SUPERVISORY COMMITTEE -Report

Writing
SUPERVISORY COMMITTEE
a) There shall be a supervisory committee consisting of three (3) members who shall be
elected by general meeting and completely independent of the management committee.
The supervisory committee shall be directly answerable to the general meeting to which it
shall report.
b) Members of supervisory committee shall be elected for a period of three (3) years with
one member retiring annually. Conditions for qualifications to be elected and lose office
shall be similar to those of management committee.
c) Notwithstanding the provision (a) of these by-laws, any member of the supervisory
committee may be removed by a resolution of two-third of members a general meeting
present and voting.
DUTIES OF SUPERVISORY COMMITTEE
Pursuant to Rule 28 (3) of the act the following powers and duties shall be restored upon the
supervisory committee:(a) Verification of all transactions of the society
(b) Write periodic reports of its findings to be tables at management committee meetings
and general meeting.
(c) Evaluate programs and policies of the society
(d) Assist in proper interpretation of local policies, by-laws, act, rules, general meeting
(e)
(f)
(g)
(h)
(i)
(j)
(k)

resolution, and management policies and ensure implementation thereof.

Confirm cash balances regularly and reconcile it with the records.
Access bank statements monthly and their reconciliations
Check balance sheet and income and expenses statements to ensure they are correct.
Audit members personal accounts and trace any difference.
Check adherence to loan policy and note any exceptions
Verify all societys investments, assets, liabilities etc.
Check delinquent loans among the management committee and general members and

ensure prompt recovery of the same.

(l) Ascertain adherence to budgetary control.
(m)Ensure implementation of standardized accounting system
(n) Listen to and receive members complains and assist them to find solution.
(o) Address any weakness in the management of the society.
(p) Ensure proper functioning of staff establishment and management organs of the
society.

1 Prudent Accounting and Tax Solutions Sacco training

(q) Freedom to acquire services of an expert in a specialized field in the course of their
duties; whereby remuneration of such expert shall be determined by management
committee.
(r) Receive and scrutinize the reports of the internal auditor, if any take action on the
same or recommend for action by the general meeting.
(s) Submitted its quarterly reports to the commissioner
AUTHORITY OF THE SUPERVISORY COMMITTEE
Without performing any duties or exercising any of the powers of the Management
Committee, the Supervisory Committee shall be responsible for the Society's compliance and
internal control. It's also responsible for accuracy and control of Sacco finances, conducive
administrative procedures and safeguarding of the Society's corporate image.
LIABILITY OF SUPERVISORY COMMITTEE
In spite of its total independence from the Society, Management Committee, the Supervisory
Committee shall be jointly liable for losses sustained trough their lack of supervisions or
negligence in noticing illegal and fraudulent acts.
QUALIFICATION FOR SUPERVISORY COMMITTEE MEMBERSHIP
In addition to qualifications set in By-laws, the General Meeting may set other qualifications
for a person to be elected a supervisory committee member. Such qualifications shall include,
but not limited to:
(a)
(b)
(c)
(d)
(e)

Basic accounting knowledge

Investigative audit
Intelligence gathering
Banking and finance
Economic skills

A. Internal Controls in SACCO

Internal controls are mechanisms, policies, and procedures used to minimize and monitor
operational risks. In order to deter employees and/or members from committing a
dishonest or fraudulent act the controls must be thorough and comprehensive. However,
internal controls by themselves are not enough. They will be effective only if they are
2 Prudent Accounting and Tax Solutions Sacco training

reinforced by the SACCOs culture, policies and procedures, information systems,

training, and supervision of staff.
Usually fraud is perpetrated by

falsifying or altering documents, embezzling funds,

omitting the effects of transactions,
recording nonexistent transactions,
and/or incorrectly
using accounting policies and procedures.

