The Non Profit Organizations Accounting Essay

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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 shows the enhancement of financial performance of the organizations (Irvine 2005). The result of this study supports others' view as this research highlighted on financial expertise and personnel training in organization in order to attain a high degree of efficiency.

Accounting systems can be used and incorporated to further the church's mission in a pragmatic way and that accounting can have an enabling potential in the church context (Paisey and Paisey 2011). More expertise is required to practice the financial management that will enhance the financial performance (Irvine 2005). However, some organizations used non-accounting staff in managing accounting information including for budget participation. While in research by (Greiling 2010), they mentioned that a risk management system is helpful to some NPOs, (Soobaroyen and Sannassee 2007) stressed about the necessity of a good computer system. Besides budget preparation and other aspects, the study noted that they are strongly placing the effort in meeting the statutorily defined responsibilities including keeping proper records, filing accounts with the regulatory authorities and donors where appropriate as well as ensuring the organization's solvency to be considered as a commitment towards legal responsibility, accountability to the association and its members as well as fulfilling stewardship role towards the shareholders. As all these aspects are being examined, it indicates that those elements represent concern in financial management practices to be looked upon.

The research has emphasized those NPOs which practicing financial management such as above eventually leads to better overall performance of NPO. Thus, it is important for organizations to have such trait to be able to achieve maximum potential benefits and to be able to provide services to its stakeholders because good performance will indirectly guarantees a longer life of its organization.


Effective nonprofit leaders must have a widely varied skill set. (Shepeard 2007) stated that nonprofit leadership effectiveness has initiated from the board of directors and the governance process in which mission and direction of organization lies on them both from aspect of legal and moral. Beside, the main in the governance process are the task of strategically guiding the mission through establishing policies, establish measurement to ensure the evaluating objective goal attainment, raising funds to ensure the survivability of the organization and making tough decisions about allocation of resources to support the needs of beneficiaries. (Olinske 2009) added among the role of good nonprofit leader are continually assess financial and program achievements against performance measurement established, all while motivating others to embrace the vision and move toward it too.

Every nonprofit board member has different perspectives and different motivations that draw them to nonprofit service. Ideally, board members are recruited based on the particular skills needed by the nonprofit organization and the network within the community they possess. Board members help make connections within the community to various sources of funding and support as well as contributing their business skills or passion for the work of the nonprofit (Bryant and Davis 2011). Board members are responsible for the achievement of organizational goals, both financial and program related. The members are often people of influence in the community with the capacity to financially support the organization.

(Olinske 2009) added that the management and board relationship is crucial to effective nonprofit organizational leadership. The nature of the relationship between the executive director and board of directors is a fundamental aspect of the success of the nonprofit. This relationship lies the meaning of cooperation between management and board to obtain input to support decision making.

Researchers have spent years studying different models and methods to measure a nonprofits' effectiveness through its board's performance (Shepeard 2007). Study carried out by (Hodge 2006) studied the extent of board effectiveness roles and impacts as governance on overall financial position or financial vulnerability of the non-profit organization. One of them is whether board has influence towards the primary funding sources in the organization as predicted in resource dependence theory. Thus, they hypothesized that board of directors' effectiveness has direct impact on organization's overall performance both in terms of financial management and services delivery. The result supported that board effectiveness is a significant positive predictor of organization long-term financial health and was identified as statistically significant. Thus, all these support the view that governing board was shown to play an important role in determining the financial position of the nonprofit organization.

(Trautmann, Maher et al. 2007) in his study claimed that the transformational leadership has been shown to improve the financial performance of organizations as well as to increase overall organizational effectiveness as they assert that this type of leadership has been demonstrated to have positive affect followers' performance particularly in motivating followers to exceed performance expectations. Besides, accountability aspect is being demand and of concern by many due to economy uncertainty and fierce competition in terms of funding, skilled staff, dedicated board members, clients and the attention of the community (Murphy 2007).

(Elson, O'Callaghan et al. 2006) conducted a study to examine the corporate governance practices in religious organizations fiscal oversight and financial management practices in the local church. The findings reported that some churches used ushers, deacons, finance teams, the treasurer and various other personnel and to some extent the board members also involved in collecting the offerings during church services. Furthermore, for those churches that used a budget, 94 percent of respondents reported that their budget was approved by the board prior to the start of the church year. The results showed that churches do have adequate fiscal oversight and financial management controls whereby they have independent board of directors with a financial expert and documented policies and procedures.

