Cash flow, fighting fraud and audits

1Managing cash flow

An NGO can be solvent on paper and unable to pay in practice: donors pay in instalments, often after reporting. The monthly cash flow plan matches expected receipts (by donor and instalment) with disbursements (salaries, purchases, partners). It anticipates cash gaps and makes it possible to request advances or postpone purchases.

Exchange-rate risk is managed by converting as needed, recording at the rate set in each contract (spot rate, average rate or InforEuro rate, for example) and tracking exchange gains and losses. Transfers to hard-to-reach areas (banks, mobile money, hawala) require a risk analysis and suitable controls.

2Fraud: prevent, detect, respond

The fraud triangle (pressure, opportunity, rationalisation) explains why internal controls aim first at reducing opportunities: segregation of duties, approval thresholds, rotation, monthly bank reconciliations, supplier vetting, conflict-of-interest declarations.

• Red flags: split invoices, suppliers with no verifiable address, consistently high prices, an employee who never takes leave, altered documents.
• Response: anti-fraud policy, protected reporting channel, investigation by an independent person, informing donors within contractual deadlines, sanctions and recovery of funds.

3Passing an audit

A project audit checks that declared expenses are real, eligible, justified and compliant with the contract. Preparation starts on day one: documents filed by budget line, reconciliation between accounts and financial reports, complete procurement files (quotes, comparative analysis, contract, goods received note), timesheets for staff charged to the project.

After the audit, the management letter leads to an action plan followed up by management. Rejected costs are borne by the organisation: that is what compliance is for.

4Building a multi-donor cash flow forecast: the method

The cash flow forecast answers a single question: will we have the money in the right account, in the right currency, on the day we have to pay? The budget and the budget versus actuals report deal with authorised and spent expenditure; treasury deals with actual receipts and disbursements. A mission can have 2 million dollars of signed grants and still be unable to pay next month's salaries.

Two complementary horizons

• The 13-week rolling forecast, updated weekly by the country finance manager: receipts and disbursements week by week, by account and by currency. This is the operational tool that triggers funding requests to headquarters or to donors.
• The 6- or 12-month forecast, updated monthly after closing: it reveals cash gaps linked to the tranche schedule and makes it possible to negotiate in time (advance from headquarters, payment schedule, postponement of purchases).

Payment modalities to know

The method step by step

1. Start from actual balances of all bank accounts and cash boxes on the day of the update, by currency.
2. List receipts by donor, tranche and probable date, applying a realistic rather than contractual date: if a donor usually pays 30 days after approving a report, the receipt date is the report submission date plus the approval time plus 30 days.
3. List disbursements: salaries and social charges (fixed dates), rent, transfers to partners according to agreements, major purchases according to the procurement plan and suppliers' payment terms, distributions and cash transfers according to the activity schedule.
4. Calculate the end-of-period balance and compare it with a safety threshold defined by the policy, often one month of salaries and fixed costs.
5. Build a downside scenario: delay of the most uncertain tranche, exchange rate shift, urgent purchase.
6. Decide on measures and document them: early request, internal advance, postponement, renegotiation.

One donor's funds must not be used to pay another project's expenditure, even temporarily, unless internal policy and the contracts expressly allow it and the movement is recorded as an inter-project loan that is repaid and traceable. An undocumented "temporary" advance becomes, at audit, an ineligible expenditure or a misuse of funds.

Working capital

National NGOs are the most exposed to cash gaps, because they rarely have unrestricted funds. Several options exist: negotiating advances rather than reimbursements, including support costs in budgets that make it possible to build up a reserve, and asking international partners for transfers at the start of the quarter rather than on a reimbursement basis. These issues are part of the quality funding commitments of the Grand Bargain (A Shared Commitment to Better Serve People in Need). For an international NGO, the headquarters working capital fund makes it possible to advance funds to missions according to written rules (maximum amount, duration, priority repayment when the tranche arrives).

5Worked example: a six-month cash flow forecast and its corrective measures

Fictional context: the NGO "Horizon Santé" manages four grants in the fictional country of Varanie. The country finance manager prepares the forecast for July to December. Amounts in thousands of dollars. Safety threshold set by the policy: one month of salaries, i.e. 85.