Weak internal controls not only allow for the perpetration of fraud but allow for errors and
unintentional mistakes to go undetected for a long period of time. Usually, these errors
individually do not represent a large amount
of funds. However, the cumulative total can be material and the time needed to correct
the error significant.
The primary objectives of internal controls are to:
Safeguard assets and member savings;
Verify the efficiency and effectiveness of the operations;
Assure the reliability and completeness of financial and management information;
Prevent fraud and mistakes; and
Ensure compliance with applicable laws and regulations.
Internal controls can be broken down into two categories
accounting and administrative controls.
These two categories are not mutually exclusive. Some of the procedures and
records involved in accounting control also apply to administrative control.
Accounting Controls - Accounting controls should provide reasonable assurance that
staff performs transactions according to managements direction and their authorization
level. In addition, transactions should be recorded and financial statements prepared
according to accepted accounting principles. A SACCOs records must reflect its actual
financial condition, structure, and results of operation. Accounting controls may differ
with the size and complexity of a SACCO. The following controls should be part of the
internal control environment and should be helpful both to inform the SACCOs board

3 Prudent Accounting and Tax Solutions Sacco training

and to enhance managerial effectiveness:

1. Daily Posting Posting records daily will maintain each days activities separate and
distinct from another days work. This makes it much easier to locate errors and
make corrections. At least monthly, staff must individually prove and balance each
general ledger account with its supporting subsidiary ledger, including zero balance
accounts with activity during the month.
2. Subsidiary Records No less than monthly accounting staff should balance
subsidiary records such as share and loan ledgers, bank and investment statements
and individual cashier records with the respective general ledger control accounts. A
staff member, other than the preparer of the subsidiary and reconciliations between
the subsidiaries and general ledger accounts, should review the periodic
reconciliations and document their reviews.
3. Internal Reports SACCOs should design their accounting systems to facilitate the
preparation of internal reports (e.g. Non-amortizing Loans, Dormant Savings
Accounts, Negative Share Accounts, etc.) necessary to review key areas of operation. A
staff member who is not involved in the transactions should regularly review all of the
reports. The review of the reports should be documented and any irregularities
discussed immediately with a supervisory or general manager.
4. Recording of Transactions All SACCOs should use transparent accounting
practices that are prescribed by accepted accounting principles to record all their
transactions. The recording of transactions should be consistent from one accounting
period to the next. SACCOs may not defer expenses or accelerate income for the
purpose of manipulating earnings.
5. Sequential Numbering Sequentially numbered instruments used for items such as
checks, cash receipt vouchers, journal vouchers, and share certificates assist in
reconciling and controlling used and unused items. Credit unions should retain
unissued, pre-numbered items under dual control.
6. Audit Trail SACCO records and systems should provide an audit trail (i.e. paper
documentation) that allows for the tracing of each transaction from its inception to
4 Prudent Accounting and Tax Solutions Sacco training

completion. The documentation should include the name of the individual making the
transaction, the date of the transaction, how much it is for, and what general ledger
accounts it effects.
Some of the more common record keeping deficiencies include:
General ledger entries that fail to contain an adequate description of the
transaction;
Lack of permanent and satisfactory records pertaining to cash items and
overdrafts;
Teller cash sheets that do not contain adequate details;
Investment subsidiary ledger that fails to list all necessary information;
Bank account reconcilements that are not current or fail to reflect the description and
disposition of outstanding items;
Inadequate details concerning debits and credits to the cash account;
Correcting record keeping errors by erasing instead of crossing through the error;
Numerous corrections each month;
Failure to make daily postings to the accounts and records;
Failure to promptly close the books each month; and
Failure to review exception and other internal control reports.
7. Supervisory committee Auditing Every SACCO should have an adequate audit program.
An active supervisory committee may be adequate for small, limited service SACCOs, while
medium-sized institutions offering more than basic services should employ the expertise of an
external auditor to perform the annual audit. The supervisory committee can perform the
account verification and internal audit functions.
Ideally, larger SACCOs should consider a program that consists of a full-time internal
auditor reporting to the supervisory committee and an annual external audit performed by an
independent third party accounting firm.
The scope of the internal audit depends on the size of the SACCO and the number and
complexity of the services offered. Because of cost constraints, many SACCOs cannot afford a
full-time internal auditor. In this case, periodically the supervisory committee can perform:
bank reconcilements, cash counts, review of employee and officials loans, review of activity
within accounts designated as dormant, and review of expenses and the supporting
documentation.
5 Prudent Accounting and Tax Solutions Sacco training

