Quality Information by Charity Organizations and its Relationship with Donations

Quality Information by Charity Organizations and its Relationship with Donations RUHAYA ATAN 1, SAUNAH ZAINON 2, YAP BEE WAH 3 Faculty of Accountancy 1,2 Faculty of Computer and Mathematical Science 3 Universiti Teknologi MARA, 40450 Shah Alam, Selangor MALAYSIA Email: ruhayaa@salam.uitm.edu.my, http://www.uitm.edu.my Abstract This study examines the extent of disclosures of quality information by charity organizations that is measured based on the institutional donors needs for information and relates it to the financial performance (as measured by total donations). Data were obtained from annual returns for the year 2009 of 101 charity organizations. A self-developed instrument, named as Charity Organizations Reporting Index (ChORI) was used to measure the extent of disclosure of quality information in this study. The disclosure score was calculated based on the ratio of total disclosure score to its total possible disclosure score. The overall total disclosure was found to be very low. Statistical tests of relationship indicate that total donation received is significantly related to the extent of disclosure. The findings of this study can be used as a general guideline by the management of charity organizations in preparing their reports in accordance with the institutional donors needs for information. Thus, it provides evidence to the management of the charity organizations to improve their disclosure of information in their reporting, convincing the stakeholders that the resources are used efficiently in the provision of charity services. Keywords: disclosure, quality information, donations, index, charity organizations 1 Introduction Non-profit organizations (NPOs) in Malaysia are not subject to public financial reporting obligations, therefore, there is a broad acceptance that the NPOs, specifically the charity organizations, need to improve their accountability and transparency. The lack of transparency and information asymmetry that exists between NPOs and donors can be minimized through more transparent information disclosure. This study on the extent of disclosure by charity organizations in Malaysia is to suggest areas where efforts to improve the financial reporting framework in the country should be concentrated. For this reason, the specific aim of this study is to examine the extent of quality information disclosure by charity organizations and relates to its financial performance, as captured by the aggregate amount of donations. The findings of this study are necessary to ensure that donors and volunteers would continue their support and involvement in charity organizations. There many previous studies that correlate the organizational attributes on the extent of disclosure [1-3]. The importance of testing empirically for the effects of donations on total extent of disclosure of charity organizations in Malaysia is to suggest areas for improvements in charity organizations reporting framework. There are a number of important contributions of this study. First, the study measures the extent of disclosures using a self-developed Charity Organizations Reporting Index (ChORI) that was developed based on institutional donors needs for information. This unique disclosure index will assist in the examination of the extent of disclosures of information. Therefore this study examines whether ISBN: 978-1-61804-066-4 118

charity organizations disclosed information in line with the expectation for information by the institutional donors. Second, the findings that total donations are significantly and positively related to the extent of disclosure provides evidence to the management of the charity organizations in Malaysia to improve their financial reporting framework on the financial disclosure of information in order to attract more support from donors. The remainder of this study is organized as follows. Section 2 reviews the literature on the financial information and the extent of disclosures. Section 3 outlines the research design and study sample. Section 4 operationalizes the extent of information disclosures. Section 5 summarizes the findings and finally, Section 6 discusses the implications and concludes the study. 2 Review of Literature A considerable literature has developed which examines the disclosure levels and financial performance of charity (donations as a proxy of financial performance). A number of studies have found positive relationship between the extent of disclosure levels and the amount of future donations received [2, 4-7]. These studies used the extent of voluntary disclosures based on annual reports that are hypothesized to impact the charity donation decisions. In other studies, NPOs websites have been found to be more effective tool in providing financial and performance disclosure for the stakeholders in making decision [8, 9]. Research indicates institutional funders, governmental grantors and corporate donors have studied nonprofits financial statements during grant review process or donation decisions [10]. Nevertheless, many individual contributors do not review a charity s financial statements before making their contribution decisions [3]. Total