Growth Of NPO In Malaysia Accounting Essay

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Non Profit Organizations or so-called "third" sector plays important roles in communities around the world in areas ranging from education, healthcare, disaster relief, social work and overall improvement of human condition (Liu, 2010; Seo, 2011) . Their operation fund is provided by their donors who do not expect any repayment (Iwaarden, Wiele, Williams, & Moxham, 2009). It has become widely recognized that efficiency and effectiveness of the operation of non-profit organizations is as important as profit organizations.

Over the last twenty years, non-profit organizations have become important providers of social services in many countries. The scope, scale and range of their activities focus not only on the traditional domain of charity but include job training, community and economic development, housing, substance abuse programs, refugee placement, and various other services (Nahar & Yaacob, 2011).

NPOs need to demonstrate their effectiveness as this sector alone comprises of U.S. account for approximately 10% of the gross national product, account for approximately 13 percent of employment in the U.S (Murphy, 2007), and collective assets represent approximately 2.5 trillion dollars (Small, 2009). NPO existence is increasing in size and amount as it is gradually being put emphasis on by market economy, hence it is important to be able to determine and evaluate the performance as well as to develop practical evaluation mechanism for NPO though this aspect is among many areas that continue to challenge the researchers and practitioners.

Research done in the Netherlands by the Dutch Institute for Public Opinion and Market Research showed that the large majority of charity supporters would like to know more about what happens with their donations (Scholten, Scott, & Fynes, 2010). Furthermore, there are various parties that are eager to know and ensure that the organization they donate to, the programs they fund on for the public, the programs they devote their valuable time into, whther those really are contibuting to the lives of community (Murphy, 2007). Those parties such as the government agencies, foundations, other nonprofit funders as well as public community generally. However, in their findings, the researchers emphasize on the difference between investors and donors. Investors often do want to know the exact comparative performance of an organization because then they can place their money in something that will give them a slightly higher return on their funds, whereas donors are not so interested in placing their money in the very highest returning organizations. Thus, it is indeed important to them to know about efficiency ratios regardless of the accuracy or questionable those ratios are since they are signal of efficiency of performance of non-profit organizations (Iwaarden et al., 2009).

Religious and other non-profit organizations have a responsibility to their various constituents to be fiscally responsible and transparent in carrying out their missions (Elson, O'Callaghan, & Walker, 2006). Those organizations are performing various task-oriented and services as well as serving humanitarian functions which are also playing a role of conveying the societies concern to government and authorities to formulate further step. Those organizations encourage participation of civil society stakeholders at the community level thus they are made up of people with a common interest including paid up employees and volunteers (Awio, Northcott, & Lawrence, 2011).


As at November 2011, in Malaysia, there are 47376 non-profit organizations registered under one of the society registrar which is Registrar of Society (Society, 2011). In Malaysia, all non-profit organizations are required to register. The main statue dealing with establishment and regulation of non-profit organizations are the Societies Act 1966 (Zainon, Atan, Wah, & Nam, 2011). Non-profit organizations can be registered under one of registrar either Companies Commission of Malaysia or Registrar of Society. Some non-profit organizations will register under Registrar of Society which this registrar is under Ministry of Home Affairs. This department is the one who administer and record all the details of progress of non-profit organizations. Besides, this department is the one which controlling and monitoring organization which not consistent with the requirements of the Societies Act 1966 and Societies Regulations 1984 and to ensure all societies comply with the established society policies, rules and procedures. This registrar has vision which is to be a dynamic principal government department that responsible to supervise and control the activities of non-profit organizations in order to achieve national socio-economic development, security, peace, public order, good offer, welfare or morality in Malaysia. This department's main objective is to ensure registered societies comply with the Societies Act 1966, their articles of association and national policies. This registrar has classified those non-profit organizations under different types of non-profit organizations which are according to their principal activities. There are thirteen categories which are religious, welfare, social and recreation, women, culture, mutual benefit societies, trade associations, sports, youth, education, political, employment associations and general (Society, 2012).


There are many non-profit organizations especially charity fundraising organizations which have been established but it does not last long (Witmer, 2006) since many non-profit organizations are losing their funding thus leads to inability to services to their communities and society. In reality, there is no for profit or nonprofit organization can survive without financial support (Shepeard, 2007). Those charity fundraising organizations cannot survive for long due to the shortage of fund received by them (Smith, 2010). Normally, survival depends highly from donation from government, businesses, corporations, foundations, institutions, individuals, fees and lending (Beiser, 2005; Elson et al., 2006; Feng, 2010; Irvine, 2011; Keating, 2001; Seo, 2011; Sloan, 2010).

Besides, these organizations rely on the public for a significant portion of their annual budget (Elson et al., 2006). According to a study by (Soobaroyen & Sannassee, 2007), about 44 percent of the NPO relies primarily on public donations and corporate meanwhile the remaining 24 percent depend on some form of government funding. It is also known that such organizations receive and depends for government subsidies for meeting their regular operational costs. Support is received by nonprofit organizations in the form of tithes, pledges or donations (Elson et al., 2006).

As universally known, there is always an absence of a profit motive in non-profit organizations. Consequently, these organizations are more dependent upon the external environment for generating financial resources for them to operate. As studied by (Afifuddin & Siti-Nabiha, 2010), donations are likely to occur in the religious faith based sector such as religious organizations or humanitarian mission based organization, where these certain phenomena are something that rarely occurs in business organizations. Hence, these phenomena which involve significant contribution to the financial support of the organization are served to guarantee the continuance of their activities (Afifuddin & Siti-Nabiha, 2010).