ii) Administrative Controls

Administrative control is a managerial responsibility that directly affects the success or
failure of the SACCO. These controls establish lines of authority and responsibility, segregate
the operating and recording functions, and provide for the hiring of qualified employees.
Although the uniqueness of each SACCO defies one set of internal controls for all, an effective
plan for administrative control should contain the following at a minimum:
1. Accounting System The board should adopt an accounting system that is flexible in
its capacity and rigid in its controls and standards. The system should provide timely,
accurate, and useful data to all employees. All staff should be adequately trained on
the system prior to performing transactions that affect general ledger and member accounts.
2. Written Policy and Procedure SACCO policy is established by the board to direct
operations and establish clear limits and authority. Operational staff develop procedures,
they are normally not approved by the board. Procedures describe how to do a job.
Regardless of the SACCOs size, written policies and procedures are imperative.
Policies and procedures let all employees know what is expected of them, how they
should perform their job duties, and what the consequences are if they do not perform
them as required. Written policies and procedures also enable the SACCO and its
employees to treat each member consistently. These policies and procedures should be
included in a regularly updated operations manual. The manual should clearly define the
steps required for each transaction, explain how to handle exceptions, and delineate
lines of authority. Employees should be required to review all policies that pertain to
their position during initial job training and annually thereafter.
3. Board Approval and Monitoring . In addition to policy, the board
establishes control and direction through the annual budget and the longer-term
business plan that they are a part of developing, approving, and reviewing on a
periodic basis. The board should request, at least monthly, the following reports to
monitor the financial condition of the SACCO:
Balance Sheet;
Income Statement;
6 Prudent Accounting and Tax Solutions Sacco training

 Cash Flow and Liquidity Analysis;

Comparison of Actual Results to Budgeted Figures;
Outstanding Investments;
Delinquent Loans; and
Savings and Lines of Credit Overdrafts.
4. Cash Control Cash is the most liquid and accessible asset to most employees. As such,
controls to prevent the conversion of this asset by officials or employees for their own
personal use should be established. Adequate cash controls include:
Surprise cash counts that are performed routinely;
Cashiers that are required to balance the contents of their cash drawer with the
general ledger total daily.
Cash limits established for the total amount that can be kept on the SACCO
premise, in the vault, and in each cashiers drawer;
Limited access to the vault and cashier drawers to those individually responsible
for the funds in the vault or drawer;
Immediate verification under dual control of cash upon receipt;
Counting of cash under dual control if tellers buy or sell funds to the vault or
another teller;
Documentation of all transactions made by and between cashiers with a receipt;
Vault and cashier drawers equipped with adequate, functioning, locking devices;
and
Prohibiting cashiers and employees to transact business on their own accounts or
those of related persons.
5. Segregation of Duties The participation of two or more persons in a transaction
creates a system of checks and balances and reduces the opportunity for fraud
considerably. The SACCO should assign duties so no one person dominates any
transaction from beginning to end. For example A person handling cash should not
post to the accounting records; a loan officer should not disburse loan proceeds for
loans they approved; and those having authority to sign checks should not reconcile
bank accounts. In situations where this separation of duties is not possible, because of
a limited staff, the supervisory committee should perform additional procedures to offset
the lack of adequate control.
7 Prudent Accounting and Tax Solutions Sacco training

