Expand oon the exsisting lit review IOT discuss a comparsion of international and US NPOs

Evaluating Accounting Approaches for Non-Profit Organizations – An International
Perspective”
Introduction
Non-profit organizations (NPOs) have a significant influence on the economies of
a country. As a result policymakers in the USA and the world are keen to establish
charity regulations that ensure funds are not mismanaged. Charity regulations such as
tax limitation are imposed to attract donors and increase public trust in NPOs. NPOs
accounting requirements are considerably different compared to other organizations
which are subjected to commercial accounting. This is because NPOs incur costs by
providing non-profitable services to the public – thus NPOs target money effect activities
as opposed to the revenue and expenditure effects. The financial records of NPOs
possess unique accounting factors that call for the transparency and liability of income
resources.
Purpose of the Literature Review
The principal objective of this review is to examine writings on the topic of
accounting approaches utilized by NPOs globally while at the same time citing
examples from in the U.S.A. This review will focus on analyzing the bookkeeping, and
financial statements approaches adopted by NPOs. The discussion will begin with a
general literature review of financial management for non-profit organizations and
2
conclude by examining the accounting issues facing NPOs and suggesting future
accounting practices.
Financial Management of NPOs
The financial management of NPOs mainly differs from commercial organizations
due to the way NPOs are funded. The diverse sources of equity for NPOs and its
economic vulnerabilities make it challenging to the average costs of debts and credits
within NPOs operations (Cordery et al., 2017). Charity regulations assist NPOs in
avoiding incurring costs associated with debts whilst increasing its inflow. The Federal
Government in the United States plays a significant role in determining the scope of
non-profit regulations. Similar to other countries, the Congress has the power to
examine the needs for change in regulatory policies and enact national legislation that
manages these regulations. Cordery et al. (2017) argue that the rules must implement
disclosure and accountability policies – that force NPOs to be self-evident, because of
the increased government and public protection, high levels of fraudulent acts that
enable charity organizations to manipulate the industry.
Financial accountability for NPOs is expected to include the services or programs
offered by an organization as opposed to the revenue income or losses incurred by an
organization. Cordery (2015) defines accountability as the process in which an
organization or individual performance is measured according to their function. Hence,
they are expected to take responsibility for the appropriate execution of tasks and
3
performance – accountability is universal in financial departments and the business
operations of an organization.
The substantial inflow of cash from governments and private donors and the
existence of few barriers in creating an NPO have increased the number of unethical
NPOs being established worldwide. This issue is accelerated by the challenges that
fund donors have – in differentiating between legit and fraudulent recipients. As a result,
there have been demands to hold the nonprofit industry accountable. According to
Reheul et al. (2014), accountability entails; recording data and information that assist
stakeholders in evaluating the performance of the organization as well as addressing
the organizational concerns of stakeholders. NPOs accounting and auditing is an
unpopular subject due to the idea of rejecting commercial practices and beliefs. For
instance in the US alone at least one-third of NPOs avoid employing accounting staff –
hence accounting is generally invisible for NPOs activities. For NPOs that choose to
disclose their accounts information, the accountability information varies and is at times
inconsistency.
Financial reporting for NPOs is challenging since no standard principle requires
NPOs to record their income usage. Most NPOs around the world choose to account for
their assets and funds partially. For instance, in the US charity organizations may opt to
report their fixed assets and ignore the depreciating assets and vice versa (Sutton et al.,
2010). Such inconsistencies in asset treatment lead to the accusation that NPOs have
the opportunity to get away with financial discrepancies. In most jurisdictions globally,
the exemption of tax on charities and the benefits of these organizations to local and
national borders, provide governments with sufficient reasons to protect NPOs from
4
reporting their income (Hyndman & McMahon, 2011). Some NPOs (are accused of)
acting opportunistically to benefit from the financial assistance provided by the
government and private donors – which enables them to keep inaccurate asset records
or manipulate their financial disclosures (Hyndman & McMahon, 2011). Nonetheless, to
reduce the abuse of tax exemption benefits, most governments have opted to restrict
the charity regulations provided to some of the NPOs.
