Financial Management for Business Associations

1. INTERNAL CONTROLS, FRAUDS
AND BUDGETS
Thursday May 23, 2013
Secretary General Conference
Islamabad, Pakistan
By: Malik Mirza, FCCA, ACA, MBA
www.wisdomfrombooks.com
4/27/2012 www.wisdomfrombooks.com

2. INTRODUCTION
• Facilitator
• Objectives
• Format for two hours’
session
• Conclusion

3. Facilitator
Malik Mirza

4. OBJECTIVES
• UNDERSTAND about internal controls
• KNOW budgeting techniques to prepare
effective budget

5. FORMAT
• Case study
• Group discussions
• Sharing experience
• Power point presentation

6. Who is this man?
• New York money
manager Bernard
Madoff's $65 billion
Ponzi scheme, the
largest fraud ever by an
individual, was exposed
in December 2008
when Madoff, now
doing 150 years in
prison, confessed to his
sons. The case led the
SEC, which missed
several opportunities to
stop the fraud, to focus
on Ponzis and
investment advisor
fraud.

7. Who is he?
• Shortly after the
company was created
by the merger of CUC
International and HFS in
1997, a massive, decade
long accounting fraud at
CUC was uncovered. It
was estimated to have
cost investors at least
$19 billion, and was the
largest fraud
prosecuted by the SEC
to that date. Securities
class action lawsuits
settled later for more
than $3 billion. A judge
sentenced former
chairman Walter Forbes
to 12 years and seven
months in federal prison
and ordered him to pay
$3.275 billion in
restitution.

8. Guess who?
• The 2002 fraud-induced
bankruptcy of the telecom
company wiped out a firm
that once had $103.9
billion in assets on its
books. The resulting $6.1
billion securities class
action lawsuit payout is
the second largest since
1995. Former CEO
Worldcom Mr. Bernard
Ebbers was convicted of
fraud and is doing 25 years
in federal prison.

9. Now: Who is this person
• In March of 2003, the SEC
accused CEO Richard M.
Scrushy of overstating
earnings by at least $1.4
billion over four years.
Scrushy was acquitted of all
charges but later went to jail
on a separate charge of
bribing Alabama's governor.
Fifteen former executives,
including all five of its recent
CFOs, pleaded guilty to
accounting fraud.

10. Last guess: A good guy?
• Qwest's stock traded as
high as $64 in 2000
before plummeting in
2002 to less than $1
because of a multiyear
accounting fraud. The
SEC and DOJ probe was
prompted by a
whistleblower letter.
CEO Joseph Nacchio
forfeited $44 million for
insider trading and went
to jail. A class action
settlement added $400
million to the pot but
investors got back
pennies on the dollar.

11. What’s the conclusion after five
guesses?
• Frauds do happen
• Can it happen at your organization?
• If yes, how?
• If no, why not?

12. Case study
Mr. Rahim has recently joined the Business chamber of commerce as chief
accountant.
The President and Secretary of Chamber have full faith and trust on Mr. Rahim and as
a result, Mr. Rahim is all in all in finance.
The President and Secretary of Chamber have authorized Mr. Rahim to:
• Finalize rates of transactions with vendors
• Receive invoices
• Verify invoices
• Prepare cheques
• Deliver cheques to vendors
• Record transactions in the books of account

13. Case study
• There is no further check on Mr. Rahim except for trust of the President and
Secretary. The only oversight by the President and Secretary of the Business
chamber is the signature on cheques.
ASSIGNMENT / GROUP DISCUSSION & PRESENTATION
• Please consider the above scenario and after discussion in your group, answer the
following:
• How can Mr. Rahim conduct fraud or what are two frauds Mr. Rahim can conduct?
• What are three suggested internal controls which will help mitigate chances of
fraud at the Business Chamber of Commerce?
• Are there any internal controls at your chamber? Please explain three of them
• What one internal control do you consider you will implement once you are back
from this session?

14. 14
COSO Definition of Internal Control
Internal control is a process, effected by an entity’s board of directors,
management and other personnel, designed to provide reasonable
assurance regarding the achievement of objectives in the following
categories:
• Effectiveness and efficiency of operations
• Reliability of financial reporting
• Compliance with applicable laws and regulations
What do we mean by ‘internal
control’?

15. 15
COSO Internal Controls Key Concepts
– Internal control is a process. It is a means to an end, not an end in itself.
– Internal control is effected by people. It’s not merely policy manuals and forms,
but people at every level of an organization.
– Internal control can be expected to provide only reasonable assurance, not
absolute assurance, to an entity’s management and board.
– Internal control is geared to the achievement of objectives in one or more
separate but overlapping categories.
What do we mean by ‘internal
control’?