6. Dual Control Accessing vaults, files, or other storage devices should require at least two
keys or combinations under the control of at least two different people. Effective dual
control mandates that all employees carefully guard their key or combination;thus, only
collusion can bypass this important control feature. Examples of items that should be under
dual control are: vault cash, negotiable collateral, investment securities, reserve supply of
checks, credit cards and money orders, the night depository, mail receipts, ATM cash,
dormant savings accounts, and spare keys to cashier drawers.
7. Protection of Assets A principal method of safeguarding assets is to limit access to
authorized personnel only. Protection of assets can be accomplished by:
Developing operating policies and procedures for cash control;
Establishing dual control over cash;
Conducting periodic physical inventories of SACCO assets;
Protecting assets by purchasing adequate insurance;
Requiring the use of passwords to access the computer system and changing
passwords no less than quarterly; and
Limiting physical access to cash and the computer system.
8. Zero Tolerance culture the SACCO should have a culture that supports internal
controls and does not tolerate excessive errors or fraud. These values can be
promoted by establishing:

Severe consequences for fraud that are written, conveyed verbally, and

strictly followed. All fraudulent acts should be met with swift and permanent
action;

Clear negative consequences for staff with excessive error rates;

A performance based incentive system that rewards high productivity and

low error rates;

Competitive salaries that reduce the motivation to commit fraud; and

Training that explains the reasons behind internal controls and emphasizes how fraud
and errors hurt the institution and its members.

9. Personnel Policies Personnel policies should specifically state the consequences for
fraudulent acts and excessive errors so each employee understands the ramifications
8 Prudent Accounting and Tax Solutions Sacco training

of such actions. Employees should be familiar with the personnel policy; a review of
this policy should be part of each employees initial training. The policy at a
minimum should:

Require management to check references of prospective employees;

Include written position descriptions that define the duties, responsibilities, and
performance standards for each position; and
Require written performance appraisals of all employees annually.

10. Rotation of Personnel From time to time, employee job functions should be rotated
unannounced. The rotation should be of sufficient duration to discover any fraud.
Besides being an effective internal check, rotation of personnel is a valuable aid in the
SACCOs overall training program as employees learn how to perform other jobs. The
cross-trained employee can substitute when other employees take vacations, are absent,
or are rotated.
11. Mandatory Vacations SACCOs should have a vacation policy that requires all employees
to take at least 5 consecutive working days off. During this time they should have no access to
SACCO records. An uninterrupted work schedule frequently is needed to embezzle funds
unnoticed.
12. Proper financial decision analysis. For a Sacco the following decision analysis should be
made.
(i)
(ii)

(iii)

Liquidity risk analysis loans demand and cash availability, divided payment
and cash availability.
Financial risk analysis:
The possibility of not able to meet long-term financial obligations as the fall
due e.g. repayment of loan to bank.
Cost-benefit analysis in case of a project the benefits versa the resources to
be used. Always take project which adds value to the sacco.

Signs of Warning
The following are possible indicators that internal controls are not adequate to discourage
dishonest or fraudulent acts. SACCO officials or management should take corrective action to
reduce the chance of fraud. Regulatory authorities should address these shortfalls with the
officials and management and develop plans to enhance internal controls.
Little or no internal controls in place;
9 Prudent Accounting and Tax Solutions Sacco training

 Inadequate segregation of duties with limited internal controls in place;

Inactive supervisory committee;
Unacceptable or lack of external audit or member account verification;
Numerous record keeping problems;
Accounting records and financial statements in arrears;
Management reports and accounting records destroyed or missing;
Employees or officials with financial problems;
Multiple family members or related parties control operations;
Inadequate or no review of internal control reports provided by the computer
system;
Computer entries do not identify the employee that performed the transaction;
Employees share their password with other individuals;
The computer system lacks adequate controls and audit trail and it is
easily manipulated;
High employee turnover; and
Poorly trained staff.