Fund accounting is a unique and popular characteristic for many NPOs since it
allows them to engage in inter-fund allocations and appropriation activities. Inter-fund
distributions enable NPOs to transfer funds between different resources while
appropriation entails the authorization of current and future disbursement of capitals to
fulfil specific goals (Reheul et al., 2014). These two features add to the complex nature
of analyzing the financial statements of an NPO. In this case, some NPOs often take
advantage and exploit legitimate donors, conceal the transfer of funds intended for
illegal acts or use this approach to avoid their funds and assets from being frozen.
(Reheul et al., 2014) Mentions that although self-reporting enhances accountability for
NPOs, it also minimizes the regulatory burdens placed on the government. Countries
such as Canada have been prosperous in implementing co-regulation acts; however,
these approaches are limited in the NPOs regulation policies (Phillips, 2013). Moreover,
the low levels of compliance rates make it a challenge for governments to promote
administrative efficiency within these organizations.
NPOs have adopted the use of cash accounting as opposed to accrual
accounting. As a result, charity organizations only keep the financial record of
transactions completed with cash payments and ignore reporting the debts incurred due
5
to unpaid bills. Although cash based accounting is easy in bookkeeping, organizations
compromise the realization and matching concepts of funds (Reheul et al., 2014). Small
sized NPOs often use the cash basis while medium-sized and large charity corporations
have adopted the accrual accounting method. In some instances, NPOs decide to use
fund accounting which means that accountability is based on the projects and resources
that have utilized the money invested in an organization. However, for accountability
and stewardship, NPOs using the fund accounting method issue financial statements for
each project.
Issues of financial accountability and transparency for NPOs
The development of charity regulation boards is associated with the increased
number of NPOs. Most governments are contracting charity organizations to offer social
and public service programs (Hyndman & McMahon, 2011). The emerging issues
surrounding NPOs accounting and transparency provide good reasons as to why it is
imperative to regulate these organizations. The major problems linked to the accounting
needs of NPOs are perceived to be related with the multi-source financing units
(Hyndman & McMahon, 2011). Many of these authors believe that it is a challenge to
have a sustainable and accountable NPO due to the inconsistencies of funding sources
and financial management.
The lack of clear and uniform policies to govern NPOs challenges the financial
management and transparency of NPOs. Some NPOs are subjected to the charity
regulatory policies while other are automatically exempted – thus allowing for
discrepancies when it comes to financial statements from NPOs. For instance, religious
organizations are considered as non-profitable organizations which are not expected to
6
file their taxes even without registering for tax exemption. In the US the organizational
structure of churches is ambiguous as they are considered as; unincorporated
organizations, sole proprietorship organizations, and NGOs (Cordery, 2015). Religious
corporations are also termed as ‘organized’ entities that do not require comprehensive
records. Therefore, the charity and federal regulations that govern NPOs, exempt
churches from the committing to these laws. This introduces accountability complexities
that require NPOs to meet the regulatory requirements.
The tax exemption laws applied to NPOs have contributed to the creation of
abusive schemes whose primary goal is to cover their activities behind charitable acts to
evade tax. In most instances, taxpayer entities attempt to convert their organization’s
revenues from taxable income to tax-exempt income (Cordery et al., 2017). As a result,
such entities acquire donor funds and assets for their commercial use with the
exemption of tax or acquire assets with the benefits associated with charitable
deductions. This may have contributed to the increase of fraud and misuse of funds
within these organizations. For instance, individuals may take advantage of the tax
exemption act on churches to extort members of the congregation.
Tax-exempt organizations gain a competitive advantage over commercial
organizations. This exemption is still applicable to NPOs that take part in trading
activities and generate income from investments. Furthermore, NPOs that engage in
commercial activities maximize their profit given that they at times work with volunteers
for the supply of goods and services.
Again, these authors believe that increased financial and leadership misconduct
of NPOs emphasizes the need to have effective regulations. They identify fault in NPOs
7
including; the mismanagement of resources, fraud and excessive compensation. They
believe that this has contributes to the decline of public and government trust in NPOs
who demand transparent accountability and regulation of these organizations (Reheul et
al., 2014). Furthermore, private donors have responded to scandals surrounding NPOs
by withdrawing their donations leading to the collapse of charitable organizations. On
the other hand, policymakers have resorted to implementing strict regulatory laws that
have put heavy scrutiny in the NPOs industry.
