Verifying Fiduciary Compliance

Published on: Wed Sep 28 2022 by Ivar Strand

**Verifying Fiduciary Compliance: An Approach to Expenditure Tracking and Controls

Ensuring that funds are used for their intended purpose is the foundational principle of donor stewardship. The traditional mechanism for this is the end-of-project financial audit. While essential, the final audit is a retrospective instrument; it can confirm if money was misspent, but only after the fact. It provides a judgment, not real-time visibility.

A more robust approach to fiduciary assurance requires a shift from a single, summative event to a continuous verification process. The objective is not simply to identify problems at the end of a project, but to systematically reduce the opportunity for mismanagement throughout its lifecycle. This involves a proactive assessment of internal controls and a disciplined tracing of expenditures as they occur.

This paper outlines a layered approach to fiduciary verification, designed to provide ongoing assurance and support real-time risk management.

From Retrospective Judgment to Proactive Assurance

A proactive stance on fiduciary compliance focuses on two distinct but interconnected lines of inquiry, moving beyond a simple check of receipts:

1. The Integrity of Systems: This involves assessing the design and application of the implementing partner’s internal financial controls. Are the established procedures for procurement, payment authorisation, and asset management sufficiently robust to prevent misuse of funds? Are these procedures being consistently followed in practice?
2. The Integrity of Transactions: This involves examining individual expenditures to confirm their validity and alignment with programmatic goals. This goes beyond checking for documentation; it scrutinises transactions for compliance with agreed-upon rules, reasonableness, and value for money.

This dual focus shifts the verification exercise from a historical review to a forward-looking risk management discipline.

A Layered Approach to Fiduciary Verification

A comprehensive verification process can be structured in three distinct, reinforcing layers. Each layer answers a different, fundamental question.

• Layer 1: Systems and Controls Assessment This foundational layer seeks to answer the question: “Are the rules of financial management well-designed and understood?” The process begins with a desk review of the partner’s financial, procurement, and human resources manuals. This is followed by a “walk-through” exercise, where verifiers interview finance and logistics staff to map out the actual process for key transactions, from initiation to approval and payment. The output is a controls map that identifies potential weaknesses, such as inadequate segregation of duties or a lack of independent oversight, which represent potential fiduciary risks.

• Layer 2: Transactional Testing (Expenditure Verification) This layer tests whether the rules are being followed in practice, asking: “Are expenditures compliant and properly documented?” It involves a statistically relevant, risk-based sampling of transactions across different categories (e.g., procurement of goods, salary payments, workshop expenses). For each sampled transaction, verifiers trace the complete audit trail—from purchase request to invoice, approval documentation, evidence of payment, and final receipt. At Abyrint, we have found this “follow the money” exercise is critical for identifying deviations from established procedure.

• Layer 3: Physical and Output Verification This crucial final layer connects expenditures to real-world results. It answers the question: “Did we receive the value we paid for?” This cannot be answered from paperwork alone. It requires physical inspection of assets and activities: verifying that procured goods match the specifications and quantity on the invoice, confirming that personnel on the payroll are actively engaged in the project, or checking that beneficiaries have received the goods or services documented in distribution lists. This layer provides the essential link between financial compliance and programmatic effectiveness.

Reporting for Fiduciary Risk Management

The findings from this layered approach are not held for a single, end-of-project report. They are fed back to management in near real-time to enable immediate course correction.

• Control Weakness Memos: Significant gaps or weaknesses identified in Layer 1 are communicated immediately to the partner and donor so that controls can be strengthened before they are exploited.
• Expenditure Exception Reports: Transactions from Layer 2 that fail verification are flagged in regular reports, allowing management to investigate and take corrective action on specific non-compliant payments.
• Consolidated Assurance Reports: On a periodic basis, findings from all three layers are synthesised into a single report. This provides the donor and implementing partner with a holistic and current assessment of fiduciary risk and the overall health of the project’s financial management systems.

Exhibit A: The Fiduciary Verification Cycle (A conceptual diagram shows a circle composed of three connected segments. The segments are labelled: “1. Assess Internal Controls,” “2. Test Transactions,” and “3. Verify Physical Outputs.” Arrows indicate a continuous flow between the segments. At the centre of the circle, a box is labelled “Continuous Reporting & Risk Mitigation,” with arrows pointing to it from each of the three segments.)

Fiduciary Assurance as a Management Discipline

A proactive, multi-layered approach to fiduciary verification is not an expression of distrust. It is a fundamental discipline of professional financial management and responsible stewardship in complex environments. This methodology shifts the focus from a pass/fail judgment at the project’s conclusion to a collaborative and ongoing process of risk mitigation and system strengthening.

By providing continuous insight into the integrity of both systems and transactions, this approach gives donors and implementing partners a much higher degree of confidence that resources are being protected and deployed effectively to achieve their intended purpose.