects (Publisher: Brot für die Welt, Evangelisches Werk für Diakonie und Entwicklung e. V., Caroline-Michaelis-Str. 1, 10115 Berlin, Germany, Fon +49 30 65211 0, email@example.com, www.brot-fuer-die-welt.de, Editor: David Wortham, Axel Stelzner, Ulla Kroog (V.i.S.d.P.)
ISA 550 – Related Party (revised 2009) issued by IFAC (International Federation of Accountants)