income has been widely used as one of the NPOs attributes in disclosure studies. Total income generated by charity organizations depends on contributed income such as donations from donors and grants from foundations. This shows that financial information reported in the financial statement is important information. The financial information provided by charity can be one of the factors affecting the extent of disclosure and consequently influences a potential donor s decision to donate. Previous studies provide evidence that financial reports play a role in donation decision [11-15]. Through financial reports issued by the charity organizations, donors can obtain necessary information for them to assess and evaluate the performance efficiency of the organization. Performance efficiency is often used in disclosure studies and is also found to positively affect the charity donations [16-18]. Efficiency is defined by [6] as the degree to which non-profit organizations direct their available resources to the organization s mission. This aspect of performance efficiency becomes one of the donors principal financial concerns to determine the degree to which available resources are directed to providing programmes based on donors-specified terms and purposes. [12] and [13] reported that donors principal concern is the performance efficiency in terms of the percentage of expenses dedicated to programmes. In other words, donors want information on whether funds donated are actually utilized for their intended activities and programmes that will induce them to donate in the future. The disclosures beyond financial information are considered as supplemental disclosures of nonfinancial information. Non-financial information through Service Efforts and Accomplishments (SEA) disclosures are to complement and supplement the financial information. It is also a way to provide information about an organization s mission s accomplishment. Supplementing information with SEA information was significantly found to have increased the donors perception towards the charity organizations and increase the percentage of potential donors to donate to the charity organization in the future [1]. [19] examine 100 public and private institutions on their extent of SEA information and found that public institutions are more likely to include performance indicators in their annual reports. Further, public non-profit institutions audited by state auditors rather than certified public accounting firms are more inclined to disclose more SEA information. The Financial Accounting Standards Board (FASB) and the Government Accounting Standards Board (GASB) discuss the reporting of SEA in their conceptual framework [20] to mandate disclosure of performance indicators. Without mandated disclosure, reports containing SEA information have little consistency in their contents. GASB [21] takes a normative approach in producing external reports of Reporting Performance Information: Suggested Criteria for Effective Communication. This report suggests the use of 16 ISBN: 978-1-61804-066-4 119

criteria in order to communicate relevant, reliable information about the government programmes and services to the users of the report. 3 Research Design and Sample The population under study is all registered charity organizations with the ROS in Malaysia and eligible for tax-exempt status. A total of 1,262 registered charity organizations have been granted tax-exempt status under subsection 44(6) of the ITA 1967 as at January 2010. The breakdown of the registered charity organizations is made up of 1,028 from Wilayah Persekutuan and Putra Jaya and 234 from the state Selangor. Judgmental or purposive sampling was used in this study to include only the organizations that are willing to participate. As a result, a total of 101 organizations (36 from Selangor and 65 from Kuala Lumpur) formed the sample in this study. The annual returns for the year 2009 of 101 sample organizations were obtained from the Head Office of the ROS. The age of the establishment of organization in the sample varies from very young group up to the mature group. Majority (42.6%) of them are matured organizations. 4 Operationalization on the Extent of Information Disclosures The organization s extent of disclosure was operationalized or measured based on the ratio of total disclosure score to its total possible disclosure score. These scores were weighted scores developed as an index through a four-step process as follows: 4.1 The Identification of the Information Items The list of information items is primarily determined through a review of literature and prior studies. The minimum regulatory requirements of Malaysia charity reporting issued by the Registry of Society (ROS) and the Income Tax Act 1967 guideline for the tax-exempt status application were also referred to. [11] s priori model was also used as a benchmark in the identification of the items of information. As a result, an initial list of index (ChORI) contains 34 items of information. The list was reviewed by the institutional donors and the management of the charity organizations provide their feedback and the index was modified with a list of 38 items of information. 