20 Ways to Detect Fraud

1. Unusual Behavior
The perpetrator will often display unusual behavior, that when taken as a whole is a strong
indicator of fraud. The fraudster may not ever take a vacation or call in sick in fear of being
caught. He or she may not assign out work even when overloaded. Other symptoms may be
changes in behavior such as increased drinking, smoking, defensiveness, and unusual
irritability and suspiciousness.
2. Complaints
Frequently tips or complaints will be received which indicate that a fraudulent action is going
on. Complaints have been known to be some of the best sources of fraud and should be taken
seriously. Although all too often, the motives of the complainant may be suspect, the
allegations usually have merit that warrant further investigation.
3. Stale Items in Reconciliations
In bank reconciliations, deposits or checks not included in the reconciliation could be
indicative of theft. Missing deposits could mean the perpetrator absconded with the funds;
missing checks could indicate one made out to a bogus payee.

10 Prudent Accounting and Tax Solutions Sacco training

4. Excessive Voids
Voided sales slips could mean that the sale was rung up, the payment diverted to the use of
the perpetrator, and the sales slip subsequently voided to cover the theft.
5. Missing Documents
Documents which are unable to be located can be a red flag for fraud. Although it is expected
that some documents will be misplaced, the auditor should look for explanations as to why
the documents are missing, and what steps were taken to locate the requested items. All too
often, the auditors will select an alternate item or allow the auditee to select an alternate
without determining whether or not a problem exists.
6. Excessive Credit Memos
Similar to excessive voids, this technique can be used to cover the theft of cash. A credit
memo to a phony customer is written out, and the cash is taken to make total cash balance.
7. Common Names and Addresses for Refunds
Sales employees frequently make bogus refunds to customers for merchandise. The address
shown for the refund is then made to the employee's address, or to the address of a friend or
co-worker.
8. Increasing Reconciling Items
Stolen deposits, or bogus checks written, are frequently not removed, or covered, from the
reconciliation. Hence, over a period of time, the reconciling items tend to increase.
9. General Ledger Out-of-Balance
When funds, merchandise, or assets are stolen and not covered by a fictitious entry, the
general ledger will be out of balance. An inventory of the merchandise or cash is needed to
confirm the existence of the missing assets.
10. Adjustments to Receivables or Payables
In cases where customer payments are misappropriated, adjustments to receivables can be
made to cover the shortage. Where payables are adjusted, the perpetrator can use a phony
billing scheme to convert cash to his or her own use.
11. Excess Purchases
Excess purchases can be used to cover fraud in two ways:
Fictitious payees are used to convert funds
Excessive purchases may indicate a possible payoff of purchasing agent
12. Duplicate Payments
Duplicate payments are sometimes converted to the use of an employee. The employee may
notice the duplicate payment, then he or she may prepare a phony endorsement of the
check.
11 Prudent Accounting and Tax Solutions Sacco training

13. Ghost Employees

Ghost employee schemes are frequently uncovered when an auditor, fraud examiner, or other
individual distributes paychecks to employees. Missing or otherwise unaccounted for
employees could indicate the existence of a ghost employee scheme.
14. Employee Expense Accounts
Employees frequently conceal fraud in their individual expense account reimbursements.
These reimbursements should be scrutinized for reasonableness and trends, especially in the
area of cash transactions on the expense account.
15. Inventory Shortages
Normal shrinkage over a period of time can be computed through historical analysis. Excessive
shrinkage could explain a host of fraudulent activity, from embezzlement to theft of
inventory.
16. Increased Scrap
In the manufacturing process, an increased amount of scrap could indicate a scheme to steal
and resell this material. Scrap is a favorite target of embezzlers because it is usually subject
to less scrutiny than regular inventory.
17. Large Payments to Individuals
Excessively large payments to individuals may indicate instances of fraudulent disbursements.
18. Employee Overtime
Employees being paid for overtime hours not worked by altering time sheets before or after
management approval.
19. Write-off of Accounts Receivable
Comparing the write-off of receivables by customers may lead to information indicating that
the employee has absconded with customer payments.
20. Post Office Boxes as Shipping Addresses
In instances where merchandise is shipped to a post office box, this may indicate that an
employee is shipping to a bogus purchaser.

B.Interpretation of financial statements

Financial statements form part of the process of financial reporting. A complete set of
financial statements normally includes a balance sheet, an income statement, a cash flow
statement, and those notes and other statements and explanatory material that are an
integral part of the financial statements.