Without exception, non-profit organizations could not prevent themselves from being affected by the economic crisis faced by the world which eventually leads to the exposure of challenges in meeting the target performance (Smith, 2010). This is due to the size of non-profit organizations which are normally small and lack of capital as well as uncertain fund sources. The factors that could be the cause of the problem faced by almost every non-profit organization is that many organizations lack political support and depend heavily on the leader influence.

Many non-profit organizations are facing greater uncertainty, particularly in the financial field, as government budgets are being cut back and as non-profit organizations are being asked to shoulder more responsibilities (Irvine, 2011). Previously, the donations in charities fell by nearly 6% in 2008 which is the sharpest drop from 53 years ago (Charities Aid Foundation and National Council for Voluntary Organisations, November 2009). For many nonprofit organizations, one of the biggest challenges is not raising so much money from donors (Carol M. Ostrom, 2001). Some of those charity fundraising organizations are having high fund while some of charity fundraising organizations are having low fund (Felix Salmon, 2011). Public must have want to know how the charity fundraising organizations spend their fund, money and resources obtained so that the public can decide whether those charity fundraising organizations are effective and efficient or not (Iwaarden et al., 2009; Murphy, 2007). This situation will lead the public on whether to donate on that particular charity fundraising organization or not. NPOs are having limited opportunities for generating additional income, but are faced with an ever increasing agenda of activities. Similar scenario occurs in Malaysia on the growing mission, roles and functions as a sign of importance of non-profit organizations in world daily life (Lightbody, 2000). In this context, the financial management processes of NPOs are generally subjected by conditions of resource scarcity.

In some cases, despite the large amount of charitable giving, there are signs that donors are not happy with the performance realized by charities (Iwaarden et al., 2009). Thus, it would give meaning that organization governance is more important than organization management. If organization governance is not well arranged, it is impossible to achieve good management. From this sense, nonprofits must solve governance above all, in order to realize rapid development.

Nonprofit governance is becoming the critical issue with regard to healthy development and realization of its mission. In a broad sense, nonprofit governance involves broader stakeholders, including donors, board of directors, managers, employees, volunteers, beneficiaries, associations, the government and community since these parties have a beneficial relationship with organizations. Nonprofit governance must harmonize the nonprofit with all stakeholders to realize scientific decision and power equilibrium, to achieve the organizational mission (Liu, 2010). Because of characteristics such as absence of owners, as well as separation of donors and beneficiaries, nonprofit governance is widely different from public governance and corporate governance. Since nonprofits are self-governed, boards are the core of governance activities without question. Board governance has become one of the hotspots of nonprofit governance for the last few years. Many studies were carried out to examine the role of board on firm's performance (Dalton, Daily, Johnson, & Ellstrand, 1999; Gu, 2009; Hodge & Piccolo, 2011; Kaufman, 2007; Neal, 2007; Pins, 2011).

However, most if not all of these studies were focusing on private sector. Currently, studies that examine the role of BOD in enhancing the performance of NPO is not widely available. Many scholars are implementing related in-depth and practice-meaning researches, including board pattern and efficiency, core competence, strategy making, member motivation, board performance and evaluation.

The market environment for civil society organizations has changed significantly over the last decade. Nonprofit organizations are finding themselves competing for societal resources and doing so are becoming serious business-like competitors. NPO are no longer live in a protected environment in which little is expected in exchange for financial support. The funding community, both government and philanthropy demand these nonprofit organizations to demonstrate their impacts on society and their cost-effectiveness, and to justify their support and special benefits in public policy. Donors claim more say over the allocation of the funds they contributed, and want nonprofits to be accountable and measure their performance and results.

These rising concerns are calling for reforms that transform civil society organizations to measure up to the standards of business, and to move non-profit sector further in the direction of the market. Therefore, donors who are increasingly paying attention as to whether nonprofit organizations provide transparency in their operations requires non-profit organizations to have a responsibility to their various constituents to be fiscally responsible and transparent in carrying out their missions (Elson et al., 2006).

Good intentions are no longer sufficient; indeed, numerous scandals of some major nonprofits have spoiled public trust towards civil society as in the case of American Red Cross and the United Way where excessive salaries paid to executives and board members at other nonprofit organizations are some of the actions that are raising concerns among the various constituents (Geer, 2009; Gollmar, 2008). Many people readily recall scandals involving the United Way of America in the early 1990s when the executive director misused funds and spent lavishly on business trips and the very similar and more recent scandals at the United Way of the National Capital Area and United Way of the Carolinas, during which the former executives misappropriated funds by taking salary advances and inappropriate reimbursement of business expenses and arranged for excessive compensation and retirement benefits. The American Red Cross has also suffered harsh criticism for not clearly communicating the use of contributions and for not deploying donor contributions for their intended purposes following 11 September and Hurricane Katrina. These incidents are easily recalled because the organizations involved have a long history and national profiles. However, accountability lapses appear to be much more widespread. Oversight of the fledgling U.S. nonprofit sector was originally provided by various religious organizations, but as the sector became larger and more secularized, this oversight was either no longer adequate or present, leading to gaps in accountability.

All these cases raise the concern by many parties and also affected nonprofit sector whereby now it has been under scrutiny from many parties such as funders, regulatory bodies, and the general public (Nava, 2009). Scandals such as inefficient management and the use of unlawful fundraising activities have raised questions regarding the governance and accountability of these organizations such as government regulation, public perception of nonprofits, requirement for membership in a national organization and evaluation by nonprofit funders (Gollmar, 2008).

(Shepeard, 2007) reported that approximately 2% of the $260 billion dollars donated to nonprofit organizations in 2005 was lost to executive director fraud, waste, and abuse. Thus, this causes the rise of nonprofit board of directors as one issue to be analyzed as the ineffective nonprofit executive director leadership can negatively influence client confidence, fundraising, fiscal performance, funding decisions by supporters, and finally the organization's ability to accomplish the mission.

