Budgeting
- The Make Way Foundation
Why the Funding of the Children’s Summer Expense Project was Overlooked
Fund management is critical especially for non-profit or charity organizations with limited resources, and dependent on private or public donations. Competing priorities could lead to misallocation of funds. In the case of Children’s Summer Expense Project, its omission in the Foundation’s list of priorities could be one of the reasons why funding was insufficient. In many cases, programs to be funded are based on how strong their proponents are in advocating for their cause(s). If a program has no assigned proponent to lobby for its full financial support, it will be disregarded in the budgeting process and considered as less important.
In the course of the operating year, misappropriation of funds could also happen. It is possible that Summer Expense Project was allotted a budget, but somehow was diverted to another program. This happens when a project’s source of funding is non-designated or no donor is particularly supporting the project that the financing has to come from a pool of multi-purpose funds. Prioritization comes into play. If a certain project is deemed more important than others, it is likely that it will be prioritized. Its funding allocation when threatened may come from other programs, as may be the case for the Children’s Summer Expense Project.
Conflict of interest could be another reason why the Children’s Summer Project may not have been funded appropriately. This is an area of ethical issue which has become a critical concern for donors of charity organizations. A member of the board or executive committee may be a major proponent of a program that could be in rivalry of another. Due to his/her position, he/she could influence the decisions to support his/her project and take others for granted (Boucher, T. and Hudspeth, S., 2008).
Three Ways to Save the Children’s Summer Expense Project
One way and the quickest means to save the project is to source its financial requirements from the contingency funds, if there is an allocation in the budget for it. Setting aside a contingency fund during the planning process is one measure done by organizations to minimize operational risks, i.e., running short on budget for completion of a project. The fund may also be sourced from completed projects that have savings and can be used for other activities aligned to the organization’s cause.
In the future, this project may be assigned to a supporter within the organization to ensure that it gets the appropriate funding during the planning and budgeting process. On a broader and deeper undertaking, code of ethics, policies and procedures should be established to ensure that this situation does not happen again.
- Money Cares Investment Corporation
As an investment company, Money Cares Investment Corporation is in the business of taking care of other people’s money, which had been entrusted to them to grow on behalf of their clients’ interest and financial objectives (US Securities Exchange Commission, 2013). A huge part of its asset is therefore in cash and cash equivalent and its investment portfolio. Consequently, the bulk of its expenses would be in sales and administrative cost to secure and protect the clients’ investments. In the execution of its fiduciary duties, however, there are inherent operational risks involved.
Aside from the external risk factors that threaten investment companies’ capital, their operation is also susceptible to risks from internal business processes and management (or lack thereof), employment practices, or clients and business practices. These threats are commonly identified with the following functions in the organization:
- Corporate finance- responsible for establishing short and long-term plans. In setting the company objectives and strategies, there is a possibility of establishing unrealistic targets. This could lead business drivers to take risky investments that are not aligned to client’s objectives. The higher the risks undertaken, the higher the expected returns, but also, the potential losses.
- Trading and sales- in charge of marketing and trading investment portfolios. Employees involved in this function can become overzealous and liable to overspend on promotional paraphernalia. Moreover, this area of the business is exposed to pleasing clients and thus, the tendency for unrestricted spending as part of sales acquisition. This is also where investment risks can take place to achieve targets and sales commissions.
- Agency services- as the provider of after-sales services, this is where the backroom work happens, such as accounting and paper works to ensure compliance to regulations and investment contracts. Sloppy procedures and short cuts in the system can render trouble for an investment company with their clients, or worst, with industry regulators.
These operational concerns have been the focus recently for the industry regulators as cited in the study conducted by Investment Company Institute (Calomiris, C.W. and Herring R. J., 2002). It was noted that setting a minimum capital requirement is not enough to protect investors from potential operational risks faced by investment companies, policies and procedures must be in place to ensure compliance to industry regulations.
In Money Care’s case, it is apparent that there is poor internal control on spending against budget. The overspending on marketing supplies, transportation and workshop items is likely to be contributing to the company’s budgetary problems. If this continues, there is a threat that the business could be tempted to dip into their client’s money to cover for operating expenses. This will lead Money Care into the path of ethical issues. Ensuring ethical practices is critical for maintaining and building the reputation of an investment company in order to gain their clients trusts.
The discovery of excessive spending to treat clients is also a sign of the lack of policy on employee’s discretionary spending. If kept uncheck, this situation could lead to employee’s embezzlement of funds. In the paper written by Marquet International (2011), it was noted that nine out of the top 10 embezzlement cases in the U.S. were committed by individuals or financial institutions with fiduciary duties. The average duration of the defalcations is eight years before they were exposed. Thus, while the present conditions may not seem serious yet for Money Care, the prolonged absence of policies and its strict implementation, pose an opportunity for employees to commit fraud.
A worthy undertaking while the company is still considered small is to establish a code of ethics. This will serve as part of Money Cares’ core values that will enable the company to achieve its mission and vision. Having it while it is still young will help it grow healthily and in compliance with government and industry regulations. Adopting Boucher and Hudspeth (2008) suggestions for Non-profit organizations to preserve their good reputation and ensure smooth delivery of their services, they suggested these three steps in developing an ethics program:
- “establish a code of ethics
- inform employees about the code and its provisions and the compliance process, and provide training to enable all involved to carry out the code’s letter and spirit”
On a daily basis, this will guide Money Cares’ way of doing business. The principles, if successfully cascaded down to its employees, will lead their behavior on their dealings and prevent risks of fraud.
At the same time that the code is being instilled in the organization, policies can be established to ensure that a system is in place to regulate business conduct. One important policy could be on setting the limit on discretionary spending. Depending on the position in the company, the policy could set the cap amount on authorized spending at any given period of time. Anything in excess of the authorized amount must be approved by the manager or the financier, or the CEO if the requesting party is the manager or financiers themselves.
The policy must also specify what conditions merit an approved discretionary spending, as well as the procedures to be followed in liquidating the expenses charged to employees’ credit cards. All expenses must be supported by receipts and approved business activities that entitle the spending.
Finally, to ensure compliance to the policies and procedures, there must be an internal audit conducted from time to time. In a much bigger organization, this internal audit is more formal. These policies and procedures should be reviewed and updated regularly to make sure that it suits the business conditions and market regulatory requirements.
References
Bassingthwaigthe, M. (Dec 2009). Avoiding problems with the client trust account. Wyoming
Boucher, T. and Hudspeth, S. (Dec 2008). Ethics and the non-profit. Commonfund. Ret. from
https://www.commonfund.org/investorresources/publications/white%20papers/ethics%20and%20the%20nonprofit.pdf
Calomiris, C.W. and Herring R. J. (Sep 2002). The regulation of operational risk in investment
management companies. Investment Companies Institute. Perspective. Vol. 8 No.2. Retrieved from http://conferences.ici.org/pdf/per08-02.pdf
Marquet, C.T. (22 April 2011). The top 10 embezzlement cases in modern US history
Marquet International, Ltd. Retrieved from http://www.marquetinternational.com/pdf/top_10_embezzlement_cases_in_us_history.pdf
McRay, G. (Posted on 16 Dec2009). Are you misappropriating your nonprofit’s funds?
Retrieved from http://501c3.org/blog/misappropriating-nonprofit-funds/
U.S. Securities and Exchange Commission (7 Sep 2013). Investment Companies. Retrieved from
https://www.sec.gov/answers/mfinvco.htm