(Smith 2010) argued that eventhough Sarbanes-Oxley Act of 2002 (SOX) legislation only apply to public companies, as the third sector, this legislation gives quite an impact to this sector (Bryant and Davis 2011). This new legislation increased responsibilities on the board of directors of public companies to improve their governance practices by having the financial expertise and independence needed to oversee their organization management performance. (Elson, O'Callaghan et al. 2006) mentioned that some non-profit organizations provides transparency of operations and some organizations went a step further by contracting for an internal controls audit to be performed by an independent accountant as part of the organization's efforts to voluntarily comply with SOX which resulting to good performance of organization. The organization reported about 71 per cent of the churches had been obtaining revenue of $300,000 meanwhile about 75 per cent churches had 300 members as of their most recent year end.

(Liu 2010) is in opinion that nonprofits required higher inside governance standard because of lack of an active control market, thus boards are considered the core of governance activities. In addition, services offered are complex and nonprofits lack a performance evaluation index such as profitability requires the board governance skills to be very high. Board will perform their roles better in fundraising and policy making matter and in terms of overseeing executive as well as organization performance in if responsibilities of board are clarified. It has been indicated that good board governance will help nonprofits improve reputation and will accord with requirements of public interests. Thus, it can be predicted that board governance is closely related with organizational development which it will bring heavy strikes that may destroy organizations if the board governance is in serious trouble.

(Kong 2010) argues that the quality of leadership exercised at the top by their presidents, CEOs, or executive directors is the most crucial factor on nonprofit organizations performance. The capabilities of nonprofit leaders and managers to deal with accountability and responsiveness to stakeholders' needs and the public interest become important especially when dealing with a variety of stakeholders with different expectations. The directors capabilities in managing external relations becomes especially important to nonprofit organizations since there is high demand for transparency and accountability and increase in collaborative arrangements with organizations from other sectors.

Nonprofit hospitals are included in the nonprofit organizations which were also known as missionary or religious organization (28%) in Lebanon apart from private (67%) and government hospitals (5%). Governance is the system by which organizations are directed and controlled (Jamali, Hallal et al. 2010). Most hospitals have their own governing board and a professional team of executive managers which composed as to perform function of steering the overall operations, leading to effective performance of a hospital, defining the hospital's mission, setting its objectives, supporting and monitoring their realization at the operational level besides board members usually volunteer out of the desire to serve the community. Result of the study supported the view of (Eeckloo, Van Herck et al. 2004) which claimed that the board role are involving in clinical auditing, dealing with conflict effectively, managing risk and supporting policies that encourage open disclosure and a patient focused approach. As supported in (Jamali, Hallal et al. 2010) better governance would boost the performance of even family-owned hospitals, simply because better governance would help reduce costs and optimize operations, not to mention the favorable effect it would have on brand name and reputation in a fierce consumer-oriented market.

Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders, and should facilitate effective monitor (Kamardin and Haron 2011). A focus on board performance is required, as several studies concerning the relationship between board performance and firm performance have shown a positive relationship which indicates the importance of the BOD in providing effective board performance to ensure higher firm performance. It is expected that the influence internal corporate governance mechanisms on board performance will have some impact in executing monitoring roles on the roles played by the board of directors and suggests that non-independent non-executive directors have relevant incentives to monitor management decisions and evaluate management performance.

(Lin 2010) argues that variation in board composition and governance is likely to influence the structure and functioning of nonprofit organizations, and ultimately affects organizational performance meanwhile (Rudolph 2009) claimed that lack of accountability can be very detrimental for nonprofit organizations including churches, for instance lack of financial practices or the personal behavior of leaders. Organization with accountability are organization which able to determine on whether they have used the fund properly. Furthermore, it has been asserted that level of accountability within an organization may affect the organization's future viability.

The research has emphasized that NPOs which having sound corporate governance and good accountability aspect such as healthy board of directors eventually leads to better overall performance of NPO. Thus, it is important for organizations to have good corporate governance and accountability mechanism to be able to achieve maximum potential benefits and to be able to provide services to its stakeholders because good performance will indirectly guarantees a longer life of its organization.


