Skip to main content
Log in

NPO, Internal Controls, and Supervision Mechanisms in a Developing Country

  • Original Paper
  • Published:
VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations Aims and scope Submit manuscript

An Erratum to this article was published on 01 April 2014

Abstract

The premise of this paper is that effective supervision and proper internal control system (ICS) can promote accountability and transparency, and this will attract more donors. However, in a developing country like Malaysia, it is common that proper accounting standards are not available, the laws are not enforced, and charities often struggle for survival. Debates on regulating nonprofit organizations (NPOs) have been sensitive to many and are often left unresolved, and some quarters believe that NPOs should be left to handle their own affairs. This paper provides evidence from a survey of 60 charities on the status of their ICS. It briefly describes the current state of regulations in Malaysia and makes a case for better monitoring of the sector, as this might be the reason NPOs are lacking in their ICS. We propose what type of regulation and assistance can be provided by the authorities to this sector, not only in Malaysia but also in other developing countries facing similar challenges.

Résumé

L’hypothèse de départ de cet article est qu’une supervision efficace et un système de contrôle interne (SCI) adéquat peuvent favoriser la responsabilité et la transparence, attirant ainsi plus de donateurs. Cependant, dans un pays en développement tel que la Malaisie, on trouve rarement des standards de comptabilité adéquats, les lois sont rarement appliquées, et les organismes charitables luttent souvent pour leur survie. Les débats sur la régulation des Organisations à But Non-Lucratif (OBNL) sont une question sensible pour beaucoup et restent souvent sans réponse, et certains pensent qu’il faut laisser les OBNL gérer leurs propres affaires. Sur la base d’une recherche empirique, cet article rend compte du statut des SCI de 60 organisations charitables. Après une brève description de l’état présent des réglementations en Malaisie, nous avançons qu’il conviendrait de mettre en place une meilleure surveillance du secteur, étant donné qu’il s’agit peut-être là de la raison pour laquelle les SCI des OBNL sont défaillants. Nous suggérons quel type de réglementation et d’aide les autorités pourraient fournir à ce secteur, non seulement en Malaisie, mais aussi dans d’autres pays en développement confrontés à des difficultés similaires.

Zusammenfassung

Dieser Beitrag geht davon aus, dass eine effektive Überwachung und ein angemessenes internes Kontrollsystem Verantwortlichkeit und Transparenz fördern können, was wiederum mehr Spender anzieht. In Entwicklungsländern wie Malaysia ist es jedoch allgemein üblich, dass es keine angemessenen Rechnungslegungsstandards gibt, Gesetze nicht vollstreckt werden und gemeinnützige Organisationen oftmals ums Überleben kämpfen. Diskussionen über die Regulierung von Nonprofit-Organisationen sind für viele ein heikles Thema und bleiben oftmals fruchtlos. In einigen Kreisen ist man der Meinung, dass man Nonprofit-Organisationen die Regelung ihrer Angelegenheiten selbst überlassen sollte. Der vorliegende Beitrag liefert Nachweise aus einer Umfrage von 60 gemeinnützigen Organisationen zur gegenwärtigen Situation ihrer internen Kontrollsysteme. Die Abhandlung geht kurz auf den gegenwärtigen Stand der Regulierungen in Malaysia ein und liefert Argumente für eine bessere Überwachung des Sektors, da dies der Grund dafür sein mag, dass es in den Nonprofit-Organisationen an internen Kontrollsystemen mangelt. Wir unterbreiten Vorschläge dahingehend, welche Art von Regulierung und Unterstützung die Behörden diesem Sektor bereitstellen können; nicht nur in Malaysia, sondern auch in anderen Entwicklungsländern, die ähnlichen Problemen ausgesetzt sind.

Resumen

La premisa del presente documento es que una supervisión efectiva y un sistema de control interno apropiado (ICS, del inglés internal control system) puede fomentar la responsabilidad y la transparencia, y esto atraerá a más donantes. Sin embargo, en un país en vías de desarrollo como Malasia, es normal que no se disponga de normas contables apropiadas, que las leyes no se apliquen y que las organizaciones benéficas luchen a menudo para sobrevivir. Los debates sobre la regulación de las Organizaciones sin ánimo de lucro (NPO, del inglés NonProfit Organization) son sensibles para muchos y a menudo se dejan sin resolver, y en algunos ámbitos se cree que debe dejarse que las NPO manejen sus propios asuntos. El presente documento proporciona pruebas de una encuesta de 60 organizaciones benéficas sobre el estado de su ICS. Describe brevemente el estado actual de las reglamentaciones en Malasia y defiende una mejor monitorización del sector, ya que esto podría ser el motivo de que las NPO tengan carencias en sus ICS. Proponemos qué tipo de reglamentación y asistencia puede ser proporcionado por las autoridades a este sector, no sólo en Malasia, sino también en otros países en vías de desarrollo que se enfrentan a desafíos similares.