Data

• Cash balance at 1 July, all accounts: 340.
• Donor A (United Nations agency, quarterly advances): 90 in July, 90 in October, advance for the following first quarter requested for the end of December (90), each advance conditional on liquidation of the previous one.
• Donor B (pooled fund): second tranche of 120 expected in September, conditional on the interim report due on 31 August; usual approval time of three to six weeks, hence a risk of slippage into October.
• Donor C (monthly reimbursement of expenditure with a lag of about 45 days): 35 per month from August to December.
• Donor D: new contract under negotiation, first payment of 180 expected in November.
• Disbursements: salaries of 85 per month; activities and running costs of 70, 80, 120 (September distribution), 60, 75 and 80; transfers to the national partner of 40 in July and in October.

The initial forecast

Downside scenario: if B's tranche slips into October, the September balance falls to 105 + 35 - 205 = - 65. The mission would be unable to pay the end-of-September salaries, at the very moment of the largest distribution. The October balance returns to - 5, since the tranche then arrives.

The reasoning

• The problem is not a lack of funding (the four contracts cover the expenditure), but a timing mismatch.
• Two risks dominate: the date of tranche B, which depends on the mission itself (report submission date), and the date of D's first payment, which depends on the negotiation.
• Salaries and the September distribution cannot be postponed without serious consequences for staff and affected people.

The measures adopted

All balances are back above the threshold. The forecast is presented to the country director with both versions and the downside scenario, then updated monthly. Repayment of the headquarters advance in January is already entered in the next forecast.

A useful cash flow forecast does not aim for accuracy to the dollar. It aims to see the gap two to three months ahead, while there is still time to negotiate. A gap spotted in payroll week leaves only bad options.

Control points in this example

• The headquarters advance is recorded as a liability to headquarters, not as a grant receipt.
• The transfer to the national partner is not delayed to improve cash flow: that would shift the problem onto the most fragile actor.
• A's funds are not used to pay C's expenditure while awaiting reimbursement: each project bears its own expenditure, and the timing gap is covered by the headquarters advance.

6Exchange rates, fund transfers and high-risk payment channels

Conversion methods

A contract denominated in euros, accounts kept in dollars and expenditure paid in local currency: this is the ordinary situation of a mission. The conversion rule applied must be written, consistent with each contract and applied consistently.

Worked example of an exchange loss

A 500,000-euro contract was budgeted at a rate of 1.10 dollars to the euro, i.e. 550,000 dollars of activities. The pre-financing of 400,000 euros is converted at 1.08, i.e. 432,000 dollars instead of the 440,000 planned: an exchange loss of 8,000 dollars. Under the rules of most donors, exchange losses are not compensated: the organisation must reduce some expenditure or find additional funding. Conversely, an exchange gain belongs to the project and must be used for its activities, with the donor's agreement if this changes the results. Monthly monitoring of the cumulative exchange difference, with commentary in the budget versus actuals report, avoids an unpleasant surprise at the end of the project.

Multiple exchange rate economies and high inflation

• Where there is a significant gap between the official rate and the parallel rate, any conversion outside the official channel may expose the organisation to legal sanctions and to disallowance of costs. The decision is never taken alone: it goes through headquarters, legal advisers and the donor's written agreement.
• Cash working groups and NGO forums often share analyses of the foreign exchange market; decisions coordinated among organisations offer better protection than an isolated decision.
• Under high inflation, convert as needs arise (weekly rather than quarterly), index cash transfer values according to a rule agreed with the working group, and revise budgets more often.

Transferring funds to hard-to-reach areas

A transfer channel is not chosen for convenience alone: it is chosen at the end of a written analysis comparing staff safety, traceability, cost, sanctions risk and donor acceptance. This analysis is the first document the auditor will ask for if a transfer raises a problem.

7Conducting an investigation into suspected fraud, from report to findings

A poorly conducted investigation can destroy evidence, expose a whistleblower, violate the rights of the subject of the allegation and make any sanction or recovery impossible. It must therefore be prepared with the same rigour as an audit. The CHS Alliance guidelines on investigations, designed for humanitarian organisations, provide a reference framework; each organisation's anti-fraud policy specifies who decides and who investigates.