16. COSO’S FRAMEWORK – THREE
DIMENSIONS OF INTERNAL
CONTROL
MONITORING
INFORMATION AND
COMMUNICATION
CONTROL ACTIVITIES
RISK ASSESSMENT
CONTROL ENVIRONMENT
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ACTIVITY2
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1. Consists of three objectives:
– Effectiveness and efficiency of operations
– Reliability of financial reporting
– Compliance with applicable laws and
regulations
2. Consists of five components:
– Control environment
– Risk assessment
– Control activities
– Information/Communication
– Monitoring
3. Requires an entity level focus and an activity
level focus

17. 17
Control Environment
CONTROL ENVIRONMENT
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The control environment sets the tone of the organization,
influencing the control consciousness of its people. It is the
foundation for all other components of internal control, providing
discipline and structure.
Control environment factors include:
• Integrity and ethical values
• Commitment to competence
• Board of Directors or Audit Committee
• Management philosophy and operating style
• Organizational structure
• Assignment of authority and responsibility
• Human resource policies and procedures
CONTROL ENVIRONMENT

18. 18
Risk Assessment
RISK ASSESSMENT
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Risk assessment is the identification
and analysis of relevant risks to
achievement of the objectives, forming
a basis for determining how the risks
should be managed.
RISK ASSESSMENT

19. 19
Risk Assessment
RISK ASSESSMENT
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Objectives (i.e. assertions) must be established prior to the identification
of risks to their achievement and to take necessary actions to manage the
risks.
By setting objectives, both at entity and activity
levels, prior to a risk assessment, a company
can determine the critical success factors; then
determine the risks to the critical success
factors.
A risk assessment usually includes:
a. Estimating the significance of a risk
b. Assessing the likelihood (or
frequency) of the risk occurring
c. Consideration of how the risk should
be managed
RISK ASSESSMENT

20. 20
Control Activities
CONTROL ACTIVITIES
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Control activities are the policies and procedures that help ensure
management directives are carried out. They help to ensure that necessary
actions are taken to address risks to achievement of the entity's objectives.
Control activities occur throughout the organization, at all levels and in all
functions.
Control activities include:
•Approvals
•Authorizations
•Verifications
•Reconciliations
•Reviews of operating performance
•Security of assets
•Segregation duties
CONTROL ACTIVITIES

21. 21
Control Classification
Preventive controls focus on preventing
errors or exceptions. Such preventive
controls are
– Standard policies and procedures
– Proper segregation of duties
– Authorization levels/approvals
Detective controls are designed to identify an
error or exception after it has occurred.
Such detective controls are:
– Exception reports
– Reconciliations
– Periodic audits
Internal controls can be classified as either Preventive or Detective.
CONTROL ACTIVITIES
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CONTROL ACTIVITIES

22. CONCLUDING INTERNAL CONTROLS: SHARING EXPERIENCE
Let’s review the environment of chambers and provide feedback on:
1. Control environment
2. Risk assessment
3. Control activities
4. Information/Communication
5. Monitoring

23. Budget Preparation:
Best Practice & Strategy

24. WHAT IS A BUDGET
• A budget is a detailed plan of income and
expenses.

25. WHY WE NEED BUDGET
I’ ve got a great
training course Have u done
a budget

26. CRITICISMS OF TRADITIONAL
BUDGETING
• Rarely strategically focused
• Time consuming and costly
• Reinforces departmental barriers rather than
encouraging knowledge sharing
• Sometimes based on unsupported
assumptions and guesswork as opposed to
well-constructed performance data
• Infrequently updated (budget amendment)

27. Two Questions
1. Why Do We Budget and Forecast?
– Budget and Forecast Timeline
1. How Do We Budget and Forecast

28. BUDGET PREPRATION AND
STRATEGY
Bankrupt
Waah!
What’s
wrong with
him?
He didn’t prepare
a budget

29. Why Budget and Forecast?
Budgets and Forecasts
A Budget is a formal expression of the plans
for the operation for a specific period
A forecast is a projection of activity based
upon the information
A budget and forecast is your best estimate of
the department’s/ function’s financial result
for a fiscal year

30. Why Budget and Forecast?
Budgets and Forecasts
Measure actual and forecasts against the
budget throughout the planning process
Analyze anticipated versus actual results
Predict future performance and anticipate
changes

31. Why Budget and Forecast?
Budgets and Forecasts
Assist in monitoring control of current
performance
Provide early warning of deviations from plans
Internal financial control by department

32. Why Budget and Forecast?
Budgets and Forecasts
Impact decisions at higher levels
Reporting responsibility to Board of Directors
Quarterly meeting plus executive sessions
Importance of good budgets and good
forecasts

33. Budget Preparation:
Best Practice & Strategy

34. FINANCIAL BUDGET PREPARATION
I need to prepare a
training budget.
Don’t forget to
develop your training
plan first.
PLAN

