Common NGO Mistakes in Donor Reporting and How to Avoid Them

A donor financial report is read at least twice: first by the donor’s programme manager, then by the independent auditor engaged by the donor or the organisation to verify expenditure. Both are looking for the same thing: whether the funds were spent on project purposes, within budget, according to the donor’s rules, and whether this can be proven with documents.

Over more than 20 years of work with donor-funded projects, the MK Audit team has seen hundreds of reports, and the list of findings repeats itself time and again. Below are the most common mistakes, grouped by the topics that most often end up in audit reports, together with practical ways to avoid them.

Source document errors

This is the largest group of findings. During a grant audit, the auditor traces each sampled expense through the full chain: contract, invoice, evidence of delivery (acceptance act or delivery note), proof of payment, and evidence that the item was used for its intended purpose. A gap anywhere in the chain means the expense is unsupported.

• a payment exists but there is no acceptance act or delivery note, or the document is dated after the reporting period;
• the act says “services rendered” with no detail of what, when and in what volume;
• documents are issued to another organisation or to an individual (for example, tickets in an employee’s name with no expense report);
• the file contains only copies or scans with no note that they were checked against originals;
• event costs are not supported by participant lists, agendas, photos or signed registration forms;
• business trip orders, trip reports or proof of attendance are missing.

How to avoid it: draw up a list of mandatory documents for each type of cost and check it at the point of payment, not at reporting time. For events, keep a separate folder with the agenda, registration sheets and acts for each type of cost.

Budget variances

The grant budget is part of the agreement, and any deviation from it needs a basis. Typical findings:

• a budget line exceeded beyond the permitted flexibility (for many donors, 10 percent of the line or of the total budget) without written approval;
• costs charged to lines that do not exist in the budget, or costs reclassified to fit the budget (equipment recorded as consumables);
• costs incurred before the project start date or after the end date;
• ineligible costs: fines, penalties, hospitality, alcohol, VAT that the organisation is entitled to recover, and costs already funded by another donor.

How to avoid it: compare actual to budget for each line every month. If a line is heading over budget, request a reallocation from the donor in advance: most donors approve reallocations before the period ends, but almost none do so retroactively.

Procurement

Donors require goods and services to be procured transparently and at a reasonable price. The auditor checks whether the procedure set by the donor’s rules or the organisation’s internal policy was followed. The most frequent breaches:

• no quotations from several suppliers where the amount exceeds the donor’s threshold;
• splitting one purchase into several smaller ones to avoid a competitive process;
• no minutes or memo justifying the choice of supplier;
• the supplier is related to board members or staff and the conflict of interest is not declared;
• equipment is not entered in the fixed asset register, not labelled and not handed over under an act.

How to avoid it: adopt an internal procurement policy with thresholds and procedures, and make sure it is no less strict than the donor’s rules. For every purchase above the threshold, keep the requests, the quotations received, a comparison table and the decision.

Payroll

Salaries are usually the largest budget line and the most frequent source of findings:

• no timesheets, or timesheets filled in formally (100 percent on one project while the person also works on other grants);
• an employee’s total allocation across all projects exceeds 100 percent;
• pay exceeds the rate in the budget or differs significantly from market rates without justification;
• no appointment order, job description, contract or addendum linking the position to the project;
• payments under civil law contracts made without acceptance acts, or with acts that have no substance;
• taxes and social contributions are accrued, but the amount in the report does not match the ledger.

How to avoid it: introduce monthly timesheets for all grant-funded staff, showing the split between projects, signed by the employee and the manager. Reconcile the splits with orders and budgets before every report.

Exchange rates

Exchange rate errors are rarely deliberate, but they are what causes the differences between the report and the ledger that the auditor is obliged to describe:

• the report uses a rate that does not match the grant agreement (for example, the National Bank rate on the expense date instead of the tranche conversion rate);
• exchange gains are not reported or are used for non-project purposes without approval;
• exchange losses are charged to the project although the agreement does not allow it;
• different conversion approaches are used in different reporting periods.

How to avoid it: put the conversion rule in writing before the first expense and keep a table of tranches with the rates applied.

Summary table: mistake, consequence, safeguard

Mistake	What the auditor will write	What to do in advance
No acceptance act for a payment	Expense unsupported	Document checklist at payment
Budget line exceeded by more than 10%	Unapproved budget variance	Monthly budget-to-actual control, reallocation request
Only one quotation	Procurement procedure breached	Procurement policy with thresholds
100% timesheet on several projects	Double funding of salaries	Single timesheet with project splits
Rate not per agreement	Report does not reconcile to ledger	Conversion rule in the project file

How to prepare for the audit so that there are no findings

1. Perform an internal reconciliation: project expenditure in the accounting system must equal the amount in the report, with every difference explained in a memo.
2. Compile a register of source documents by budget line, referencing the folder or file number.
3. Test the 10-15 largest expenses through the full document chain.
4. Re-read the grant agreement: period, budget flexibility, procurement thresholds, exchange rate rules, audit requirements (an audit under ISA 800/805 or agreed-upon procedures under ISRS 4400).
5. Gather in one place the minutes, orders and policies referred to in the report.

If the organisation lacks the capacity to keep records at this level of detail, consider outsourced accounting for NGOs with a firm that works with donor rules every day: audit preparation then becomes routine rather than an emergency.

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