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					EKA                                             Association for Rural Development (ARD)
                                                                      Management Report
                                                    for the year ended 31 December 2006

  A. STRATEGIC ISSUES

  1. PERFORMANCE MEASUREMENT

      Condition

      Traditionally, the trend towards measuring the performance of a business was
      more inward looking i.e. financially focused.

      Most businesses fail to recognize the fact that:

            Financial measures relate to the past.

            Financial accounting model does not adequately consider the value to a
             business of its intangible assets such as a happy and loyal customer base,
             well motivated, well trained and efficient staff and good quality products
             or services.

      The trend towards performance measurement should be more outward looking
      and focuses on comparisons with competitors in order to establish best practice. It
      requires a balanced presentation of both financial and non-financial measures and
      goals.


      Findings                                                                  Grade A

      The dropout rate i.e. the rates at which customers are moving out of the system is
      very alarming. The dropout rate at the Makeni branch for 2006 financial year is
      calculated to be 32%.

      Also, during the client visit in Bo most customers expressed dissatisfaction over
      the attitude of the present branch.


      Implications

      A dropout rate at 32% is considered to be material and could be an indication that
      customers are unhappy with the service they received.




                                            1                                29/11/2007
EKA                                               Association for Rural Development (ARD)
                                                                        Management Report
                                                      for the year ended 31 December 2006

      Recommendations

               The approach towards performance measurement should be more broadly
                base i.e. should be more outward looking and focuses on comparisons
                with competitors in order to establish best practice and ensure that changes
                are implemented in order to achieve it.

               A balanced presentation of both financial and non financial measure
                should be adopted.

               Also, customers should be treated as key component of the organization.



      Benefit

      As the business make fundamental improvement in their operations, the financial
      numbers take of themselves; Hence overall improvements in the organization’s
      operations.


      Management comment and plan of action


      This is as a result of the introduction of new prudent portfolio management policies, some
      of which are not suitable to nonperforming clients.

      However, management will put more emphasis on sensitizing clients to fully understand
      the new policies and procedures that have been put in place.




                                              2                                    29/11/2007
EKA                                             Association for Rural Development (ARD)
                                                                      Management Report
                                                    for the year ended 31 December 2006

  2. COMPOSITION OF A BOARD AND MUNITES OF MANAGEMENT
     MEETINGS

      Condition

      Corporate governance is the system by which organizations are directed and
      controlled. It is a set of relationships between the organisation’s directors and, its
      shareholders and other stakeholders. It also provides a structure through which the
      organization objectives are set, the means of achieving those objectives and
      monitoring performance are determined. Among others, it includes the board of
      directors.

      Also, as a good practice, minutes of meetings held both at board and management
      level should be kept to ensure that resolutions agreed upon are implemented.


      Finding                                                                      Grade A

      The organization does not have a board. Also, though management meetings were
      supposedly held, yet minutes of such meetings were not taken.


      Implications

      The organization may be run in a manner that is inconsistent with its stated
      objectives.


      Recommendation

      A board should be formed, chaired by an appropriate personnel and board
      meetings held. Minutes of both board and management meetings should be taken
      and resolutions acted upon.


      Benefit

      This would minimize any dysfunctional activity. Thus, the direction of the
      association would be predetermined at strategic level.

      Management comments and plan of action

      The current board is reflective of an NGO board with limited knowledge in microfinance.
      However, management is in the process of reconstituting a more professional board
      whose members will be from a financial background.

                                            3                                    29/11/2007
EKA                                            Association for Rural Development (ARD)
                                                                     Management Report
                                                   for the year ended 31 December 2006

  3. NON-PERFORMANCE OF BUDGETARY CONTROL

      Condition

      As a good practice, budgets should be prepared and budgetary control mechanism
      instituted.


      Finding                                                                 Grade A

      Though Budgets were prepared, budgetary controls were not performed (i.e. the
      process of comparing actual figures to that budgeted for, and investigating
      significant variances - to control and monitor transactions).

      As auditors, we performed an independent budgetary control and highlighted
      significant variances, which were presented to the finance manager for
      explanation. We still await the explanations of such variances.


      Implication

      As a result of non-performance of budgetary control mechanism, the followings
      were evident:

               Monitoring mechanism over expenditure was lacking.

               The tendency that transactions may be undertaken which were not
                budgeted for or which may not be necessary.


      Recommendation

      Budget should be prepared on an activity base and budgetary control mechanism
      instituted. I.e. actual transactions are compared to their respective budgeted
      figures; and significant variances investigated to prevent their recurrence.



      Benefit

      With adequate Budget and budgetary control mechanism in place, variances could
      be identified and explanations given for significant variances as to their causes
      and effects. Thus, management would be duly informed and prompt remedial
      actions taken.


                                           4                               29/11/2007
EKA                                         Association for Rural Development (ARD)
                                                                  Management Report
                                                for the year ended 31 December 2006

      Management comment and plan of actions

      Management has noted this as a lapse and will ensure compliance in subsequent
      periods.