35. FINANCIAL BUDGET PREPARATION
BUSINESS PLAN
EXECUTIVE SUMMARY
MAJOR ASSUMPTIONS
SWOT ANALYSIS
MARKETING AND SALES PLAN
FINANCIAL BUDGET

36. GANTT CHART – NEW COMPANY
Launch Date
Company Setup
Application of License
Office Renovation
Staff Recruitment
System Installation
System Readiness
GANTT CHART
Q1 Q2 Q3 Q4

37. Budget Preparation:
Best Practice & Strategy

38. FINANCIAL BUDGET PREPARATION
BUSINESS PLAN
GANTT CHART
MARKETING PLAN
FINANCIAL BUDGET

39. FINANCIAL BUDGET PREPARATION
MARKETING OBJECTIVES
PRODUCTS AND SERVICES
CURRENT MARKET SITUATION
a.Target Markets
b.Business Opportunities
c.Competition
SALES AND MARKETING PLAN

40. FINANCIAL BUDGET PREPARATION
MASTER BUDGET
OPERATING BUDGET FINANCIAL BUDGET
CAPITAL BUDGET
BUDGETED P&L
CASHFLOW BUDGET
REVENUE BUDGET
COST OF SALES
BUDGET
OPERATING EXPENSE
BUDGET
ADVERTISING
BUDGET
BUDGETED P&L

41. FINANCIAL BUDGET PREPARATION
REVENUE BUDGET
Rs 100
out
So I need at
least Rs 100 to
cover expenses
Where I will find
this money

42. FINANCIAL BUDGET PREPARATION
REVENUE BUDGET
OPERATING BUDGET
Provide Business Statistics
Provide breakdown of
revenue by type
Explain how these revenue
are achieved (Business mode)
Provide calculation of revenue
numbers together with related
direct costs
Specify when the revenue
targets will be achieved
Specify when the related
direct costs are incurred
REVENUE BUDGET
COST OF SALES
BUDGET
OPERATING EXPENSE
BUDGET
ADVERTISING
BUDGET
BUDGETED P&L

43. FINANCIAL BUDGET PREPARATION
OPERATING EXPENSE BUDGET
OPERATING BUDGET
Categorise the expenses
Personnel Costs
Office Premises
Travel and Entertainment
Postage and Couriers
Printing and Stationery
Provide justification and
calculation for each type of
expenses
When to incur the expense??
REVENUE BUDGET
COST OF SALES
BUDGET
OPERATING EXPENSE
BUDGET
ADVERTISING
BUDGET
BUDGETED P&L

44. FINANCIAL BUDGET PREPARATION
ADVERTISING BUDGET
OPERATING BUDGET
Provide Marketing and Sales
Plan
Provide justification and
calculation for each type of
costs
How the expense will be
incurred??
When to incur the expense??
REVENUE BUDGET
COST OF SALES
BUDGET
OPERATING EXPENSE
BUDGET
ADVERTISING
BUDGET
BUDGETED P&L

45. FINANCIAL BUDGET PREPARATION
PROFIT AND LOSS BUDGET
Income
Rs 100
Expenses
Rs 80
Great! I will
make profit of
Rs 20

46. FINANCIAL BUDGET PREPARATION
PROFIT AND LOSS BUDGET
Income
Rs 80, Expenses Rs 100,
What will I do??

47. FINANCIAL BUDGET PREPARATION
• IN CASE OF LOSS
–Increase income
–Reduce expenses
DOWNSIZING

48. FINANCIAL BUDGET PREPARATION
BREAK EVEN
Oh
well at least I
didn’t
lose anything.

49. FINANCIAL BUDGET PREPARATION
• To break even means
Income is equal to expenses
Income Rs 100 – Expenses Rs 100 =
Profit Rs 0

50. Budget Preparation:
Best Practice & Strategy

51. FINANCIAL BUDGET PREPARATION
CAPITAL BUDGET
OPERATING BUDGET FINANCIAL BUDGET
CAPITAL BUDGET
BUDGETED P&L
CASHFLOW BUDGET
Description of Expenditure
Provide Justification
Provide Costing
When to Purchase
How to Finance

52. FINANCIAL BUDGET PREPARATION
CASHFLOW BUDGET
OPERATING BUDGET FINANCIAL BUDGET
CAPITAL BUDGET
BUDGETED P&L
CASHFLOW BUDGET
From Operating Activities
From Investing Activities
From Financing Activities
Budgeted Cash Requirements

53. FINANCIAL BUDGET PREPARATION
BUDGET AND PROJECTION TEMPLATE
OPERATING BUDGET
Historical
Year 1 to
Current
Year
Budget
Current
Year
Projection
Next 4
Years
Provide
Yearly
Analysis
Provide
Yearly
Analysis
Provide
Monthly
Analysis