The accountability concept is important for all organizations to know without excluding nonprofit organizations. For Malaysian nonprofit organizations, there are two main regulators which Companies Commission of Malaysia and Registrar of Society. Companies Commission of Malaysia as one of the regulator for nonprofit organizations has played their role in disseminating the importance of accountability concept through their activities held for the nonprofit organizations personals (Laundering 2011) The CCM conducts a Corporate Directors Training Program and Annual Dialogue sessions to promote transparency, accountability and integrity of NPOs. As accountability concept begins to develop, meaning of term accountability also begins to have improvement which is from being held to account which enforceability to giving account answerability. Besides, translating these major changes and challenges into practice also resulted in a wave of accountability initiatives. Thus, numerous codes and ethics have been developed to provide general accounting principles for nonprofit organizations within the context of governance.

There are many definitions provided on accountability. One of the definitions is an obligation to give an account , the quality or state of being accountable or defined as an obligation or willingness to accept responsibility or to account for one's actions (Merriam-Webster dictionary), further expanded by quality of being accountable, liability to give account of, and answer for, discharge of duties or conduct (Oxford English Dictionary 1989). In other words, enforceability which means accountability did not mean being held to account but answerability which means giving an account, for some people and organizations engaged in corporate responsibility issues. In this, it is important to note that accountability does not have a single or even a generally agreed definition.

(Geer 2009) argues that accountability is most commonly considered in relationship to financial matters. Organizations are expected to pay more attention on representing the image of accountability such as financial record keeping and program outcomes. Larger NPO that conduct program evaluation provide reason of the motivation of why they are performing financial audit which want to compete for financial resources as well as want to highlight on the efficiency and effectiveness of their programs. They view financial audit as a symbol of support for the impact of their programs and services.

According to (Nahar and Yaacob 2011), generally, accountability shows a relationship between two parties in which one party either individual, group, company, government or organization is directly or indirectly accountable to another party for something, whether it is an action, process, output, or outcome. (Edwards, Hulme) defined further in broader view where the accountability can be categorized in several types which are upward accountability which is to government, regulators, donors and the public at large as well as downward accountability which is to partners, beneficiaries and clients. Other than that is horizontal accountability which is towards the other nonprofit organizations. Such definition is consistent to the elaboration given by (Nahar and Yaacob 2011) in which the accountability is thus imperative for such entities to ensure public confidence and trust as well as continuous flow of funds to support their activities and survival.

Laws and regulations governing nonprofit organizations and their requirements for information disclosure such as Sarbanes-Oxley Act of 2002 (SOX) are the very basic accountability mechanisms intended to ensure a minimum level of transparency (Bryant and Davis 2011). They enhance the answerability and legitimacy of nonprofit social service organizations with the purpose of ensuring public trust.(Ferenc and Monika n.d.) argued that there is relationship between enhanced accountability and financial performance where it leads to improved operating efficiencies, lower costs, better financial performance as well as enabling the organizations to achieve better impacts with their available resources. The improved reporting and monitoring activities, for instance, can help identify the effectiveness of organizational programs and activities. Finally, those organizations that introduce clear performance and accountability systems will experience an improvement in their management practices overall.

As the resources are becoming rare, the nonprofit sector is not shielded from the continuous changes that are buffeting the world (Trautmann, Maher et al. 2007). In addition, this rapid changing environment was due to the increasing demands for accountability which particularly in context of board and executive accountability (Murphy 2007). Accountability deals with problem with regards to the fundamental of transparency on how to assure the funding is being used in appropriate manner. (Elson, O'Callaghan et al. 2006) noted in this study that one of the federal government's proposals is organizations with $250,000 or more in annual gross receipts to be subject to an annual independent audit of their financial statements while some states require charity organizations with annual gross income of $2 million or more to file annual financial statements prepared by independent certified public accountants as to be specifically improving accountability within nonprofit organizations. This proposal arises since the churches are challenged by their constituents to be more transparent in their operations.

Many people have come to regard the measurement of charity effectiveness and transparency as far more important over the past decade and since many individual donors continue to give they are beginning to signal that they are not happy with the current level of information provided by charities. 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 NPOs as overall to donors when deciding which charity to support. Donor would be more likely to give to a charity if they had independent information about the performance. Thus, (Iwaarden, Wiele et al. 2009) investigate on whether charitable organizations are having standardized reporting systems in order to inform their donors on their performances since reporting system is regarded as one of accountability for NPO towards its donor and other stakeholders. Reporting system give content information on the programs undertaken or sponsored, for example through newsletters to promote transparency. Other than that, the result found that most charities publish their annual report and openly receives checking visits for level of efficiency from the funding agencies. Besides, the organization is developing performance indicators in order to measure stakeholder satisfaction and satisfaction of its private donors by focusing on the length of time a donor is continuing to support this charity. By measuring the performance of organization and reporting it accordingly, the donors would continue to give such donation which would eventually lead to unwavering funding in organization.