4.2 Assessment of Validity The next step in developing ChORI is to test the validity of the information items. Both face and content validity were used in this study. This is important because the quality of the research instrument becomes a focal point of the study. Both local and international experts participated in the validity process of ChORI. Local panel experts included institutional donor who was also a member of the National Council of Welfare and Social Development (NCSWD) of Malaysia, academician with accounting, language and law backgrounds. The expert from the non-profit regulatory body, i.e. the Registry of Society (ROS) was also invited in reviewing this validity process. 4.3 Weighted Index Disclosure Measurement The extent of disclosure is measured by weighted index. The determination of weights is usually based on the perceived importance of the items by the user groups or stakeholders. Without weights, each item has equal importance. Weight has been used in this study to acknowledge quality in terms of the importance of each item of information disclosed. Previous studies have shown the use of weights in measuring the extent of disclosures [19]. In order to calculate the disclosure index that aggregate the scores of all information, the weights assigned are measured using a seven-point scale (1= not at all important to 7= extremely important). The level of importance of each item of information was determined from a web survey of institutional donors. In the web survey, the target respondents were to rate the importance of the 88 items of information. They are those institutional donors from the main public companies listed in the Bursa Malaysia. As at 10 May 2011, there are 839 public companies listed on the main board of Bursa Malaysia. The companies were chosen based on the basis that the companies have made substantial amount of donations as one of their corporate social responsibility (CSR) pillars. From 590 web survey sent to them, a total of 140 institutional donors participated. Out of 140 returned questionnaires, 16.4% were incomplete responses and therefore only 117 fully completed questionnaires can be used for further analysis. This contributed to 13.9% of response rate. Of the 88 items in the index, three were given a high importance weight, 84 medium importance and one low importance. ISBN: 978-1-61804-066-4 120

4.4 Computing Disclosure Scores The annual returns submitted by the organizations to the ROS were used in content analysis to generate the disclosure scores. Content analysis is a quantitatively oriented technique which uses a standardized and unit of measurement. It involves codifying the qualitative and quantitative information into predefined categories so that a pattern can be discerned from information presented [22]. Specifically, the coding system or indexes were used in content analysis. Disclosure index is an extensive list of selected items which may be disclosed in the organizational reports. In this study, the disclosure index consists of 88 items of information weighted by its relative importance to the key stakeholders of the charity organizations and the institutional donors. In all, three items were given a maximum weight of 7, 58 items with a weight of 6, 22 items with a weight of 5, four items with a weight of 4 and only one item with a minimum weight of 3. Each index is the ratio of relevant items for each organization. For each organization, a disclosure index is calculated where the index I j for each set of annual return is defined as: I j = Xij n i= 1 where n = number of items, n 88, Xij = 1 if i th item disclosed, with assigned weight. Overall, the 88-index items could have total possible disclosure index score of 498. In order to control for subjectivity in interpreting the annual returns, two independent raters were used to determine which items were disclosed. The content analysis on each of the annual returns is coded individually into the disclosure score sheet. Next, the annual reports are exchanged between the raters. The score entered by each rater for each of the organization s annual returns are then compared to identify any differences and disagreements. The score has been separately analyzed according to the information, and independently examined by the raters. A very minimal disagreement was found, and an acceptable inter-rater reliability was accepted after all the disagreements and discrepancies were resolved. 5 Findings and Discussions Analysis of total extent of disclosure practices in this study is divided into two parts. Firstly, the analysis covers on the extent of disclosures made by the organizations. Secondly, the analysis on the relationship between total donations and the extent of disclosures is conducted using the statistical tests. The Pearson Correlation s statistical test was employed to determine whether there is an association between total donations and the extent of disclosures of information. This test was performed using continuous original data as an exploration to the likely associations. 