It was the largest single investment in the Danish Refugee Council’s history. The humanitarian organization launched a new enterprise resource planning system — software to serve as the backbone of its operations. But things went horribly wrong.
The organization, which is Denmark’s largest international NGO, said before its launch that it hoped this new system “paves the way for much greater efficiency, transparency, and productivity in the execution and monitoring of our projects and relief efforts.”
It expected this system-wide change would help it better serve refugee and displaced populations around the world.
By the end of its first year of implementation in 2019, DRC had invested 100 million Danish krone in the system — breaking an organizational record for a single investment.
But the new system left the organization’s data in disarray. Donors delayed payments because the organization wasn’t able to send out donor reports on time and DRC staffers were unable to properly track finances when implementing projects.
Its auditors then took a very rare action by issuing a qualified opinion, signifying the underlying records of the finances were so poor they couldn’t deliver a clean audit with confidence.
“The auditors and DRC would have moved heaven and earth not to have a qualified opinion,” an independent accountant who reviewed the organization’s accounts told Devex. The accountant wishes to remain anonymous because he still works in international development and wants to keep a cordial relationship with the organization.
During the confusion caused by the new enterprise resource planning system in 2019, DRC parted with its secretary general, who later said major mistakes had been made in the implementation of the system — mistakes that were still having consequences at the time the most recent accounts were filed.
Anne Mette Barfod, the executive director of finance at the organization, told Devex that while the situation was hectic for a while, it was the right decision for the organization to implement this new system because now staffers have greater access to information. But she said if given the chance to do it all over again, the organization would have done it differently.
DRC is an umbrella for national organizations and volunteer groups that support people forcibly displaced from their homes. It works in 40 countries, with about 9,000 employees internationally and 7,500 volunteers in Denmark.
Some of its top donors include the European Civil Protection and Humanitarian Aid Operations, International Organization for Migration, Danish International Development Agency, and the U.S. Agency for International Development.
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In 2016, it began laying the groundwork to launch the new system — integrating the organization's financial, supply chain, and grant management, as well as human resources administration.
The software that underpinned the system was named DRC Dynamics by the organization and is a customization of Microsoft Dynamics 365. Its goal is to support “the whole process from the point when an agreement is entered into with a donor to financially support a project, over project implementation management until the time when the project is completed and reported to the donor.”
It was a transition from a simple, headquarters-based financial system, which was “really not well-served for a decentralized, big international organization,” Barfod said. The software would move information to the cloud to give country operations better access.
In 2017, it contracted with SCALES, the largest Nordic Microsoft Dynamics 365 partner, to implement the software.
A team of 18 people designed the system to fit the organization’s operating model, and in 2018, staffers around the world began training.
By some measures, 2019 was a good year for the organization — it was ranked the third best NGO in the world, a position it held on to from the previous year, and reported 3.2 billion Danish krone in revenue, which was the highest income in its history. But in other ways, it was tumultuous.
The organization decided on a “big bang rollout” across the entire organization at once, as opposed to a phased one, Barfod said. This launch happened in January 2019.
By the end of April, the organization had fired its secretary general, Christian Friis Bach, who had been in the position since 2017. In a Facebook post on the dismissal, Bach said the organization had faced major challenges in the past few years including the economy, politics — and its new IT system.
At the end of 2019, the organization's financial statements were riddled with inaccuracies. When it was time to publish the year-end annual report, the organization said its management was “still in the process of clarifying incorrect and inadequate recordings.”
This led to delays in providing financial reports to donors, which put “pressure on the liquidity” of the organization because donor payments were delayed. This was not trivial because “liquidity is a focal point for DRC,” the organization wrote in its annual report, as financial losses over the previous three years had reduced available funds while operations simultaneously increased.
By the end of 2020, its financials were still a mess. The organization had assets of 29.5 million Danish krone that couldn’t be confirmed “due to incorrect and incomplete bookkeeping records” stemming from the new system, according to the 2020 annual report.
Due to the uncertainty in the figures, the auditors issued a qualified opinion. This sort of opinion happens when the auditors consider the potential for inaccuracies in one or more sections of the reported information to be so severe that they can’t deliver a clean audit opinion with confidence.
For a qualified audit opinion to be issued, the uncertainties have to be large enough to affect “material” information — core figures that need to be included because they could influence the decisions of those using financial statements, such as donors.
Three accountants Devex spoke with said this type of opinion is very rare.
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Another auditor that works in the international development sector said that over the past decade, he's audited only a few accounts that have needed a qualified opinion. He added that he has rarely seen a qualified opinion result from system implementation, as was the case for DRC. It typically results from external factors outside of the organization’s control, such as an issue with a donor or a security incident that prevented access to records.
"This is clearly a system implementation that's gone horribly wrong," he said.
An accountant, who recently worked with international NGOs operating in East Africa, agreed. “Although your auditors are independent, they will bend over backwards, working with you to give you a clean opinion,” he said. “It looks terrible to donors and to everyone else as well.”
"That was, of course, really, really annoying to get a qualified annual report. I don't think anyone who is the CFO wants to have a qualified annual report,” Barfod said.
When DRC released its financial statements for last year in June, it was clear the organization was still sorting through the mess.
Balances from the previous two years were restated after new errors were discovered in international projects.
The accountant with experience working with NGOs in East Africa reviewed the organization's accounts. In the 2021 annual report, DRC reduced net income by $829,000 in between the original and revised 2020 financial statements. This reduction was caused by project assets being overstated by $36 million and project liabilities by $35.3 million.