There is demand for improved services in pharmaceuticals and medical of nonprofit hospitals. In this context, according to (Jamali, Hallal et al. 2010), these organizations are concern about making use of fund and persist regarding the transparency and accountability of these organizations in this highly competitive consumer market. Beside the qualifications and independence of the board, but assessment and a thorough review of reporting procedures are equally necessary. The results found out that there was a slightly more positive on the nonprofit hospitals towards both the community and government stakeholder which includes the openness towards different stakeholders, communicating with the local community and volunteering relevant information on services as some aspects in the accountability towards stakeholders. Those health institutions that adopt integrated health systems and good clinical governance guidelines are reported to experience a change in culture, systems as well as being able in enhancing transparency, reporting, accountability, continuous learning and improvement. Those better governance systems would boost the performance of even family-owned hospitals, simply because better governance would help reduce costs and optimize operations. It would also bring the favorable effect it would have on brand name and reputation in a fierce consumer-oriented market.

Too much pressure and requirement to commit the accountability towards the donors made the nonprofit organizations at expense in terms of their performance. Instead of focusing on the learning and sharing for effective catalyst for social change, their focus and control function has go opposite way and damage their ability to act. (O'Dwyer and Unerman 2007) noted that those organizations in Irish which has increase their resource dependence on government agencies and eventually leads to increasing pressure to prioritize the upwards accountability to funders. In addition, the funders has also attempted to shape their operating activities by implementing polices which created tension between funders and organizations because those organizations rely on funders for economic capital.

(Afifuddin and Siti-Nabiha 2010) argued that the use of formal accounting and contracting procedures is over-specification of obligations and performance, which can destroy trust. Contractual forms of account are needed when there is a low level of trust. On the other hand, in conditions where a high level of trust is in place there is limited need for formal mechanisms such as contracts. From an accountability point of view, it is likely that the presence of high trust will lead to the use of a communal form of accountability. Research suggests that disclosure activities by nonprofits are associated with increased trust as measured by higher donations (Smith 2010).

(Irvine 2011) indicated that the nonprofit organizations have undergone significant changes in the last two decades in response to the institutional pressure including the stakeholder and society and at large as part of funder. In this study, the organization studied, Hearts & Hands is an iconic organization with a distinctive history and culture, and has significant economic as well as social impact on the Australian community has handed over their financial statement to the Big six accounting firm to audit as part of their accountability practices. The audited documents were produced to be distributed to members of the organization.

(Lin 2010) posited that nonprofits which have a system in comparing the achievements and results of programs against their objectives which leads to better information on performance including financial performance information are more likely affects nonprofits positively as the resource providers have better information. Nonprofits will receive better funding when the performance of organization is being transparent, eventually lead to better organization performance.


Financial Performance

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Figure 2.1 : Conceptual Framework of the factors influencing the financial performance

Figure 2.1 above illustrates the factors of financial performance in non-profit organization. There are three (3) hypotheses being developed to test the relationship between the factors of financial performance in non-profit organization.

Financial Management Practices and financial performance

(Abernethy and Stoelwinder 1991) have used contingency theory to argue that organizations perform more effectively if structures and control systems are designed to match contextual variables conceptualized which stating that among the examples of effective formal systems is budgeting system. Study conducted based on a sample of 192 subunit managers in four large Australian not-for-profit hospitals presented the results to indicate that there are beneficial effects on performance when budgeting as one of financial management practice is used by subunit managers in organization. The evidence suggests that the use of budgeting leads to improved performance although the relationship is only significant at the 0.10 level. The research findings show that budgeting variable has a significant influence on performance of not-for-profit hospitals especially for non-for-profit hospitals sector in Australia and in other western economies which were facing increased demands for improved accountability in terms of budget performance. This has created pressure to improve and use budgeting systems for planning and control purposes. In this particular research setting, budgeting information is routinely produced for reporting to central funding authorities.

(Zietlow 1985) discovered in this paper that goal programming which is one of financial management techniques practice by organization is extremely helpful in budgeting and working capital applications in meeting the financial and non-financial objectives. (Keating 2001) found that various financial analysis techniques are expected to be helpful in meeting the objectives and mission target items financially such as profits, market shares, sales growth and other non-fina