5.1 Descriptive Statistics Table 1 below provides descriptive statistics for three variables employed in the analyses. Table 1: Descriptive Statistics Variables n Mean Standard Deviation TDISC (Ratio) TDISC (Total) TOTDON (Donations) Min. Max. 101 0.283 0.0882 0.102 0.458 101 141.16 43.91 51 228 101 251,723 466,322 1110 3,094,770 Table 1 shows the mean relative ratio disclosure index of the sample organizations was 0.283, with a range of 0.102 and 0.458. The total disclosure score shows the mean disclosure score of 141.16 and the maximum total disclosure score are less than half of the total scores. The mean amount of total donations is RM251,723.50, with the minimum amount of donations received for the year is RM1,110 up to the maximum of RM3,094,770. A low standard deviation (0.0882) was found in total disclosure (TWDISC). Overall, this data set presents an opportunity to examine the relationship between the two variables. 5.2 Statistical Test of Correlation The correlation is estimated between TOTDON (Total Donations) and each of TWDISC (Ratio Weighted Disclosure) across the whole sample of annual returns. The Pearson Correlation coefficient was conducted which examine the degree of linear relationship between total donations and the extent of total disclosure. The result of the Pearson Correlation coefficient is reported in Table 2 below. ISBN: 978-1-61804-066-4 121

Table 2: Relationship between donations and the extent of disclosure Total Donations Pearson Correlation Sig. (2-tailed) n Extent of Disclosure 0.256 0.001* 101 * Correlation is significant at the 0.01 level (2-tailed) The result shows that there is a positive Pearson Correlation (r) coefficient of 0.256 and significant at p < 0.01. The result shows that there is a significant correlation between total donations and the extent of disclosure of information though the strength of the relationship is weak. However, this significant result is consistent with the previous researches on donations and disclosure [2, 4, 6, 8]. Organizations that received higher donations tend to disclose more information. They tend to be more accountable to their donors and other stakeholders. 6 Implications and Conclusions Based on the evidence of the statistical tests, it seems that it cannot be inferred that such disclosures made by the management of the charity organization is wasteful. We might interpret this finding as evidence to the management of the charity organization to put a serious effort on providing information to their stakeholders. Not only to reduce an information asymmetry but can enhance the accountability and transparency to stakeholders. A concern amongst the charity management to disclose more financial information could persuade the donors to be more proactive in giving more donations. References [1] S. Buchheit and L. M. Parsons, "An experimental investigation of accounting information's influence on the individual giving process," Journal of Accounting and Public Policy, vol. 25, pp. 666-686, 2006. [2] J. M. Trussel and L. M. Parsons, "Financial reporting factors affecting donations to charitable organizations," Advances in Accounting, vol. 23, pp. 263-285, 2008. One of the most needed information by the institutional donors, as confirmed by the survey, is the financial information on cash flow from operating activities. This information is given among the highest weights by donors importance of information. However, disclosure of this information is not regulated and very few organizations disclosed it. Overall, the extent of disclosure made by the charity organizations is very low and information disclosed often made when it is regulated. To improve this is by considering disclosure as one aspect in non-profit governance and accountability. All registered charity organizations under the Societies Act 1966 (Act 335) & Regulations can be required to make their financial information available to the public. Considering the asymmetry problems between the charity organizations and the donors, the disclosure not only can reduce the asymmetry but can also enhance the accountability relationships, enhance the public trust [9] and thus increase the amount of donations. This study found evidence that there is a significant association between the amount of donations and the extent of disclosure of information. Empirical evidence is provided that disclosure is an important component for non-profit governance. Only through disclosure, the dissemination of information can be made to the donors and potential donors for them to make donations decision. This study has taken into consideration the institutional donors needs for information. Future research might consider different category of NPOs since they have different mission and their stakeholders may be need different information. Acknowledgements: The authors gratefully acknowledge the use of Exploratory Research Grants Scheme (ERGS) funded by the Ministry of Higher Education Malaysia. [3] T. P. Gordon and S. B. Khumawala, "The demand for not-for-profit financial statements: A model of individual giving," Journal of Accounting Literature, vol. 18, pp. 31-56, 1999. [4] B. Behn, D. DeVries, and J. Lin. Voluntary disclosure in nonprofit organizations: An exploratory study [Online]. Available: http://ssrn.com/abstract=727363 [5] A. Christensen and R. Mohr, "Not-forprofit annual reports: What do ISBN: 978-1-61804-066-4 122

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