To justify the legitimacy of NPOs they have been forced to produce accountability
reports. Financial reports from NPOs will allow charities to exist and enjoy the tax
exemption laws and other benefits through legal ways (Hyndman & McMahon, 2011).
However, the gap between the sizes of NPOs causes the implementation of charity
regulations to be a complex issue (Hyndman & McMahon, 2011). For instance,
compliance costs may be a financial burden for small charities which may hinder them
from abiding by the disclosure laws. Such financial troubles may discourage private
donors from investing in small-sized NPOs. Additionally, enforcement barriers such as
regulatory constraints on resources will result in transparency issues as NPOs fail to
account for their assets. Designing an effective regulatory system that meets the needs
of all NPOs regardless of their functions and size is challenging.
Regulations are identified as the only effective approach that will ensure that
NPOs are transparent and accountable. According to the public interest theory, charities
regulations are mandatory to effectively respond to the issues surrounding resource
allocation (Cordery et al., 2017). Arguments presented by the public interest theory
affirm that sole corporations that act as charity entities are more focused on protecting
8
their interests as opposed to the social interests of the public – due to the conflict of
interests in such scenarios, there is a need to have regulations in place so as to protect
the interests of the people (Cordery et al., 2017). The enacted NPOs rules will enable
governments to minimize the poor programs and services offered to the public due to a
monopoly in the market. Cordery et al. (2017) suggest having regulatory policies will
assist legislators in managing issues of information asymmetries and encourage fair
distribution of resources within the vulnerable communities. Subsequently, regulatory
fundraising policies will allow policymakers to assist regulators in monitoring whether
donations are utilized appropriately for charitable endeavors – which may increase
public confidence and interests from donors.
The Federal Government also has the authority to regulate charities by issuing
entry restrictions. This way the government will facilitate public safety; through quality
programs that serve the social needs of a community (Hyndman & McMahon, 2011).
Besides implementing penalties for those participating in inappropriate acts are believed
to be essential approaches that will regulate entrants to the charity sector – new
regulations might focus on ensuring that NPOs comply with the registration and
operation laws. Nevertheless, rules to restrict entry to the marketplace are likely to be
more effective in comparison to having policies that regulate disclosure for specific
activities (Hyndman & McMahon, 2011). According to Philips (2013), regulation of
financial reporting by organizations were developed as a response to the inadequate
self-reporting disclosures that was required to initiate a globally efficient marketplace.
Thus, regulators are aimed at creating opportunities for NPOs to restore “donor market”
and public confidence.
9
Conclusion
It seems that the confidence and trust of the beneficiaries and the government in
NPOs have somewhat declined yet donors continue to invest in the charity sector. The
extent to which these organizations are taking advantage of the available resources
questions the credibility of some NPOs. From this review, it seems the current literature
reviewed espouses that independent regulatory laws should be designed to increase
accountability efficiency among NPOs. The implementation of differentiated regulations
will ensure that NPOs are monitored, and their performance accounted for
transparently. The arguments in the literature also suggest that it is imperative for
governments to recognize and regulate charitable organizations that exist through a
regulatory system that restricts the entry of NPOs that do not intend to comply with the
set regulations.
10
References
Cordery, C. (2015). Accounting history and religion: A review of studies and a research
agenda. Accounting History; Vol. 20(4) 430–463
Cordery, C., Sim, D. and Zijl, T. (2017). Differentiated regulation: the case of charities.
Accounting and Finance, 57,131–164
Hyndman, N., and McMahon, D. (2011). The hand of government in shaping accounting
and reporting in the UK charity sector. Public Money and Management 31, 167–
173.
Phillips, S. (2013) Shining light on charities or looking in the wrong place?, Regulation
by-transparency in Canada, VOLUNTAS: International Journal of Voluntary and
Nonprofit Organizations 24, 881–905.
Reheul, A.-M., T. Caneghem, and S. Verbruggen, (2014). Financial reporting lags in the
non-profit sector: An empirical analysis, Voluntas: International Journal of
Voluntary and Nonprofit Organizations 25, 352–377.
Sutton, D., Baskerville, R. and C. Cordery, C. (2010). A development agenda, the donor
dollar and voluntary failure, Accounting, Business and Financial History 20, 209–
229.