The value of the assets and liabilities moved in the same direction, with the gross adjustments making up about 8% of income. However, when combined together, they canceled each other out so the net adjustment — or $829,000 — was just 0.2% of income.
The gross adjustment would be considered a material percentage in audit and accounting terms, according to the accountant.
Another auditor agreed, saying that for larger organizations, such as DRC, it's expected they be audited to accuracy within 1% of income. Asked whether this might impact the organization’s future funding, she added that it depends on how financially astute an organization’s donors are. If a donor has a choice of several organizations to fund, they might opt for the one with a “clean” opinion.
However, a DRC spokesperson said the net adjustment was the key figure.
"The two regulated balances are 100% related," she said. "Therefore, we still believe that it’s the net figure that best describes the inaccuracy in the annual report."
Barfod said that because each of its country offices is its own legal entity, when money moves between headquarters and countries, it creates assets and liabilities. When this is consolidated, at an organizational level, these balances are netted out, which was a challenge under the new system. This ended up “beefing up the balance sheet a bit” which should be avoided, she said.
The new software challenges leading to the qualified opinion in the financial reports to the Danish government in 2020 were particularly related to currency, she said. The organization receives donor funds in one currency and transfers to the country level in another — but as time passes between transfers, values change. Ensuring currency values were documented at the right time was not straightforward during the software rollout, causing uncertainty in the numbers.
"Currency is one of the most complex areas in our financial reporting,” Barfod said.
DRC administers around 600 million Danish krone ($60 million) from donors each quarter, according to Barford. The delayed donor reports resulted in the organization having between 300 million Danish krone to 400 million Danish krone less than normal for about nine months.
“That is, of course, quite a lot of money,” Barfod said.
Each year, the organization makes around one thousand reports to donors, she said. In 2019, reports that were supposed to be sent out in March were instead sent out in May and June. It took the organization until around the end of 2020 to catch up on its reporting.
“We did see that some donors were very understanding, and then there were other donors where it harmed our relationship for a while until we came back into sort of normal procedures again,” Barfod said.
But she said while reports were delayed, the quality of donor reports wasn’t impacted.
She said that problems caused by the new software only meant assets and liabilities were incorrectly recorded, not income and costs on each project. This affected statutory reporting to the Danish government, which requires a balance sheet, but it didn’t affect donor reports, which are based only on funds received compared against incurred costs.
But as a result of the reduced cash flow, the organization tightened procedures around liquidity.
The organization moves about 100 million Danish krone from headquarters to its country offices each month. For a number of years prior to the software rollout, the organization had excess liquidity, allowing countries to access cash easily. Because of the problems caused by the software rollout, countries must now undergo more formalized processes to access cash, Barfod said. During the last years, the organization also assessed whether bigger payments could be held off and a new policy was created, which triggers board involvement when liquidity reaches certain levels.
Another issue was underspending on certain projects. During the first months after the software implementation, part of the data from projects was on the old system and part on the new. This led to staffers losing track of how much was spent.
Because of this, some project managers didn’t use all of the money from the donor. But because the organization had incurred support costs on those projects, the organization still took a loss.
Another problem was connectivity. In its 2019 annual report, DRC said it had challenges in rolling out the system in countries where infrastructure and capacity had “proven inadequate.” Some of the countries don’t have reliable internet access, Barford said, which is an issue with a cloud-based system. This has created ongoing hurdles for the organization, she said, so the organization is investing in satellite connections.
But despite the years of jumbled data, project managers now have much more information about their projects compared to what they had before, Barfod said.
The secretary general fired from the organization in 2019, Christian Friis Bach, wrote in an email to Devex that the contract and implementation model for the enterprise resource planning system was signed off the week before he started in 2017. This “was the worst possible start for me into the implementation of the ERP system,” he said.
He said a number of mistakes were made. One was that the implementation of the new system was treated as a project that was managed by different working groups.
"This was also a serious mistake because it meant that the ERP system was sidelined as a project and did not receive enough attention in the line management," he wrote.
While Bach said he was told the working groups were operating smoothly, it turned out some had stopped meeting completely and line managers — midlevel managers responsible for managing staffers while also reporting to senior members of the organization — didn’t have enough ownership over the implementation.
"And only when it went wrong and all the problems occurred did we realise that line managers had not been sufficiently involved," he said. "My learning is not to implement large and crucial IT systems in a project model. Do it in line management! And make sure that all management groups and line managers are involved and responsible from start to end."
Outside experts agree that management engagement is critical. Andrew Gross, senior director of the global knowledge and information management team at Catholic Relief Services, said organizational change is difficult — ensuring the right structures, processes, and people are put in place. And trying to do too much at one time can lead to a “tremendous amount of problems.”
“Organizations always underestimate the amount of effort, from an organizational change perspective, you actually have to put into this,” he said.
“Your executives need to stay engaged and they need to make sure their teams are engaged,” Gross added. “They have to be the number one champion.”
Barfod said it would have been better for DRC to have conducted an extensive pilot before the launch instead of moving straight into the “big bang rollout,” with the software rolled out in a number of countries to spot the sticking points.
The implementation is ongoing. For example, the organization hasn’t yet rolled out the supply chain module completely. But it has devoted a lot of internal resources to bringing the financial accounts up to par since the qualified audit, Barfod said, adding that she doesn’t anticipate problems in future financial statements to the Danish government.
“I will not say that it's not stressful and as an organization, you shouldn't do it unless you have the capacity to take on more stress than you have at the moment,” she said.
“When you do a big ERP implementation, for a while, you lose your navigation — until you have it again, and then you have a much stronger navigation,” she added.