In addition, the community sees that the donations for some nonprofit organizations from the local government budget are prone to be misused. Such as in the case of a religious organization as one type of non-profit organizations which is the administer of church confessed on stealing of $1.35 million of money donations for over 26 years from two churches that he had served (Afifuddin & Siti-Nabiha, 2010). Similarly, a lot of evidence claimed that religious organizations show a lack of transparency and accountability to the public, especially to their donors. Thus, eventually, in light of recent scandals and lawsuits, accountability is becoming increasingly important and is now being demanded of religious organizations (Nava, 2009). In other words, such donations given to the organization requires a supervision by the donors including society in large.

Charities have in the past not been concerned about stakeholder management and performance measurement and management. However, many people have come to regard the measurement of charity effectiveness and transparency as far more important over the past decade there was issue of dissatisfaction of donors with the current level of information provided by charities. It is therefore clear that most of them now realize that they have to pay more attention to these areas in order to survive to the future since performance of a charity is one of the major aspects to donors when deciding which charity to support. Donors are now requesting more information about what is actually happening to their money (Mitchell, 2009). In other words, donors would like to know in regards to the performance of non-profit organizations as overall. However, (Mitchell, 2009) found that the charity watchdog and rating groups emerged to assist donors in evaluating the more donation-worthy charities in which they compile public information for various charities into a searchable database often freely available through a web site.

(Nugent, 2008) claimed that both the corporate and nonprofit world were shocked by a series of abuses and illegal activities which led the nonprofit executive to respond to this changing environment and implement any reforms needed in the organization for the law and recommendations by government for nonprofit sector which requires greater accountability. (Nava, 2009) found that recent scandals affected executives in various ways and demanded a proactive response from them as claimed by impression management theory that executives are motivated to manage the image that others have of them in presence of scandal.

In addition, (Zietlow, 1985) claimed that the administrators of NPOs are generally regarded as poor managers of financial resources. The inability to manage financial resources effectively and efficiently by the management of non-profit organization is no exception for the independent religious mission agencies nonprofit charitable organizations which are being studied in this research. This religious organization is being included in the types of non-profit organizations as stated in the ROS. Past studies on accountability tended to focus on the role of accountability in improving the performance of private sector organization. Studies that examined the relationship between accountability and performance of NPO are not widely available.


This research is undertaken:

To analyze the types of financial management practices used by non-profit organizations

To examine the relationship between financial management practices and performance of non-profit organizations

To examine the relationship between board of directors effectiveness and performance of non-profit organizations

To examine the relationship between accountability and performance of non-profit organizations


This research relies on the framework outline by the resource dependence and agency theory to investigate the relationship between non-profit organizations and both independent variables. The following research questions are addressed:

What are the existing financial management practices used by non-profit organizations?

What are the consequences of the use of financial management practices on performance of non-profit organizations?

What are the implications of board of directors' effectiveness on performance of non-profit organizations?

What are the effects of accountability on performance of non-profit organizations?


This study will analyze three independent variables which are financial management practices, board of directors' effectiveness and accountability. Previous studies have examined the three independent variables in many dimensions. Previous studies have examined both accountability and governance aspect in non-profit organizations dimensions and it eventually gives notion to the management, board of directors and employees of non-profit organizations to improve towards improvement in both aspects. Therefore, from all the findings from previous researches done so far, it can be concluded that findings in this study could provide good contribution to the non-profit sector area. First, financial management practices in non-profit organizations for instance budgetary application which being studied should be valuable input to other researchers, therefore, this could be considered as a variable in knowing the factors in performance of non-profit organizations regardless in aspect of financial or non-financial. This reason arises due to aggregate amount of resources consumed annually by the non-profit organizations. Thus, the economists are pondering over the factor that can lead to efficiency or effectiveness of funds spent. Although there were some studies on non-profit organizations have been done previously, however, they have been performing to some segments such as only on educational, healthcare or religious nonprofit organizations. For this research, the segments are not restricted and the inclusiveness of all types of non-profit organizations is being explored.

Second, this research will also provide some general view on the debate over the appropriate objective and to make administrators of non-profit organizations clear on what aspect to be designate as priorities for the own non-profit organizations. Additionally, the findings will provide valuable information for interested observers who wonder if non-profit organizations are really different from ordinary businesses.

Importantly, this research will give background information into the current status of non-profit organizations in Malaysia as there are vast numbers of non-profit organizations in Malaysia. However, to date, not all non-profit organizations can sustain for a long time due to shortage of fund and resources. All parties need to consider the non-profit organizations as important as profit organization in terms of their operation effectiveness and efficiency and cannot let NPOs goes extinct and vanished since community generally cannot afford to live in better environment without realizing and indirectly receiving the benefits of NPOs. Hence, it is important to carry out this study to achieve the research objectives to able to know whether the factors have impact on the operation of non-profit organizations and indirectly guarantees a longer life.

Finally, this study is important for non-profit organizations to further explore and examine financial management practices, board of directors' effectiveness and accountability on financial performance of non-profit organizations. The research findings may be useful to non-profit organizations managers in general as they would endeavor to be effective managers and stewards and accountable of the limited financial resources given by the fund providers. For future non-profit organizations, the result can help non-profit organizations staffs and practitioners to develop new approaches in designing financial management system for the organization. For overall body of knowledge, the result can enrich the knowledge database for not only having profit organization area but also in non-profit organizations area. All these researches contribute to the existing overall body of knowledge, including the area of accounting and finance literatures on firm governance.


The dissertation consists of five chapters. The summary of each chapter is presented below:

Chapter 1: Introduction portrays the importance of nonprofit organizations and the growth of nonprofit organizations in Malaysia. This chapter also covers the research significance which covers the problem statements, the objectives and scope of dissertation.