12 Prudent Accounting and Tax Solutions Sacco training

They may also include supplementary schedules and information based on or derived from,
and expected to be read with, such statements. Such schedules and supplementary
information may deal, for example, with financial information about industrial and
geographical segments and disclosures about the effects of changing prices.
Financial statements do not, however, include such items as reports by directors, statements
by the chairman, discussion and analysis by management and similar items that may be
included in a financial or annual report.

The Objective of Financial Statements

1. The objective of financial statements is to provide information about the financial
position,performance and changes in financial position of an enterprise that is useful
to a wide range of users in making economic decisions.
2. Financial statements prepared for this purpose meet the common needs of most users.
However, financial statements do not provide all the information that users may need to
make economic decisions since they largely portray the financial effects of past events
and do not necessarily provide non-financial information.
3. Financial statements also show the results of the stewardship of management, or the
accountability of management for the resources entrusted to it.

Users and Their Information Needs

The users of financial statements include present and potential investors, employees,
lenders, suppliers and other trade creditors, customers, governments and their agencies
and the public.
They use financial statements in order to satisfy some of their different needs for
information.
A. Statement of comprehensive incomes
It shows profit or loss made by the sacco. It has the following items:i)

Revenues
These are the source of incomes. For a sacco the main source of income is interest of
members loans. All other sources are classified as operating incomes including sale of
loan forms, fines and penalties, withdrawal charges etc.Interest on loans guides on
how much to give as return on investments to the shareholders (interest on
deposits/savings).

13 Prudent Accounting and Tax Solutions Sacco training

ii)

Expenditure
Actual accounting is used to know what to include as expenditure. All expenditure
either paid or unpaid should be included sacco expenditure is usually divided into.
1. Administrative any expenditure related to normal day today running of the
office, which includes stationery, sundry expenditure, entertainment, etc.
2. Personnel any expenses related to employee of the sacco e.g. salaries, wages,
allowances etc.
3. Financial it includes bank charges and interest on loan borrowed.
4. Governance any expenditure related to members either a committee or others
5. Others any other expenditure which may not be classified in the above stated
classes e.g. depreciation

iii ) Transfer to reserves

Any an appropriated amount is taken to statement of changes in Equity.
B. Statement of changes in equity
Equity means owners resources. The statement shows what the owners have in the sacco.
It should show the following:(1) Share capital
(2) General reserve (if any)
(3) Retained loss / profit (if any)
(4) Statutory reserve
(5) Taxation
Any change in the above items should be shown.
Statutory reserve: is per section 47 (subsection 1, 2) of the cooperative Act.
C. Balance sheet / statement of financial position:
It shows all assets, liabilities, reserves and capital.
KEY TERMS
Assets: an asset can be defined as resources present in a business organization that have
probable future economic benefit. They include cash, land and buildings stock e.t.c.
Assets can either be defined as current, non-current or intangible.
Current Assets: these are assets consumed in one year or are expected to benefit the
firmwithin a period of not more than one financial year e.g. stock, cash at hand, cash at
bank,debtors, prepayments e.t.c
Non-current Assets: these are assets whose economic benefits to the organization are
achieved for a period exceeding one financial year. Examples would be land and buildings,
motor vehicles, plant and machinery, computers e.t.c
Intangible Assets: these are assets of economic value to the business enterprise but cannot
be physically felt or seen e.g. goodwill, patents, copyrights e.t.c
14 Prudent Accounting and Tax Solutions Sacco training