The steps

1. Receipt of the report: through the designated channel (focal point, dedicated address, whistleblowing hotline, line manager). Acknowledgement to the whistleblower where possible, with a reminder of confidentiality and protection against retaliation.
2. Preliminary assessment (a few days): is the allegation sufficiently specific and credible? Does it concern fraud, other misconduct, or a management disagreement? Which funds and which donors are involved? This step does not include an interview with the subject of the allegation.
3. Decision and mandate: the competent management (often headquarters for significant cases) decides to open an investigation, appoints one or two trained investigators independent of the line management concerned, and sets terms of reference (facts to be established, scope, timetable).
4. Precautionary measures: secure original documents, copy accounting data and work email accounts in line with the IT policy, suspend certain access rights and, if necessary, place the person on administrative leave. These measures are not sanctions and do not prejudge the outcome.
5. Informing donors: most contracts require the donor to be informed without delay, or within a short fixed deadline, as soon as a credible suspicion concerns its funds. For EU funds, the information may be passed on to OLAF; for UK funds, FCDO agreements require immediate notification; UN agencies and pooled funds set their own deadlines. It is better to inform early with partial information than late with a complete file.
6. Collection of documentary evidence: accounting records, procurement files, bank and mobile money statements, logbooks, stock records, distribution lists. Documentary evidence always comes before interviews.
7. Interviews: witnesses first, the subject of the allegation last. Two investigators, a signed record, and the person's right to be informed of the allegations, to respond, to provide evidence and, depending on the policy, to be accompanied. No promises, no pressure, no recording without consent, in line with applicable law.
8. Analysis and standard of proof: in an internal administrative procedure, the usual standard is the balance of probabilities (more likely than not), not the criminal standard. The findings distinguish between facts that are substantiated, unsubstantiated and inconclusive.
9. Investigation report: factual, with no opinion on the sanction, with evidence annexed and the control weaknesses identified.
10. Decision and follow-up: disciplinary decision by management in accordance with local labour law, recovery of funds, possible criminal complaint (after analysing the risks to the safety of staff and witnesses), final report to the donor, correction of controls.

Example: fuel at the Tamba base

Fictional context: a monthly consumption analysis shows that three vehicles at the Tamba base consume an average of 22 litres per 100 kilometres, compared with 14 for identical vehicles on comparable routes at the other bases. Over six months, the logbooks show 60,000 kilometres driven by these three vehicles.

• Expected consumption: 60,000 × 14 / 100 = 8,400 litres. Invoiced consumption: 60,000 × 22 / 100 = 13,200 litres. Excess: 4,800 litres, i.e. 7,680 dollars at an average price of 1.60 dollars per litre.
• The preliminary assessment rules out a technical cause (the vehicles have been serviced) and notes that all fuel vouchers are signed by the same logistics supervisor, and that the filling station's invoices show round quantities.
• The focal point informs headquarters, which opens an investigation and informs the donor whose funds cover the base's fuel.
• The investigators match the vouchers, the invoices and the filling station's records (obtained with the manager's agreement), then the GPS logs of two vehicles. They establish that refuels were invoiced on dates when the vehicles were off the road.
• Interviews: drivers, the filling station manager, then the logistics supervisor, who admits part of the facts.
• Findings: misappropriation substantiated for 5,100 dollars, unsubstantiated for the remainder. Dismissal in accordance with local procedure, partial recovery through a written agreement, full information to the donor, repayment of the substantiated amount to the donor from unrestricted funds, named fuel cards and monthly analysis rolled out to all bases.

Three things never to do: investigate alone and in secret without a mandate, confront the person before securing the evidence, and disclose the whistleblower's identity. Each of these can render the investigation unusable and put people in danger.

8After the audit: disallowed costs, action plan and recovery

The audit report is not the end of the process. The way the organisation handles the findings, negotiates disallowed costs and corrects its systems determines its reputation with donors for years to come.

Example: the contradictory phase of a project audit

Fictional context: the audit of a 1.2-million-euro project identifies 23,400 euros of ineligible or unsupported costs, spread across five findings.

Reading: the contradictory phase reduced disallowed costs by 13,100 euros, solely by producing existing documents. The remaining 10,300 euros will be repaid to the donor or deducted from the payment of the balance, from the organisation's unrestricted funds. Main lesson: the documents partly existed, but were not filed in the project file. The cost of rigorous filing is far lower than that of disallowed costs.