摘要

本论文的前提是有效监督和适当内部控制系统 (ICS) 可以促进可说明性和透明度,同时这将吸引更多捐赠者。然而,马来西亚等发展中国家没有适当的会计标准,未执行法律,同时慈善机构经常都在为生存而努力。有关对非营利组织 (NPO) 进行监管的争论对于许多国家来说非常敏感,同时经常悬而未决;一些国家认为应让NPO处理自己的事务。本论文提供了来自60家慈善机构ICS状态调查的证据。其中简要介绍了的马来西亚的法规现状,并列举示例以更好地监督该领域,因为这可能是NPO缺少ICS的原因所在。我们不仅为马来西亚,而且为面临类似挑战的其他发展中国家建议当局应为该领域提供的法规和帮助类型.

ملخص

الإفتراض الأساسي لهذا البحث هو أن الإشراف الفعال والسليم لنظام المراقبة الداخلية (ICS) يمكن أن يعزز المساءلة والشفافية، وهذا سيؤدي إلى جذب المزيد من الجهات المانحة. مع ذلك، في بلد نام مثل ماليزيا، من الشائع أن معايير المحاسبة المناسبة غير متوفرة، لا يتم فرض القوانين، والمؤسسات الخيرية في كثير من الأحيان تناضل من أجل البقاء. المناقشات بشأن تنظيم المنظمات غير الربحية (NPOs) أصبحت حساسة كثيرا˝ وغالبا˝ ما تترك دون حل، وتعتقد بعض الأوساط أنه ينبغي أن تترك المنظمات الغير ربحية(NPOs) للتعامل مع شؤونها الخاصة. هذا البحث يقدم دليل من إستطلاع رأي من 60 من الجمعيات الخيرية عن حالة نظام المراقبة الداخلية (ICS)الخاصة بهم. فهو يصف الوضع الحالي للأنظمة في ماليزيا ويجعل حالة بالنسبة لرصد أفضل للقطاع، لأن ذلك قد يكون السبب أن المنظمات الغير ربحية (NPOs) تعاني من نقص في نظام المراقبة الداخلية (ICS) الخاصة بها. نحن نقترح النوع الذي يمكن توفيره من انواع التنظيم والمساعدة من جانب السلطات لهذا القطاع، ليس فقط في ماليزيا، ولكن في غيرها من البلدان النامية التي تواجه تحديات مماثلة.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

References

  • Abraham, A. (2003). Financial sustainability and accountability: A model for non-profit organizations. AFAANZ 2003 Conference Proceedings (p 26). Brisbane: AFAANZ.

  • Anthony, R. (1978). Financial accounting in nonbusiness organizations. Connecticut: FASB.

  • Anthony, R. N., & Young, D.W. (1994). Management control in nonprofit organizations (5th ed.). Burr Ridge: Richard D. Irwin.

  • APG. (2007). Asia/Pacific Group (APG) mutual evaluation report on Malaysia against the FATF 40 recommendations (2003) and 9 special recommendations. Asia/Pacific Group on Money Laundering.

  • Ashford, K., & Clarke, J. (2006). Grant monitoring by charities: The process of grant-making and evaluation. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 7(3), 279–299.

    Article  Google Scholar 

  • Atan, R., Zainon, S., & Wah, Y. B. (2012). Quality information by charity organizations and its relationship with donations. In Recent advances in business administration (pp. 118–123).

  • Baker, M., & Collins, M. (2005). Audit and control in the not-for-profit sector: An endowed charity case 1739–1853. Accounting and Business Research, 35(2), 111.

    Article  Google Scholar 

  • Barton, T. L., Shenkir, W. G., & McEldowney, J. E. (1996). The case of Dr Grayson: Fraud and abuse at a not for profit. The CPA Journal, 66(2), 46–50.

    Google Scholar 

  • Bode, I. (2004). A new agenda for European charity: Catholic welfare and organizational change in France and Germany. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 14(2), 205–225.