2 0 FINANCIAL ACCOUNTING
STUDYTEXT
Liabilities
These are obligations that a business is expected to meet within a certain duration. They can
also be defined as total funds owed for assets supplied to a business or expense incurred but
not paid yet.
Liabilities can either be short term or long term. Short term liabilities are those that are
expected to be met within duration of one financial year. Payment for accrued expense,
creditors, dividends to share holders e.t.c. on the other hand long term liabilities are those
payable within a period exceeding one financial year e.g. long term loan, re-payment of
debentures e.t.c
Capital: this is defined as the total of all resources invested and left in business by its
owner.Revenue/Income: this can be defined as the monetary value of all goods and services
sold to customers by a business enterprise.
It shows the net value of the business/ wealth. It gives the general picture of the business
D. Cashflows statement:
Shows the inflows and outflows of cash.
The sources and application of cash. It has the following heading:
1. Cashflows from operating activities
2. Cashflow from investing activities
3. Cashflow from financing activities
The final figure shows the cash and bank balance the end of the period.

C.Analysing Financial Statements

What are Financial Statements?
Financial statements are a product of the financial accounting process. They are
a summary of all the transactions for a specified period and show the financial
position of an organization.

1.Income Statement

2.

Income statement is also called as profit and loss account, which reflects the
operational position of a SACCO during a particular period.
It consists of one accounting year.
It determines the entire operational performance of the SACCO like total
revenue generated and expenses incurred
Income statement helps to ascertain the gross profit and net profit of the SACCO.
Balance Sheet

15 Prudent Accounting and Tax Solutions Sacco training

Reflects the financial position of the SACCO.

Indicates in simple terms the total assets, liabilities and equity of a SACCO
Financial statement analysis is largely a study of the relationship among the
various financial factors in a SACCO as disclosed by a financial statement and a
study of the trend of these factors as shown in the statements
Determines the financial and operational performance of the SACCO.
There are several methods or techniques, which are used but we will discuss the
following:
Comparative Statement Analysis
Trend Analysis
Ratio Analysis

1 Comparative Statement Analysis

Comparative statement analysis is an analysis of financial statement at different
period of time.
This statement helps to understand the comparative position of financial and
operational performance.
Classified into two major parts such as:
comparative balance sheet analysis
comparative profit and loss account analysis.
2.Trend Analysis
The financial statements may be analyzed by computing trends of series of
information which involve the percentage relationship of each and every item of
the statement with the common value of 100%.
Trend analysis helps to understand the trend relationship with various items,
which appear in the financial statements.
Only major items are considered for calculating the trend percentage.
3 .Ratio Analysis
Ratio analysis is used to compare different items to determine the soundness of
the SACCOs operations.
A ratio unless compared with a set standard is not meaningful.
Comparison of a ratio with a standard will help the management to interpret and
assess the financial status of the SACCO.
There are unlimited number of possible ratios.
It is important to identify and use those ratios which are relevant to SACCOs.
This would enable the management to improve the performance by taking
remedial actions.
Ratios also help identifying the strengths and reaffirm the efficiency of the
SACCO and enhances its credibility.

What is PEARLS?

Developed by WOCCU based on decades of SACCO experience in different countries with

varying economic environments.

It is continuously being reviewed and updated to meet the problems of today and
overcome the challenges of tomorrow.
16 Prudent Accounting and Tax Solutions Sacco training

A management tool

Alerts general managers to potential problems before they become difficult to

repair

It pin points where the problems are located

It can be used to develop a Business Plan

For Board of Directors,

PEARLS provides a tool to monitor management's progress toward financial

goals

PEARLS - What does it stand for?

P = Protection

E = Effective Financial Structure

A = Asset Quality

R = Rates of Return

L = Liquidity

S = Signs or Growth

PEARLS Analysis

The PEARLS Ratios Analyze:

Balance Sheet

Income Statement

17 Prudent Accounting and Tax Solutions Sacco training

PEARLS relates various elements in the balance sheet and income statement in an
integrated manner.