The action plan

The plan is validated by senior management, sent to the donor if the contract requires it, presented to the board or the audit committee, and followed up every quarter until all actions are closed. A recommendation is closed only once the effectiveness of the action has been verified, not when the procedure has been written.

Recovery and provisions

• As soon as a cost is at risk of disallowance, the finance department records a provision in the accounts so as not to discover the loss at the annual closing.
• Sums misappropriated by an employee or a supplier may be recovered (amicable settlement, deduction within the limits of labour law, legal action, insurance if a policy covers fraud), but repayment to the donor does not wait for recovery.
• An implementing partner whose costs are disallowed must repay according to the terms of the partnership agreement; if the lead organisation repays the donor on its behalf, it must decide so explicitly and document it.

An auditor who returns the following year starts by reading the previous action plan. Repeated findings are interpreted as a governance weakness and can move the organisation into a higher risk category, with shorter tranches and more controls.

9Adapting to context, common mistakes, interview questions and references

Variations according to context

Common mistakes

• Building the cash flow forecast on contractual payment dates rather than on actual observed dates.
• Using one project's funds to pre-finance another without rules or a paper trail.
• Leaving large balances in a depreciating local currency or, conversely, converting the entire pre-financing in one go at the start.
• Delaying informing the donor of a suspected fraud "in order to have a complete file".
• Entrusting the investigation to the direct line manager of the subject of the allegation, or to an untrained person.
• Treating the audit report as an end point rather than the starting point of a monitored action plan.

Interview questions

1. "Your cash flow forecast shows a gap of 150,000 dollars in three months. What do you do?"

A strong answer distinguishes a timing problem from a funding problem, checks the forecast's assumptions, identifies the levers (dates of reports that trigger tranches, negotiation of payment schedules, headquarters working capital, postponement of non-critical purchases), refuses undocumented loans between projects, and informs senior management with a quantified scenario and options.

2. "A donor pays in euros, your expenditure is in local currency and inflation is running at 40% a year. How do you manage exchange?"

The candidate cites the method set out in the contract, conversions as needs arise, monthly monitoring of the exchange difference, a written policy, the prohibition on using an unofficial market without legal clearance and the donor's written agreement, and coordination with other organisations and the cash working group.

3. "A colleague tells you that some materials invoices look fake. Describe your approach."

The candidate protects the source, confronts no one, discreetly secures the documents if their role allows it, reports through the channel set out in the policy, and then explains the steps of an investigation: preliminary assessment, mandate, precautionary measures, informing the donor, documentary evidence before interviews, standard of proof, report and follow-up.

4. "The auditor proposes to disallow 40,000 dollars. How do you prepare for the contradictory phase?"

The candidate analyses each finding separately, looks for existing documents, distinguishes what can be contested from what cannot, responds within the deadline with evidence, informs senior management of the probable amount and proposes a provision, then turns the findings into an action plan.

5. "Why can the hawala channel be acceptable, and under what conditions?"

The candidate explains that it is sometimes the only channel available, and that it requires a written analysis of options, due diligence on the agent (registration, screening, references), a contract, acknowledgements of receipt, ceilings, the donor's prior approval and regular review.

Key references

• Code of Federal Regulations, Title 2, Part 200, in particular 200.305 (payment and advances) and Subpart F (audit requirements): United States Government.
• ECHO Humanitarian Framework Partnership Agreement and its annexes; InforEuro accounting rates published by the European Commission.
• FACE form (Funding Authorization and Certificate of Expenditures) and HACT framework: the UN agencies concerned.
• Country-Based Pooled Funds (CBPF) Operational Handbook: OCHA.
• Guidelines for Investigations: CHS Alliance.
• Financial Action Task Force (FATF) Recommendations, in particular on non-profit organisations and money or value transfer services.
• Grand Bargain commitments (A Shared Commitment to Better Serve People in Need) on quality funding and localisation.
• ISA 800 and 805 and ISRS 4400 (Revised): IAASB.
• Core Humanitarian Standard on Quality and Accountability (CHS), Commitment 9.