54. KEY PERFORMANCE INDICATORS
• Abbreviated KPIs
• Quantitative Measure
• Derived from Key Success Factors
• Base vs Stretch target
For Forecast
• YTD actual and FY Forecast
• Comments on expected variance

55. Budget Preparation:
Best Practice & Strategy

56. FINANCIAL BUDGET PREPARATION

57. FINANCIAL BUDGET PREPARATION

58. TOP DOWN VS BOTTOM UP
 A top down budget is a budget that is set
without allowing the ultimate budget holder
to have the opportunity to participate in the
budgeting process
 A bottom up budget is a system of budgeting
in which budget holders have the opportunity
to participate in setting their own budgets.
Also called PARTICIPATIVE BUDGET

59. BUDGETARY SLACK
• Difference between minimum necessary costs
and the costs built into budget or actually
incurred.
• Managers set targets that are too easy to
achieve.
• Managers must ensure that their spending
rises to meet their budget.
• Waste money on non-essential expenses.
SOLUTION ZBB

60. BUDGET TYPES
 Firm/ Sanctioned
 Unfirm/ Contingent/ Unsanactioned
 In most of the organisations contingent
budget is also approved by board.
 The movement from contingent to firm is
considered as memorandum amendment

61. INCREMENTAL BUDGETING
 Starts with previous year budget or actual
results and +/ - an incremental amount to
cover inflation and other known changes
 Have advantages and disadvantages

62. INCREMENTAL BUDGETING
 Suitable for stable businesses
 Costs are not expected to change significantly
 Good cost control
 Limited discretionary costs
 Quick & easy to prepare
 Builds inefficiency
 Uneconomic activities may be continued
 Budgetary Slack

63. ZERO BASED BUDGETING
Requires each cost element to be specifically
justified through the activities to which the
budget relates
 Managers should specify those activities that
can be individually evaluated
 Decision is evaluated and ranked using cost/
benefit analysis
 Resources are then allocated

64. ZERO BASED BUDGETING
 Inefficient operations can be discontinued
 Increased staff involvement
 Responds to change in business environment
 Efficient allocation of resources
 Enhanced knowledge of cost behaviour
patterns
 Emphasis short term benefits
 Demotivation due to large amount of time
 Ranking can be difficult for different type of
activities

65. ROLLING BUDGETS
Kept continuously up to date by adding another
accounting period (month or quarter) when the
earliest accounting period has expired
 Suitable in fast moving environment where
accurate forecasts cannot be made
 Suitable if business needs tight control
Q1 Y1 Q2 Y1 Q3 Y1 Q4 Y1 Q1 Y2
Budge
t
Actual
Add

66. ZERO BASED BUDGETING
 Planning will be based on most accurate budget
 Reduce element of uncertainty
 Always a budget that extends into future
 Forces management to reassess the budget
regularly
 Costly and time consuming
 Danger Budget = last budget +/-
 Demotivate employees = budgetary targets
constantly changing

67. ACTIVITY BASED BUDGETING
Based on budgeting based on an activity
framework and utilising cost driver data
 Use for overhead costs determination
 Constructed by preparing activity matrix
 Good tool for variance feedback processes

68. HOW DO I MONITOR THE BUDGET
COMPARISON
ACTUAL VS
BUDGET

69. FEED FORWARD CONTROL
Comparing budgeted results against a
forecasted results
 Feed back simply compare historical results
with the budgeted results
 Feed forward is the acceptable system over
the world for control action

70. FEED FORWARD CONTROLSalesRs
Budget 2011
Sales to date used to
forecast results to end
of the year
Control action can be
taken now to close
the gap
Time
Current date
Sales
to date

71. FEED FORWARD CONTROL
Feedback Report
Sales report for April 2011
Month YTD
Budget Actual Variance Budget Actual Variance
Product Rs'000 Rs'000 Rs'000 Rs'000 Rs'000 Rs'000
X 35 38 3 (F) 90 94 4 (F)
Y 20 14 (6) (A) 50 39 (11) (A)
Z 25 23 (2) (A) 50 45 (5) (A)
Total 80 75 (5) (A) 190 178 (12) (A)

72. FEED FORWARD CONTROL
Feedforward Report
Sales report for April 2011
Full Year
Budget Forecast Variance
Product Rs'000 Rs'000 Rs'000
X 240 250 10 (F)
Y 150 120 (30) (A)
Z 210 194 (16) (A)
Total 600 564 (36) (A)

73. REPORTING ON VARIANCES
There are different reports being prepared for
reporting of variances.
There is a link between numbers and words.
Numbers are represented by different names
like Flash Report, Summary Analysis,
Variance Analysis, Snapshots, etc.

74. REPORTING ON VARIANCES
Without descriptive, textual and narrative part
numbers are considered to be meaningless
 In large organisations, a weekly CEO report or
for small organisations, a monthly
commentary.
These documents embed with numbers (flash
report) along with narratives.

75. THANK YOU