    Article  Google Scholar 

  • Bottiglieri, W. A., Koleski, S. L., & Conway, K. (2011). The regulation of non-profit organizations. Journal of Business & Economic Research, 9(9), 51–60.

    Google Scholar 

  • Buchheit, S., & Parsons, L. M. (2006). An experimental investigation of accounting information’s influence on the individual giving process. Journal of Accounting and Public Policy, 25, 666–686.

    Article  Google Scholar 

  • Carr, R. (2000). Charity fraud hard to stop, understaffed regulators say online soliciting raises new fears. Atlanta Journal-Constitution, A13.

  • CCOS. (2012). Charities Commission of Singapore website. Retrieved, from https://www.charities.gov.sg/charity/index.do. Accessed 20 December 2011.

  • Christensen, A., & Mohr, R. (2003). Not-for-profit annual reports: What do museum managers communicate? Financial Accountability & Management, 19, 139–158.

    Article  Google Scholar 

  • Connolly, C., & Hyndman, N. (2001). A comparative study on the impact of revised SORP 2 on British and Irish charities. Financial, Accountability & Management, 17(1), 73–96.

    Article  Google Scholar 

  • Connolly, C., & Hyndman, N. (2004). Performance reporting: A comparative study of British and Irish charities. The British Accounting Review, 36, 127–154.

    Article  Google Scholar 

  • Copal Partners Research. (2006). India’s charity sector: An overview and analytical approach. Retrieved December 20, 2011, from http://www.oneworldtrust.org/csoproject/images/documents/INDA5.pdf.

  • Cullis, G. J., Jones, P. R., & Thanassoulas, C. (2004). Are charities efficient firms? A preliminary test of the UK charitable sector. Public Choice, 44(2), 367–373.

    Article  Google Scholar 

  • D’Souza, J. M. (1998). Rate-regulated enterprises and mandated accounting changes: The case of electric utilities and post-retirement benefits other than pensions (SFAS No. 106). The Accounting Review, 387–410.

  • Doncaster, D., & Hughes, J. (1996). Governance and control for not-for-profit organizations. The Philanthropist, 13(3), 45–51.

    Google Scholar 

  • Douglas, J. (1987). Political theories of nonprofit organization. In W. W. Powell (Ed.), The nonprofit sector (p. 13). New Haven: Yale University Press.

    Google Scholar 

  • Duncan, J. B., Flesher, D. L., & Stocks, M. H. (1999). Internal control systems in US churches: An examination of the effects of church size and denomination on systems of internal control. Accounting, Auditing and Accountability Journal, 12(2), 142.

    Article  Google Scholar 

  • Elkin, R. (1985). Paying the piper and calling the tune: Accountability in the human services. Administration in Social Work, 9(2), 13.

    Article  Google Scholar 

  • Gilbelman, M., & Gelman, S. R. (2004). A loss of credibility: Patterns of wrongdoing among nongovernmental organizations. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 15(4), 355–381.

    Article  Google Scholar 

  • Gordon, T. P., & Khumawala, S. B. (1999). The demand for not-for-profit financial statements: A model of individual giving. Journal of Accounting Literature, 18, 31–56.

    Google Scholar 

  • Greene, E. (1995). The NAACP: What went wrong? Chronicle of Philanthropy, 2–29. http://www.charity-commission.gov.uk/publications/cc8.asp#3. Accessed 20 December 2011.

  • Jobome, O. G. (2006). Public funding, governance and pass-through efficiency in large UK charities. Corporate Governance: An International Review, 14(1), 43–59.

    Article  Google Scholar 

  • Jones, J. (1991). Earnings management during import relief investigation. Journal of Accounting Research, 21–193.

  • Lambert, J., Main, D., & Lambert, S. J. (1998). Reduce your losses from errors and fraud. Nonprofit World, 16(5), 46–48.

    Google Scholar 

  • Leslie, D. (1987). The control function in the hospitality industry. The Service Industries Journal, 7(2), 207.

    Article  Google Scholar 

  • Liu, T. (2005). The case analysis on failures of enterprise internal control in mainland China. Journal of American Academy of Business, 7(1), 92–98.

    Google Scholar 

  • Lyons, M., & Hocking, S. (1998). Australia’s nonprofit sector: Some preliminary data. Sydney: Centre for Australian Community Organizations and Management, University of Technology.

    Google Scholar 

  • McNichols, M., & Wilson, P. (1988). Evidence of earnings management from the provision for bad debts. Journal of Accounting Research Supplement, 26, 1–31.