Chapter 2: Literature review provides the reviews of development of nonprofit organizations, as well as the factors of performance which are the financial management practices, board of directors' effectiveness and accountability. This chapter also includes the theories used pertaining to the factors. This chapter also includes reviews literature on performance of nonprofit organizations. This section followed by the development of the hypotheses.

Chapter 3: This chapter describes the sample and research method used in this study. Next section consists of variable measurements.

Chapter 4: This chapter presents the analysis of findings from the research. The first section describes the demographic profile of the respondents and their organization. The second section analyzes the result of each hypothesis and it includes the discussion on this section.

Chapter 5: The conclusion summarizes the discussion with the analysis on the findings. Another direction and area for future research are also included.


This chapter provides the background of study which gives emphasis on the importance of analyzing the impact of financial management practices, board of directors' effectiveness and accountability in the perspective of the nonprofit organizations in Malaysia. Statement of the problems and the objectives of the study are presented in the next section. The next section highlights the significance of the study. The organization of the thesis was presented in the final section of this chapter.



2.0 Introduction

This chapter begins with the development of NPO in section 2.1 which includes brief literature on the definition of NPOs. Section 2.2 discusses the theories used in this study. Section 2.3 provides a broad context and literature relevant to performance measurement in NPO. Section 2.4 provides a review of financial management practices, board of directors' effectiveness and accountability by non-profit organisations. This chapter reviews the findings from prior research that examines the determinants to financial performance and non-financial performance of NPO for variables financial management practices, board of directors' effectiveness and accountability.

2.1 Non Profit Organizations

NPOs have unique definition which is different with profit organization. NPO is defined as charitable, tax exempt, voluntary, and independent, private and institutionally separate from government even though some of their sources for finding come from government (Uzonwanne 2007). Another characteristic is absence of shares, thus, leads to absence of dividend to be paid or to be distributed (Dotan 1998). Therefore, any financial surplus earned by organization cannot be distributed to the donors or equivalents; the profit has either to be reused in operating activities or to be donated to other NPOs with proper documentation (Uzonwanne 2007, Seo 2011). As generally known, those organizations fundamentally contribute to public sector by providing services and assistance. In simple words, nonprofit organizations are known as a unique set of organizations that are mission and not profit driven (Dotan 1998, Murphy 2007). Voluntary organizations, another name for NPO, especially the smaller ones established at local levels are normally depends heavily on the supply of donation goods, cash and involvement of individuals who are volunteers, with little or to some extent without reliance on professional paid staff (Soobaroyen and Sannassee 2007). Whilst a number of labels are used to describe non-profit organizations, the term voluntary organizations selected in their study is to imply a more neutral and broader set of characteristics which namely organizations made up of individuals who are freely associated themselves towards achieving a common objective, collective individuals who make decision for NPO directions, agendas and actions as well as those individuals who are not seeking remuneration or monetary returns for their time spent or resources invested in pursuance of the NPO's objectives.

In some cases, the words of NPOs and NGOs are interchangeable because the characteristics are almost similar. There is no standard definition of NGOs by (Awio, Northcott et al. 2011). NGOs have been described as extensive in, for example, size, functions, views, standards, strategy and tactics. This definition is used by those researchers in initiating their research. In addition, hospitals, community welfare centers, political parties and private schools are not included in nonprofit organizations according to the Korean Nonprofit or Nongovernmental Organizations Support Act, unlike in US whereby it is allowed to have NPO which supporting specific political parties or elected officials (Seo 2011).

The role of nonprofit organizations is increasing in the United States where they are filling the gaps when the service is absence by government (Olinske 2009). This ever expanding role of nonprofit organizations has created an interest in the organizational and leadership dynamics of such entities. Those services include programs that protect, maintain, and enhance the personal well-being of millions of individuals who would otherwise suffer from the lack of federal or state allocated resources or assistance and some of them found that those organizations are viewed as their last hope when their lives are turned upside down such as in the case of national disaster, Hurricane Katrina that devastated New Orleans, Louisiana, and parts of Mississippi and Alabama in year 2005 (Shepeard 2007).

Since the NPOs numbers have grow continuously, the expectation for information and greater transparency in programmatic and financial operations are also rise which has lead to the increasing of accountability demands from nonprofits by government through greater regulation (O'Dwyer and Unerman 2007, Mitchell 2009, Nava 2009). Those demands have directing many leading NPOs have called for initiation of better governance procedures as greater levels of self-regulation. Moreover, this self-regulation improvement on accountability in nonprofit organization is increasingly being emphasis and promoted since one council named The Evangelical Council for Financial Accountability (ECFA) has been established as one attempt in promoting this self-regulation.

There was a significant development continually being occurred on nonprofit organizations. One independent study as cited in (Gollmar 2008) provides evidence that there was an increase in the number of organizations of 74% between 1987 and 1998. Gose stated that there were 800,000 nonprofit organizations in United States by year 2005 (Gollmar 2008). (Smith 2010) reported that the number of organizations has almost doubled to more than 1 million organizations since 1996, thus, these numbers have undeniably signify the importance of NPOs in United States in addition to the significance of the valued public services provided to the citizens and as the place where millions of people work or volunteer.

2.2 Theories

2.2.1 Resource Dependence Theory

(Froelich 1999) argues that NPOs normally do not generate revenue the same as private companies usually do. These organizations generally rely on funding from variety of funding sources in order to operate. It is known that NPO rely on various donors such as fund-raising, grant and other funding to stay continue operating and performing mission and objectives of organization. This resource reliance makes the organization relate to the resource dependence theory.