                                        5                               29/11/2007
EKA                                            Association for Rural Development (ARD)
                                                                     Management Report
                                                   for the year ended 31 December 2006
  4. MISSION STATEMENT

      Conditions

      It is advisable for an established and reputable organisation to have well defined
      goal and objective in order to guide the employee as well as interested parties as
      to the aim and objective of the organization and such statement must be placed in
      a conspicuous position to be read.


      Findings                                                                   Grade A

      We observed that though there is a mission statement, such statements are not
      placed in conspicuous positions for the public and other interested parties to view.


      Implication

      Employees and other interested parties might be misinformed or misrepresented
      on the objectives and activities of the Association.


      Recommendation

      Management should print out copies of the Mission Statement and display them in
      conspicuous positions especially the aisle, offices of department heads, and the
      conference room where much interaction is done with clients.


      Benefit

      The mission statement will serve as a reminder or guide for employees and
      interested parties about the organisational code and ethics.


      Management comments and plan of action

      There is a copy of the Mission Statement downstairs. Management has considered
      making it more conspicuous within the office.




                                           6                                  29/11/2007
EKA                                            Association for Rural Development (ARD)
                                                                     Management Report
                                                   for the year ended 31 December 2006


  B. MICRO-CREDIT OPERATIONS

  5. INADEQUATE CHECKS AND BALANCES IN THE GENERAL CREDIT
     POLICY AND LOAN APPROVAL PROCESS

      Condition

      Internal controls are set up to limit risks open to the institution. The controls
      themselves do not only include the procedures set up by management for
      approving loans, but also the environment within which the procedures/activities
      operate. The procedures set up by management for approving loan application
      forms and disbursement of cash should be geared towards ensuring all loans
      granted are recovered within the stipulated period.

      As part of the control procedures (activities) of the institutions, loan forms should
      be critically assessed to determine the customer’s ability to repay the loan, before
      being approved by the credit approval committee.


      Findings                                                                   Grade A

      Though there is a clearly written guidelines supporting credit decisions, and that
      these guidelines are being adhered to, yet we notice during the clients visit that
      most customers appraisal were not properly done; taking into consideration the
      nature and sizes of their business, their ability to repay the monthly repay within
      the stipulated time remain doubtful. This is in fact one of the factors responsible
      for the huge loan write off in the 2006 financial year, which amounted to about
      One hundred and forty-eight million, four hundred and eight-four thousand, one
      hundred and fifty-four leones (Le 148,484,154).

      Also, we spoke with Sarah Mansaray, the secretary of the Hold Tight group; (a
      group whose loan has been written off), and she confirmed that the problem with
      the group was that some members were teachers who were not in any active
      business. What is questionable is whether an assessment of clients business were
      done.


      Implications

      There is the risk that loans may be disbursed to non-existing groups, or it could be
      that client staff may collude in an attempt to perpetrate fraud.




                                           7                                   29/11/2007
EKA                                           Association for Rural Development (ARD)
                                                                    Management Report
                                                  for the year ended 31 December 2006
      Recommendations

      Management should set up control policies that are adequate to ensure that loans
      granted are recovered, and should at all times endeavour to adhere to laid down
      procedures/activities. Thus, the risk of errors and irregularities could be
      minimised (if not eliminated).


      Benefit

      By so doing, unnecessary financial losses could be avoided right from the initial
      assessment stage and by making unauthorised disbursements to clients.


      Management comment and plan of actions

      This activity has been addressed by management by putting in place a lending
      procedures manual which is now followed religiously by Loan Officers and Branch
      Managers.




                                          8                                29/11/2007
EKA                                               Association for Rural Development (ARD)
                                                                        Management Report
                                                      for the year ended 31 December 2006

  6. LOAN INTEREST

      Condition

      It is the organisation’s policy that loans given to clients should attract interest of
      25% per annum; at about around 2.08% per month. Such interest is payable up-
      front before disbursements of loans to clients are made.


      Finding                                                                      Grade B

      The policy of the organization with regards to loan interest seems to be very
      difficult on the part of the customers; since interest should not be paid upfront but
      alongside with the monthly principal installment.

      Also, we noticed that the organization is in non-compliance with its stated policy,
      as it was evident that some clients paid interest after disbursement to clients, i.e.
      out of the amount disbursed to them.


      Implication

      Interest levied up-front would limit the organization ability to attract more clients.


      Recommendation

      The policy should be revisited and revised to ensure that interest on loan is paid
      on monthly installment basis together with the monthly principal installment.


      Benefit

               The revised policy will tend to attract more clients.

               Increase in clientele base will in turn lead to increase in the revenue base
                of the organization, thus ensuring sustainability in the organisation’s
                operations.


      Management comments and plan of action

      The up-front payment of interest has enabled the organisation to finance its operations
      and has helped to reduce the risk of having interest arrears.



