Archive for October, 2010

Donated salaries – ok or not ok?

Monday, October 11th, 2010

Frank Fabel, CPA

 

 

I think everybody in the NPO world knows the phenomenon of donated salaries. Usually it starts like this: You are the director of a local NGO, and luckily you won the tender for a really fat grant. The suggested salaries for the project personnel are simply far out – they exceed the salary of the director by the factor three. Moreover, the donor agrees on travel allowances that are PER DAY five times higher than the average salary in your country PER MONTH. If you paid out these amounts it would certainly destroy the solidarity in your NGO and, moreover, it would ruin your reputation in the NGO community until the end of all times. What do you do? It would be stupid to agree with the donor on lower salaries and lower daily allowances. I mean, if they want to throw out so much money, they are welcome, you think. So the best tactic would be to make a deal with the co-workers in the project. You say to them: “Look, we have this budget, and we want to receive these amounts. For this purpose, you have to sign that you have received them. At the same time, you donate it back to the organisation. Thus, we have free funds, and finally, we can buy a new computer and maybe even an air conditioner.” “An air conditioner in our office?”, your colleague says. “ Wow, I agree!”. Is this practice okay or not okay?

 

The problem has a legal dimension as well as a moral dimension; you can look at it from the point of view of the donor, of the NGO, of the auditor, or the employee.

 

This is, of course of disadvantage to employees: They first agree on a high salary, and then they are forced to pay a large share of it back. In most jurisdictions, the law would defend their rights. The employees could sue their employer for duress, which contradicts good habits – and in most countries of the world, a court ruling would decide in favor of the employee. Thus, the transaction is at least very risky for the NGO.

 

But, even if the employee decides not to sue his or her organisation, there is a slight risk that the employee might sue his or her organisation. And this tacit possibility already influences the balance of power in your NGO.

 

There is also another collateral effect that is sometimes neglected: an employee who agrees on a “donate-back” scheme might have an advantage in the social security system. For instance, if in the respective jurisdiction employees are covered by an unemployment insurance scheme, the insured salary would be much higher in case of an unemployment. Or, it could be that the pension claims would increase because of the artificially boosted income. In practice, however, I have not seen that these benefits are somehow taken into account with the employees.

 

From the point of the donor, the transaction is clearly contra-productive. The donor buys services that he could have bought for less. Is this a breach of contract with the donor? Well, we have to take a closer look at the contract. Some donors have very strict requirements regarding the conditions for employment. For instance, there should be no racial or sexual discrimination at the workplace. Would these donors accept the practice to squeeze out free funds from employees? Well, if they knew, they certainly wouldn’t. But, how could they know?

 

Usually, there is only one way how these practices are communicated to the donors, and this is the annual audit. Is there a duty of the auditor to report this finding to the donor? This is difficult to say. There can be nuances. I mean, it could be that an NGO director requests the co-workers to make a donate-back payment, or they would be simply thrown out of the organisation – I would say, such a practice, if detected, would be a reportable condition. Or it could be that there is a steady pressure of the collective to the lucky “big earners” that they should give something back. It could be that there are really signs of voluntarism (different amounts in different months, discussions on the social needs of the employees, a mutual fund, an equal salary for everybody, for instance). In these cases, it could be questionable, if it is really necessary to report the incident. I would suggest that, when reported, the auditor should also explain the circumstances that mitigate the problem.

 

It could be that the donor requires only a proof of the factual realization of the required services. This could be time sheets or travel reports, without any payment notes. In this case, it is quite clear: there is no need to report on the cash flow. Accordingly, there is no need for a “donate-back” scheme.

 

From the accounting point of view, the transaction is merely a re-classification of net assets. Temporarily restricted net assets become unrestricted net assets – with a loss in taxes and social contributions.

 

The best way would be, of course, to renegotiate the budget with the donor. The NGO director could simply ask the donor – in the example above – to allow that an air conditioner is bought. At this level usually more or less bureaucratic implications exist. For instance, the donor organisation is not allowed to give funds for technical equipment (because of the restrictions of a financing ministry or whatever). Is it better to “shut up” and silently circumvent the restrictions? Or is it better to discuss the problem openly? The second option is certainly the better one.

 

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Monday, October 11th, 2010

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