prepared reports and also facilitate comparability of financial performance of NGOs.
CCAB (2013) noted that; the International Financial Reporting Standards (IFRSs) have been influential in facilitation of business globally and boosted the confidence of amount users that the accounts have been prepared consistently. Similarly, International Public Sector Accounting Standards are improving government reporting. There two sets of standards do not however adequately cover unique issues present in NGOs. 1.1 Problem StatementIn Malawi, there is no prescribed financial reporting framework for the preparation and presentation of GPFRs for NGOs. As a result, NGOs prepare GPFRs using accounting standards and frameworks developed for preparing GPFRs for either profit-making organisations or the public sector. These frameworks do not adequately take into consideration the following factors; (i) the distinct nature of the NGOs (ii) the transactions and items specific to NGOs and (iii) the diverse and distinct users of NGO financial reports.
The use of several frameworks also make comparison of NGO financial performance difficult.The proposed study intends to assess the adequacy of the current financial reporting frameworks as a basis of preparing GPFSs for NGOs in Malawi and to determine the need to develop specific financial reporting framework for NGOs in Malawi. 1.2 Research ObjectivesThe objectives of the study are as follows;1. To assess the extent to which the current frameworks used in preparing general purpose financial reports for NGOs incorporate the distinct nature and objectives of NGOs. 2. To evaluate the extent to which key NGO specific financial matters and transactions are adequately addressed by current frameworks.
3. To assess the extent to which key users of financial reports for NGOs are acknowledged by the current frameworks. 1.3 Research Questions1. How much do the current financial reporting frameworks incorporate the nature and objectives of NGOs? 2.
How are main NGO specific financial reporting matters addressed by the current financial reporting frameworks?3. Are the current frameworks addressing needs of the broad the spectrum of users of NGOs’ GPFRs?1.4 Research Propositions1. The Current Frameworks were not developed with the unique nature and objectives of NGOs in mind.2. Key NGO specific transactions are not adequately covered by the current frameworks3. The current frameworks do not take into consideration the wide range of users of NGO GPFRs.1.
1 Scope of StudyThe study covers NGOs working in Malawi for the past three years based on their membership with the Council for Non-Governmental Organisations in Malawi (Congoma) and the NGO Board registration.1.2 Significance of the studyNGOs have grown in number, significance and influence as well as the amount of developmental funds that donors are channelling through them. It is therefore important to ensure that there is a sound financial reporting framework for the preparation and financial statements of NGOs to enhance their accountability. Due to the nature of the NGOs, there are important issues that the current financial reporting frameworks mostly adopted from the private sector do not adequately address. There is a growing global debate on the significance of developing global financial reporting standards for NGOs and the study will give input of Malawian NGOs needs and position on the discussions.2.0 LITERATURE REVIEWIntroductionLiterature review is important to acquire knowledge and insight of previous research and the general emerging of the current research in the subject area (Saunders, Lewis and Thornhill, 2009).
Knowledge of related research enables investigators to define the borders of their field, enables researchers to place their questions in perspective, help researchers to narrow the research question and to clarify and define the concepts of the study (Ary, Jacobs and Sorensen, 2010). This chapter will review literature on Major conceptual frameworks for financial accounting, the nature and objectives of NGOs, the financial issues and transactions distinct to NGOs and literature on main user groups of NGO financial information and literature on NGO accountability. Conceptual Frameworks of financial reporting and Accounting StandardsA conceptual framework for financial reporting is a theory of accounting that an accounting standard setting body develop against which practical problems objectively evaluated. It addresses fundamental financial reporting issues including; the objectives of the financial statements, the users of the financial statements, characteristics that make financial statements useful, the basic elements of financial statements and the concepts for recognising and measuring the elements in the financial statements (Financial Times 2018).
IFRS’s Conceptual frameworks for financial reporting describe the objective of general purpose financial reports as ‘…to provide financial information about the reporting entity that is useful to intended users (IFRS Foundation, 2015). This connotes three main elements in the objectives of general purpose financial statements; the reporting entity, the financial Information and the User. Each framework attempts to outline these main elements. Accounting standards are authoritative standards that must be followed when preparing financial reports (Accounting Standards Board- Canada, 2017). Accounting Standards can either be principle based or rule based. The principle based accounting standards are developed based on underlying principles for preparation and presentation of financial statements that are enshrined in a conceptual framework. The rule based statements are mostly based on enacted laws.
Currently the trend is moving towards the principle based standards because the conceptual framework platform ensures that accounting treatment of the same item between standards is consistent. Accounting standards specify how transactions and other events are to be recognized, measured, presented and disclosed in financial statements. Accounting standards are developed by national accounting standards boards or similar accounting professional bodies mandated to develop accounting standards. At the international level the International Accounting Standards Board under the oversight of the International Federation of Accountants is responsible for preparing accounting standards for the business sector and the International Public Sector Accounting Standards Board for Accounting Standards for the public sector.
To provide a framework for developing accounting standards, standards setting bodies develop conceptual frameworks for Financial Reporting. Nature and Objectives of NGOsAccording to islay-initiative (2017), the society is divided into three sectors; the first sector is the public sector made up of the government, the second sector made up of commercial enterprises and the third sector made up of not for profit organisations or NGOs. Entities in this third sector are called different name; NGOs, Non Profit Organisations (NPO), Not Profit Institutions (NPI) and Not for Profit (NFP). All there terms mean the same thing in general terms.The United Nations (2003) defines Not for Profit Organisations NPOs as; legal or social entities constituted to provide goods and services which by their status came not bring income, profit or economic gain to the entity. NPOs in practice generate surpluses or deficits but the surplus they happen to make cannot be appropriated.