1. P1. Allowance for Loan Losses/Delinquency > 12 months = 100%

2. P2. Net Allowance for Loan Losses/Delinquency of 1-12 months = 35%
3. E1. Net Loans/Total Assets
= 70%-80%
4. E5. Savings Deposits/Total Assets = 70%-80%
5 E6. External Credit/Total Assets Maximum = 5%
6. E9. Net Institutional Capital/Total Assets Minimum = 10%
7. A1. Total Loan Delinquency/Gross Loan Portfolio <= 5%
8 A2. Non-Earning Assets/Total Assets <= 5%
9. R7. Total Interest (Dividend) Cost on Shares/Average Member Shares Market Rates >= 7%
10. R9. Total Operating Expenses/Average Total Assets
= 5%
11. R12. Net Income/Average Total Assets = 10%
12. L1. ST Investments + Liquid Assets ST Payables/Savings Deposits =Minimum 15%
13. S11. Growth in Total Assets = > Inflation

18 Prudent Accounting and Tax Solutions Sacco training

OTHER Important ratios:

1. Liquidity ratios
(a) Current ratio =

Current Assets
Current liabilities

Should be at least 2:1

(b) Quick ratio =

Current assetsstock
Current liabilities

Should be at least 1:1

2. Profitability ratios:
(1)

Interest on deposit paid

total deposits

(2)

Dividend paid
share capital

x 100 =

x 100 = %

D.SUPERVISORY COMMITTEE -Report Writing

Best Practice Guidelines
There are a number of factors which contribute to good report writing and these include the
following:

1. Be factual, consistent and accurate

2. Jargon, meaningless phrases, irrelevant speculation and offensive subjective
statements should be avoided.
3. Compose text using formal language that is clear, accurate and factual, avoiding
irrelevant or unnecessary comment.
4. Try to be as objective as possible when expressing opinions.
5. Record the opinion in the context of the facts that support it.
6. Avoid personal comments or inappropriate 'colourful' remarks (potential
embarrassment individuals or organisations does not constitute grounds for withholding
access to the record).
7. Do not record unsubstantiated subjective comments, particularly those made by one
person about another. Remember that the recorded comment is considered the
personal information of the individual about whom it was made and that person has a

19 Prudent Accounting and Tax Solutions Sacco training

right of access to it. Comments by one person about another using intemperate
language can usually be re-phrased before recording without losing meaning.
8. Make sure that the medium on which text is recorded is appropriate to the subject
matter.

E.TYPICAL ISSUES CAPTURED IN SUPERVISORY

COMMITTEE REPORT
1. Compliance with the law
-Compliance with the by-laws, act, rules, management policies, general meeting
resolutions and established practices.
-Refers to specific provision in the Act, rule, policy, resolution, state the risk involved and
recommendation.
1. Weakness in the existing internal controls
-Highlight the specific control, weakness and risk posed and recommendation
-Controls depend on the organization involved.
2. Delinquent loans / dormant loans
Highlight the list of loans, risk involved and recommendation
Use of ratios in recommended.
3. Implementation of general meeting resolutions
Follow up by management, and implementation
4. Risk assessment
a) Liquidity risk
b) Financial risk
c) Operational risk
Use of ratio analysis and analytical figures is recommended
5. General business performance
- Profitability or losses / risks
- Dividend payment risks
Use of ratio analysis and analytical figures is recommended
6. Member complaints
- Lending policies
- Loan rejections
- Sacco services
- Deposit withdrawals
Assess the reality in the complaint, risk, involved and offer recommendation for the same.
7. Staff matters
- Staff establishment
- Weakness
20 Prudent Accounting and Tax Solutions Sacco training

Strength

8. Financial management practices

- Financial planning strategic and operational plans
- Financial monitoring budgets adherence and variances
- Procurement procedures adherence or otherwise
- Insurance of assets protection against loss
- Management reports availability and recommendations
9. General business environment
-Future business outlook
-Any general comment
-Prudence in management

F. How to obtain reporting issues

1.
2.
3.
4.
5.
6.
7.

General observation of the business

Audit reports and statements
Relevant legislations, regulations, policies etc
Management meeting minutes of AGM minutes etc
Accounting records and system, accounting standards
Budgets, strategic plans operational plans
Management reports / evaluation reports

21 Prudent Accounting and Tax Solutions Sacco training