According to resource dependence theory (Seo 2011), dependency characteristic on critical resources influences and gives significant impact which leads to diverse actions and behavior portrayed and acted by organizations. The practitioners are inclined to spend and give a lot of attention on the practical aspects to depict the accountability image. Results indicate that local nonprofits are more likely to adopt legal and financial accountability mechanisms such as filing the IRS Form 990 and having a board approved operating budget, apart from having those practices include financial recordkeeping and program outcomes (Geer 2009).

Organizations that depend on diverse sources of funding will be concerned with various voices from funders and stakeholders, thus, it does significantly influence organization's goals, missions, behaviors and roles of the organization. As for organizational behavior, specifically on the organizational structure, the organization tends to have formalization hierarchy managerial factors in decision making as the result of resource dependence patterns (Seo 2011). Resource dependence which is viewed as environmental factors can affect organization to have formalization system and it can be visualized by the amount of written rules and regulations. In order to satisfy the stakeholders, the organization makes an effort to create favorable situation to present the organization. Favorable condition of organization is crucial since it is among the condition in obtaining the resources. In other words, the established power the donors have does influence many organizational activities. In general, for-profit and nonprofit organizations make an effort to obtain adequate resources that they need which some of them are through the change of their structure and actions in order to reduce the influence of environment (Bryant and Davis 2011).

(Twu 2007) examines the effects of task environment on the organization structures as well as highlights how managers strategically obtain and secure crucial resources to maintain organizational survival as being claimed in resource dependence theory. This theory emphasizes the organizational necessity of adapting to environmental uncertainty, coping with problematic interdependencies and actively managing or controlling the resources flow because nonprofit organizations are accountable to various stakeholders such as their clients, donors, board of director, community in general (Geer 2009).

Cleary 1998 argued that there is an increasingly pressure in competitive funding environment, along with the growing expectation that donations through fundraising ought to come from the private sector such as business (Irvine 2011). Raising money from the public had become more difficult; in addition to scarcer Government funding along with restrictive requirements imposed such as accrual accounting was required for various reports necessary for government grants. As being claimed in resource dependency theory, leaders' awareness as institutionally acceptable image should be maintained and enhanced if the organization were to appear legitimate to those on whom it relied for funding, specifically the state and federal government, corporations, social services, fundraising and the general public. This organization which relies heavily on the external source of income for the maintenance of funding levels to fulfill this mission and the ongoing successful operations, they need to protect the image in which regarding the financial matters, adoption of accrual accounting is contributing much to better image. However, it did not only functioning as powerful image enhancer, but also a technical benefit is expected from the adoption of accrual accounting. Consequently, in order to establish and maintain legitimacy as worthwhile recipients for charitable dollars, not-for-profit organizations like Hearts & Hands were also adopting the structural forms and cultural practices not only for government and general public, but also for the corporate world to demonstrate resource dependencies (Irvine 2000). Besides, (Hodge 2006) findings prove in consistent with the resource dependence theory whereby the organizations are observed to develop a board structure that supports the financial needs of the nonprofit organization.

Indeed, an organization depends on a variety of resources for their survival, success, or high performance, such as reputation of individuals or groups, information, political support, legitimacy, and technology besides financial resources (Seo 2011). This argument is in line with the resource dependence theory that suggests that to enhance NPO efficiency, NPO will create distinct structural features such as larger size of board of directors (Dalton, Daily et al. 1999) and also adopt particular fundraising strategies such as professional fundraising (Callen, Klein et al. 2010) that will help develop connections with institutional funders to secure funding support. This theory suggest that when the NPO rely on external funders for raising revenue and under pressure to improve their performance will tend to employ more rational decision-making processes (Nemati, Bhatti et al. 2010) and then it will lead to proper financial management practices and good financial system used by NPO (Geer 2009). Through the social network that board members belong to, they are able to secure the resources that otherwise could not have been available (Bryant and Davis 2011). The board is able to provide linkage to the organization's major financial bankers and brings into the organizations different kind of expertise that is beneficial to the organizations (Bryant and Davis 2011).

(Twu 2007) added that the concept of interdependence in resource dependence theory can also be applied in the board of directors' variable which emphasizes on how board of directors and management of nonprofit organizations can build connections or linkages with members of other organizations for acquiring capital resources and influencing the use of different performance measurement standards. This study also contributes to the perspective of resource dependence by providing proof that to enhance fundraising efficiency, nonprofit organizations choose to create distinct structural features such as a larger board and adopt particular fundraising strategies such as special event that can help to develop connections with institutional funders to secure funding support.

(Irvine 2011) noted that the organizations also implement a proper accounting provided in accordance with organizational expectations as internal accountability, based on a culture of good stewardship to show that resources were to be used wisely and well. Accordingly, external accountability was fulfilled by means of the annual report and certified financial statements by independent auditors as mentioned in Sarbanes-Oxley Act of 2002 (SOX) Section 302 (Bryant and Davis 2011) and there was a strong emphasis on operating within budgetary constraints. The change in accounting practices was being implemented from cash based accounting since there were complain that the accounting information exist in the system currently was unreliable, inaccurate and late was transmitted to them from various centers. Thus, the organizations made a move to change to accrual based accounting that is timely manner of financial information. (Geer 2009) This is especially due to the fact that funding is the key reason why organizations adopt these legal or quasi-legal accountability mechanisms within their agencies. Finally, result of study done by (Geer 2009) support the hypotheses based on resource dependence theory that organizations are more motivated to adopt accountability mechanisms with greater degrees of organizational interconnectedness, external dependence on pressuring constituents, social legitimacy achieved, economic gain and legal coercion.