                                              9                                  29/11/2007
EKA                                              Association for Rural Development (ARD)
                                                                       Management Report
                                                     for the year ended 31 December 2006

  C. ACCOUNTING AND INTERNAL CONTROLS

  7. BANK RECONCILATION

      Condition

      Bank reconciliation statements should be prepared on a regular monthly basis, and
      should show evidence of review by a senior authority within the organisation.


      Finding                                                                       Grade B

      Bank reconciliation statements were not being prepared on a regular monthly
      basis for the period under review. It was not prepared for the month of November
      and December 2006.


      Implication

      The non performance of regular monthly bank reconciliation statements may
      cause irregularities to go undetected. Also bank transaction would not be
      completely and accurately captured.


      Recommendation

      Bank reconciliation statements should be prepared on a regular monthly basis and
      should show evidence of review by senior authorities.


      Benefit

      With regular preparation of monthly bank reconciliation statements, possible
      differences between the bank balance as shown by the bank statement and the
      client’s records can be specifically highlighted.


      Management comments and plan of action

      This was partly due to the change in the systems of our bankers, SLCB which created
      some errors in recording transactions thereby causing delays in producing up-to-date
      error free bank statements. This will be taken into serious consideration against future
      audits.




                                            10                                   29/11/2007
EKA                                            Association for Rural Development (ARD)
                                                                     Management Report
                                                   for the year ended 31 December 2006

  8. FIXED ASSETS MANAGEMENT
      Conditions

      Expenditures undertaken are of two types- capital and revenue expenditure.
      Expenditures incurred in the acquisition of fixed (non- current) assets are capital
      in nature, and should therefore be incorporated in the balance sheet.

      Revenue expenditures are incurred in the day to day activities of the business, and
      are normally expend in the profit and loss account as they are incurred.


      Finding                                                                    Grade B

      The following lapses with regards fixed assets were observed:

            Safeguard control such as log book, maintenance checklist, fuel utilization
             records are non-existent.

            Some of the organisation’s fixed assets were not insured.

            The fixed assets are not suitably individually marked for ease of
             identification.

            Fixed asset register is not properly maintained.

            Regular physical verification of fixed asset is not being carried out.

            There is no capitalization policy. Expenditures which should have been
             reasonably expended in the profit and loss account were capitalized and
             included in the balance sheet. Below are list of examples:

          ID Number               Description      Date       of Purchase price
                                                   purchase
          HQ/ ED 01-002           Staple           04/03/2006    15000
                                  Punch            04/03/2006    12000
                                  Punch            22/01/2001    13000
                                  Shelf            14/02/2006    20000
                                  Chair            30/06/1990    15000
                                  Benches          20/02/2006    45000




                                          11                                   29/11/2007
EKA                                               Association for Rural Development (ARD)
                                                                        Management Report
                                                      for the year ended 31 December 2006
      Implication

      Improper management of fixed asset may result to the following:

               The value of fixed asset at any point in time would be very difficult to
                ascertain.

               Ownership of fixed asset can not be readily ascertained hence theft or
                misused of the asset may go unnoticed.

               Management would experience difficulties in monitoring and tracing the
                movement of asset in the organisation.

               Wrong classification would to improper disclosure and presentation of the
                finance statement.


      Recommendation

               Carry out regular physical verification of fixed assets.

               Ensuring safeguard controls over fixed assets usage.

               Use indelible ink to mark all fixed asset of the organisation


      Benefit

      General control over fixed assets management would be enhanced.


      Management comments and plan of action

      Management has a policy of giving fixed amount of cash to staff using bikes to cover fuel
      and maintenance on a weekly basis. The Finance Department will ensure that assets
      control measures are put in place and has noted it as a strong issue in readiness for
      future audits. A capitalization policy is now put in place or included in the accounting
      Manual.




                                             12                                   29/11/2007
EKA                                              Association for Rural Development (ARD)
                                                                       Management Report
                                                     for the year ended 31 December 2006

  9. LACK OF PHYSICAL SECURITY OF CASH COLLECTED FROM CLIENTS

      Condition

      The cashiers are responsible for collecting loan repayments and all other forms of
      payment from clients. As part of the organization policy, cash collected on a
      particular day is banked the next working day.


      Finding                                                                       Grade B

      Though the stated policy with regards to the collection of cash from customer is
      adhered to, yet it is evident that security over cash collected is completely lacking.
      There is no safe for keeping cash collected awaiting bank transaction the
      following day. (Such monies are kept in a drawer by the cashier).


      Implication

      The risk open to the business is high; considering the nature of the cashier’s job
      (receiving, custody, recording and depositing cash collected into bank) on one
      hand and weighting the salaries they received on the other hand, there is the
      tendency for cash collected to be skim away for private use.


      Recommendation

      A safe should be provided for safe keeping of cash collected to be banked the next
      working day.


      Benefit

      The risk of misappropriation of fund or other mishaps would be minimized if not
      eliminated.


      Management comments and plan of action

      Save the provincial branches, the Freetown branch has safe facilities in place. However,
      there are plans to provide similar facilities in these branches based on funding
      availability.




                                            13                                   29/11/2007

				
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