    Article  Google Scholar 

  • Miller, G. A. (1997). Charity accounting rules and annual reports in Hong Kong: A note. Financial Accountability & Management, 13(1), 71–79.

    Article  Google Scholar 

  • Mohsin, A. (2006). A case of control practice in restaurants and cafes in Hamilton, New Zealand. Journal of American Academy of Business, 8(1), 271–276.

    Google Scholar 

  • Murawski, J. (1995). Former United Way chief gets seven years in jail: Sentence praised by charities. Chronicle of Philanthropy, 13, 37–38.

    Google Scholar 

  • Nasir, N. M., Othman, R., Said, J., & Ghani, E. K. (2009). Financial reporting practices of charity organisations: A Malaysian evidence. International Bulletin of Business Administration, 6, 19–27. ISSN: 1451-243X.

    Google Scholar 

  • Othman, R., Ali, N., Omar, N., & Rahman, R. A. (2012). Practical challenges in managing non-profit organizations (NPO): Tales from two neighbouring countries. International Bulletin of Business Administration, 13, 6–18.

    Google Scholar 

  • Palmer, P. (1996). Internal audit in charities: A revolution still awaited. Managerial Auditing Journal, 11(6), 11.

    Article  Google Scholar 

  • Palmer, P., & Randall, A. (2002). Financial management in the voluntary sector: New challenge. London: Routledge.

    Book  Google Scholar 

  • Pratten, B. (2004). Charity law reform: Implementing the strategy unit proposals. International Journal of Nonprofit and Voluntary Sector Marketing, 9(3), 191–201.

    Article  Google Scholar 

  • Rodrigue, G. (1998). For America’s nonprofit sector, the watchdog seldom barks, Nieman reports. Spring, 52(1), 50–57.

    Google Scholar 

  • Sacco, J., & Nagy, R. (2004). Accounting and management control in nonprofit organizations (NPO), accounting, reporting and management control. In A. Zimmer & P. Eckhard (Eds.) Future of civil society: Making central European nonprofit-organizations work (Vol. 1, pp. 381–406). Wiesbaden: VS Verlag für Sozialwissenschaften. Retrieved, from http://www.promente-jugend.at/xedaq/src/uploads/docs/480.pdf. Accessed 20 December 2011.

  • Sansing, R. (2000). Joint ventures between not-profit and for-profit organizations. The Journal of the American Taxation Association, 22, 76–88. Supplement.

    Article  Google Scholar 

  • Sinha, M. N. (1997). Helping those who help others. Quality Progress, 30(7), 37–41.

    Google Scholar 

  • Smith, J. (1997). Managing betrayal: A case study of employee dishonesty. Association Management, 49(5), 63–71.

    Google Scholar 

  • Stecklow, S. (1997). New Era’s Bennett gets 12 years in prison for defrauding charities. Wall Street Journal, B15.

  • Sulaiman, M., Siraj, S. A., & Ibrahim, S. H. M. (2008). Internal control systems in West Malaysia’s state mosques. The American Journal of Islamic Social Sciences, 25(1), 63–81.

    Google Scholar 

  • Thornburg, D. (1997). Adelphi weathering crisis, will endure. Newsday, A57.

  • Torres, L., & Pina, V. (2003). Accounting for accountability and management in NPOs. A comparative study of four Countries: Canada, the United Kingdom, the USA and Spain. Financial Accountability & Management, 19(3), 267–285.

    Google Scholar 

  • Trussel, J. M., & Parsons, L. M. (2008). Financial reporting factors affecting donations to charitable organizations. Advances in Accounting, 23, 263–285.

    Article  Google Scholar 

  • Weisbrod, B. A. (1988). The nonprofit economy. Cambridge, Massachusetts: Harvard University Press.

    Google Scholar 

Download references

Acknowledgments

The authors’ value the help of Associate Professor Dr. Mohd Nizal Haniff in pre-testing the questionnaire process and Miss NurHamizah Mohamad in the initial stage of the research. The authors’ deeply appreciate the anonymous reviewers who have helped to improve this paper significantly.

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Radiah Othman.

Appendix

Appendix

See Table 10.

Table 10 Internal controls checklist (Duncan et al. 1999)

Rights and permissions

Reprints and permissions

About this article

Cite this article

Othman, R., Ali, N. NPO, Internal Controls, and Supervision Mechanisms in a Developing Country. Voluntas 25, 201–224 (2014). https://doi.org/10.1007/s11266-012-9335-4

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11266-012-9335-4

Keywords

Navigation