2.2.2 Agency Cost Theory

Agency theory deals with the separation of ownership and control of the firm's assets (Callen, Klein et al. 2010). NPO face the same problem in managing agency cost due to absence of owners where managers are largely free from outside discipline which creates the risk of managerialism or in economist term is managerial agency cost (Bryant and Davis 2011). This managerial agency cost makes organization relate to the agency cost theory. This theory suggests that the principal-agent problem, in this case funder and management of NPO, or so called potential conflict exist because of under conditions of incomplete and asymmetric information when a principal hires an agent.

Agency theory suggests that a major board function is to monitor costs and the allocation of resources. In this respect, agency theory views the administrative function of monitoring and controlling top executive decisions and actions as the primary function of the BOD. Agency theory generally states that the agency costs associated with managerial conflicts of interest are held in check by the BOD as the delegate group of the stock owner corporate principals as a whole. The agency perspective suggests that board monitoring will have an impact upon organizational costs (Callen, Klein et al. 2010).

Consistent with this argument, the board must provide mechanisms that separate its monitoring function from management's implementation of the organization's goals. Within profit organizations, various mechanisms have been used to align the interests of the agent with those of the principal. (Callen, Klein et al. 2010) mentioned that NPOs can use mechanism structure such as the inclusion of non-executive directors on board directors, the inclusion of major donors on board directors, others such as the use of compensation and audit committees similarly practiced by for-profit organizations in order to protect the interest of funder.

Thus, according to normative agency theory, corporations should either increase monitoring, control and oversight of management by having board of directors or increase incentive structures that align the interests of funders and management such as financial outcome based incentives. The logic behind these prescriptions is to ensure that management's self interests will be aligned with the principal owners' interests.

(Geer 2009) argued that accountability issue can be based on agency theory since there are several parties involved during the operation of nonprofit organization. There are parties who are working in the organization and there are parties who are organization held accountable to, for example the donors and society in large since they are the funding provider and beneficiries, thus, giving a notion of conflict of interest among those parties. This situation gives rise on the concern of how to fulfill the accountability which are using mechanisms such as reports and evaluation.

The theory used in corporate governance is to explore the relationship between board performance and organizational performance. The theory suggests that there is a conflict relationship between the board of directors and the management team as the top management's self-interest behavior is not aligned with the interest of the stockholders. Thus it is the duty of the board of directors to monitor the management team to ensure that the interests of the stockholders are protected. This is supported by that non-profit organizations rely heavily on the board of directors' governing role which are providing leadership, strategic guidance, financial oversight and resource allocation for financial and non-financial matters for the benefits of organization (Shepeard 2007, Hodge and Piccolo 2011).


The donation for nonprofit organizations in some cases depends on the performance achieved by the organization (Iwaarden, Wiele et al. 2009, Afifuddin and Siti-Nabiha 2010). Funding organizations will require financial information in decision making on the funding of NPO the funders wanted to grant (Huang and Hooper 2011). (Irvine 2011) showed that NPOs are practicing good financial documentation by preparing the financial statement and audited financial accounts which they regard as their common types of financial information that can be presented to the funder organizations. Khumawala and Gordon (1997) stated that individuals donors are using financial statements prepared in donation decision making especially information in revenue, expenses, program, fundraising and administrative expenses information (Roberts 2000). In process of choosing the organization to donate, they will measure the nonprofit organization performance either in terms of financial or non-financial.

The choosy attitude of donors is the cause of an increasing number of profit and without left out, those non-profit organizations to employ performance management system such as the Balanced Scorecard (BSC) in order to obtain better organizational results (de Waal 2010). As stated before that performance of organization can be measured either in financial or nonfinancial element, thus the organization needs to have clear and formalized responsibility structure which a clear management style, clear tasks and responsibilities are defined.

(Lin 2010) argued that performance evaluation is a difficult and complicated task in any organization especially for nonprofit organizations in which those organizations have unique characteristic of combination of financial and non-financial dimensions. In the real world, the conflict of priority of performance elements among the organizational members and of political interests by in-and-outside stakeholders make it difficult to define what performance means and measure the size of performance. The insufficiency of resources negatively involves the managerial autonomy, organizational performance, and the continued existence of the organization (Seo 2011).

Measurement is a critical issue in all organization regardless either for-profit or non-profit organization. The concept of performance is complex and multidimensional, therefore, there is no best way to define and measure it. Performance is defined as attaining organizations' established purposes effectively and efficiently or productivity eventhough the concept of organizational performance is more than measuring effectiveness, efficiency, outputs, quality and equity today (Seo 2011). More specifically, performance is conceptualized through interaction among various measurement criteria which is target goals, outcome, objectives, purposes, and missions. (Lin 2010) argues that NPO input and output can be measured through accounting information that allows nonprofit managers to compare key variables such as revenues and costs, and eventually to conduct further financial analysis. Beside, (Lin 2010) argued that a set of criteria is developed to evaluate an organization's socially oriented performance such as organizational growth.

(Seo 2011) added another perspective which is the acquisition of valued resources successfully obtained as one of indicator of success or high effectiveness of an organization in the systems resource approach. Resource could be described as tangible or intangible something that organizations need for interactions with the environment and something that organization get in an exchange with others. (Beard 2012) measured the financial performance through the total revenue successfully received by the organizations. Nobbie and Brudney (2003) identified financial viability as another performance measurement (Lin 2010). In addition, Frumkin (2001), Ritchie and Eastwood (2006), Ritchie and Kolodinsky (2003) include administrative or total expenses successfully achieved by the organizations as one of financial performance measurement (Lin 2010). (Seo 2011) added that both internal and external measures are significant in measuring organizational performance. Measuring organizational performance should consider the views of both external stakeholders and internal employees. In addition, it can be measured by financial measurement such as revenue of organization, revenue growth, profit margin, cost reduction.

(Kinyua and Lewis 2009) stated that the success of an organization is depending on the effectiveness of vision and competencies of leaders in organization as well as depending on the knowledge and skills of organization human resources in overall. It also gives emphasis on the review of some common job duties and knowledge, skills and abilities (KSAs) for contemporary non-profit leaders such as planning, motivating, organizing, decision making, delegating, coordinating, reporting, supervising, managing finances, and fundraising. Another necessity in an organization that may help to improve the performance is accountability as behavioral dimension which imply the degree of organizational members actually feels responsible for the performance and the willingness to use the system to obtain performance information.


Numerous articles elaborate on the importance of performance of the NPOs. In this respect, the performance is being measured and focuses on organizational performance and not on individual performance. This is due to the donors and investors who are more inclined, willing to place their donation and money to the organization that are effective and efficient in their operations and daily routine (Scholten, Scott et al. 2010). A declined in funding and availability of grants as fund collection combined with financial distress can significantly related to the ability of NPO to continue in providing services (Feng 2010). The donors would like to have their money to be worth being placed there (Iwaarden, Wiele et al. 2009, de Waal 2010, de Waal, Goedegebuure et al. 2011). This issue is the cause where now the organization is now increasing the emphasis on the performance measurement for knowing their performance regardless in terms of either financial or non-financial aspect, development of skill and competencies, and improvement of customer care and process quality. The performance measurement has been defined as the process of measuring their operation where the organization going as per NPO objective being established and measuring their operation through performance indicators in order to take corrective action when necessary (de Waal, Goedegebuure et al. 2011).

(Lin 2010) argued that performance is hard to define for any organization, particularly for nonprofit organization. Performance is the action or process of carrying out or accomplishing a task, function, or mission, and organizational performance is therefore dependent on objectives and missions assumed by organizations. It is argued that the multiple services and goals however make the performance of nonprofits more ambiguous. Organizational efficiency and effectiveness are key components of organizational performance in the RDT. Organizational effectiveness is conceptualized by the relationship between organizations and the external factors; on the other hand, organizational efficiency is a criterion for specifying internal management of organization. (Shepeard 2007) stated that the director needs a board to establish policy and measurements in ensuring the nonprofit is operating effectively and efficiently.

(Seo 2011) mentioned that given their great resource scarcity, nonprofits' autonomy in the processes of decision-making and goal-setting is likely to be reduced. The degree of competitiveness to obtain critical resources can directly or indirectly affect organizational behavior and performance. Competition for resources makes nonprofit organizations more dependable on in-and-outside stakeholders that control needed resources. Organizations are likely to change their decision-making and goal-setting to meet the demands of stakeholders. Such competition for critical resources has been strong in both the American and Korean nonprofit organizations.

In general, performance can be operationalized by the following dimensions: efficiency (or productivity), effectiveness, quality, and equity in the modern nonprofit organizations. Boyne (2003) proposes dimensions for assessing performance which is through consumer satisfaction (Seo 2011). Another author provide another measurement should be more concerned with are nonprofit organizations major stakeholders' including individual funders, private companies, government agencies, citizens, and clients desire, dissatisfaction, and complaints above economic values on measuring their performance (Berman, 2006; Carnevale and Carnevale, 1993). Another measurement is through image portrayed by the respective organization. Measuring organizational performance is explicitly or implicitly related to what the organization attained through goals, missions, targets, or objectives.

Prior research has been trying to identify different dimensions of organizational performance for nonprofit organizations (Lin 2010). Forbes (1998) identified goal attainment and client satisfaction as nonprofits measurement while Shoham et al (2006) suggested that performance should include external dimension such as stakeholder satisfaction and mission achievement (Lin 2010). As for non-financial dimension, a set of criteria is developed to evaluate an organization's socially oriented performance including stakeholders' satisfaction and in terms of accomplishing goals and missions established by nonprofit management for the organizations (Lin 2010). (Gollmar 2008) argued that nonprofits have no stock and no profit to serve as measures of organization effectiveness unlike profit organizations.

(Mitchell 2009) Effectiveness is many times defined as attainment of goals related to the mission of an organization. However, efficiency in nonprofit organizations is not always measured in the traditional sense of the ratio of outputs and inputs that would be seen in a for-profit organization such as a manufacturing facility. Other terms used to describe the effectiveness of an organization were outcomes, impact, or success rate. However, number of individuals served is not on the concern, but it is more concern on the result of services provided by the nonprofit organization that expected to be in the positive direction into better for individuals.

From previous researches, as the performance is being measured in a systematic way, it leads to better commitment through resource allocation and performance reporting by organization. Thus, it can be concluded that organization that establish performance measurement to evaluate their performance would have a positive significant impact on the customer satisfaction as the organization beneficiaries.


Study carried out by (Zietlow 1985) discovered that the administrators of NPOs dealing with religious foreign mission agencies are generally regarded as poor managers of financial resources. The findings also discovered that the financial management practices adopted by religious foreign mission agencies were fund accounting and financial reporting, and asset management, financial planning, cash management, fund raising management, capital budgeting, portfolio investment strategy and cost-benefit analysis as the tools in governance in NPOs operations. This paper claimed that goal programming which considered as one of financial management techniques is extremely helpful in budgeting and working capital applications, hence, NPO would find this technique helpful in coping with the multiple objectives which are stated in financial terms and non-financial terms.

In the research carried out by (Keating 2001), it described various financial analysis techniques and how they apply in the nonprofit setting. These techniques are peer benchmarking, trend analysis, comparisons in relation to the budget, profitability measures, liquidity ratios, measures of financial distress or vulnerability, activity and efficiency measures and compensation issues. Another related technique which being suggested is risk-benefit analysis might give society better environment but at considerable cost or risk depending on the nature of NPO. At the same point of view, the author suggesting that there are multiple objectives NPO wants to achieve. NPOs would wanted to do well where their mission is to determine the needs, wants and interests of target markets or customers and to deliver the desired satisfactions more effectively and efficiently than competitors in a way that preserves or enhances the consumer's and society's well-being. It is expected to be helpful in meeting the objectives and mission target items financially such as profits, market shares, sales growth and other performance indicators.

This is consistent with to research by (Soobaroyen and Sannassee 2007) that has focused on examining the financial management practices in locally established voluntary organizations in developing country which is in Mauritius. Those voluntary organizations which are regarded as non-profit organizations use financial or control practice to convey the image as their organizations' legitimacy that decisions are done objectively which the financial management is managed by a layer of structures who are financial committees and management committees and then the processes approved by committees and members meetings since they are financially dependent on one source of funding comes from members or donors. As mentioned, among the procedures are financial budget preparation, participation, dissemination and approval among the members which these are considered as voluntary practices either for cost or revenue estimation. Budgeting is one strategy used by organizations to influence the probability that people will behave in ways which lead to the attainment of organizational objectives (Abernethy and Stoelwinder 1991). It is the main financially-orientated strategy for planning and controlling organization activities. The result proves consistently with the resource dependence theory that the non-profit organizations which are externally funded needed to practice good financial management at least financial budget report to convey the image that the decisions on the fund are not taken lightly.

This is supported by other study that indicate the local nonprofits in their findings are more likely to adopt legal and financial accountability mechanisms such as filing the IRS Form 990 and having a board approved operating budget, apart from having those practices include financial recordkeeping and program outcomes (Geer 2009) due to accountability towards numerous stakeholders such as their clients, donors, boards, the community at large. In addition, they are completing and publishing financial records and program evaluations with hope that they are perceived as favorable by the funders.

(Paisey and Paisey 2011) have studied on the financial management exercised in the church in Aberdeen, Scotland as one of religious institutions. It has been identified that there is lack of accountability and neglectful of duties within the cathedral as the church priest who was in position and has authority in church. It has been found that many cathedrals were poorly educated thus; it leads to problem in recruitment and retention. Nonetheless, the existing records show that accounting was central to the functioning of the church and that the records were important to its meticulous financial management though essentially quite simple. In addition, the Constitutions provide some evidence of significant budgetary activity in the church since budgeting is a key planning and control tool in nonprofit and obviously for profit organizations (Beard 2012).

(Greiling 2010) continued to study on balance scorecards used in NPO as financial management practice despite the lack of research on this aspect. The results show that financial measures play an important role in non-profit organizations. Findings noted that balance scorecard is being used as performance measures in financial perspective which beneficial in improved financial results in the long term such as measures like liquidity, cash flow and in terms of resources allocation. Regarding the elements of the balanced scorecard, they confirmed that balance scorecard has stronger consideration of non-financial drivers for performance as the respondents indicated that was a very helpful instrument in terms of strategy-focusing process and recipient satisfaction. In other words, the balanced scorecard which comprehensive since it comprises of financial and non-financial management components can be helpful in performance of NPO. The majority of the non-profit organizations interviewed use the balanced scorecard because it is regarded as a modern management tool and it helps to create legitimacy. They argued that the balanced scorecard may have a double function. First, it helps to increase trust in the management of a non-profit organization and therefore it may serve as a signal that the management is up-to-date with modern management tools. Second, it may also add to the legitimacy of the major financial resource providers because they can communicate to their own key stakeholders that they have making the effort in delivering efficiency in societal goals. Thus, this management tool can improve the image of NPOs where it helps in obtaining fund.

(Tyler 2005) suggested that benchmarking has great potential benefit for the non-profit sector, particularly given the reliance of non-profit enterprises on effectively utilizing human capital, thus it might be expected that this practice would be helpful in assisting organization in improving their performance, in addition to the lack of available resources to meet the needs of objectives of non-profit organizations. This paper is examining on Australian non-profit sector. This practice is considered as effective way of establishing goals and objectives, more efficient way to make improvements than trial and error, helps organizations to make improvements faster, has the potential significantly to improve organizational performance, can lead to improvement in understanding and meeting the needs of customers or clients and enables organizations better to meet the needs of their stakeholders and for continuous improvement. Given the importance of the sector, it is vital that benchmarking be promoted as a way of improving organizational performance.

In this article, it has been shown that good communication as behavioral dimension could lead towards better performance. Communication can take place in different mode which top-down communication, bottom-up communication or horizontal information exchange. It has been defined that communicating on the direction of organization, guiding on the operating activities and the results desired to be achieved are among the elements of the effective performance management since it is information needs to be communicated to the stakeholders including employees (Dumont 2010). Similar with other organization, non-profit organizations also has budget prepared as one of the results to be achieved and as part of the measurement. (de Waal 2010) mentioning the finding results which supported the view that good communication such as exchanging information about problems, corrective actions and lessons learned without excluding budget information as communication element will be able to help in improving the overall quality of the company and fosters performance-driven behavior.

Since the restriction in requirement by government grant is increasing and becoming more complex, thus organization tend to improve their system as advised by an external consultant such in the case of Heart & Hands organization which had already tried to adopt some new management accounting practices after employed a cash-based system for a long time since beginning (Irvine 2011). However, the new practices, accrual accounting required more expertise and recognized the necessity of a more highly developed accounting skill set for recording and reporting purposes in which the organization itself face more significant problem where it was lacking in many staff. Hence, these factors had contributed to the employment of a professionally qualified chief accountant. In addition, since they tried to change their system, thus they also realized the need and had faced a clash of cultures in that process in which the organization need to improve their computerized accounting system. The appropriate accounting system developed will generate the more reliable and accurate figures and