The not-for-profit sector has historically not been given attention more because of conceptual than empirical reasons and the sector is ill understood because the concepts used to depict the boundaries of the non-profit sector are ambiguous (Salamon and Anheir, 1992). In attempting to address this problem, Salamon and Anheier (1992), developed a structural /operational definition of NGOs. This definition is built on five underpinning core structural or operational features that distinguish non-profit sector from the public sector and the private sector: (i) formally constituted; (ii) non-governmental in basic structure; (iii) self-governing; (iii) non-profit-distributing and (iv) voluntary. For an entity to be considered as an NGO, it is required to have a structure, rules or constitution to ensure that the organisation is separated from the founders and live beyond their existence (Lyons, 1998).
It also distinguishes an organisation from an informal grouping of people with common interest. The NGO Act in Malawi, provide that the NGO Board can only register entities as NGO if the entity is recognized as legal entity under the laws of Malawi (NGOs Act, 2000). NGOs must be structurally and operationally independent of government. This implies that government must not have powers to appoint a majority of the organization’s governing board members (Lyons, 1998). Further to the non-governmental criteria, self-governing tests whether the entity is independent of other organizations. This can be satisfied when the organization’s constitution gives powers to governing board to shape the direction of the organisation (Lyons, 1998).
While acknowledging that for organisations need to make profits to survive, the distinguishing factor is that non-profit organisations do not pursue profit maximization as an objective and cannot distribute any surplus to its members and employees (Lyons, 1998). Voluntarism is considered from two aspects. First, NGO must have some voluntarism in their operations and membership to the NGO should not be by coercion. This structural/operational definition however has the limitation of excluding some players in the non-profit sector as argued by Morris (2000).
Furthermore, Atingdui (1995) emphasized the significance of grass root organisations and faith based organisation in ‘producing goods and services whose status does not permit them to be a source of income’ (United Nations, 2003) but do not meet this definition of non-profit organisations.The Malawi definition of an NGO is provided by the NGO Act (2000) which defines an NGO as;’… Organization constituted for a public benefit purpose to which the provisions of this Act are applicable.’ And it defines public benefit purposes as: ‘organizational purposes involving developmental and charitable purposes including but not limited to, educational, health, welfare, advocacy, cultural, civic, social, recreational, scientific, environmental, or other similar objects for the benefit of the general public, a section thereof or members of the organization but excluding involving the activities of a church or religion, trade union, employers organization or political party.’ From the Malawi legal perspective, the first sector is mainly made up of limited by share companies and is governed by the Companies Act 2013. The act has detailed financial reporting frameworks and requires all companies to report using international financial reporting standards (IFRSs) developed by the International Federation of Accountants. The second sector, the public sector is regulated by Public Finance Management Act 2003 that outlines the financial reporting framework for the public sector bodies including central government, local government and statutory corporation. The third sector is made up of trusts and limited by guarantee companies.
The trusts are regulated by the Trustees Incorporation act 1939 and the limited by guarantee companies are governed by Companies Act 2013. Whereas financial reporting in the public sector in Malawi is regulated by the Public Finance Management Act, and the private sector has adopted the IFRSs, NGOs do not have specific financial reporting frameworks. As a result, NGOs is Malawi prepare financial reports using several frameworks for preparing financial reports including IFRSs, IPSAS and some adopt other country based standards and frameworks for NGO reporting. This makes the financial statements of NGOs devoid their fundamental qualities and enhancing qualities.
The challenges arising from using for-profit Accounting standards and frameworks in NGOs arise because the nature and purpose of the organisations are so different, the NGOs has specific transactions that are not covered by the for-profit standards and the users of the financial statements are different.A few countries have developed frameworks and standards for NGO financial reporting and at the global/international level there is a debate seeking to build a case for developing international financial reporting standards for NGOs. In Africa, the Pan African Federation of Accountants (PAFA) has initiated discussions on the need for either developing a standalone framework for NGO or to either adopt IFRSs or IPSAS (Soetan, 2017).The Distinct Financial Issues and transactions in NGOs’ financial reportingGhandi (2005) argued that globally, over history, the international accounting standard setting bodies have prepared accounting standard with the for profit sector in mind as a result NPO specific issues are not particularly considered in the standard setting process. They identified seven main issues as: cash vs accruals accounting, fund accounting, inter-fund transfers, treatment of fixed assets, treatment of contributions, pledges and non-cash contributions, accounting for investments and financial reporting of expenses. Davis (2012) notes that although there are similarities between for profit and not for profit financial issue in IFRSs, there are some differences in emphasis like issues to deal with usefulness of financial information.
He further notes areas of significant differences including; non exchange transactions, funds accounting, measurement of assets and importance placed on profit. CCAB,(2014) identified; Fund accounting issues, valuation of assets, NGO specific liabilities, Non emphasis on profit and non-exchange transactions as key NGO specific issues.Main users of NGO financial reports and NGO accountabilityUsers of NGO financial reports are more diverse than those of for profit organisation. The Charity Commission of England and Wales states the objective of annual report and accounts as, ‘…to provide information about a charity’s financial performance and ?nancial position that will be useful to a wide range of stakeholders … And Identify some specific users as being ….; funders, donors and ?nancial supporters of a charity as primary users and Charity’s service users and other beneficiaries.’ (Charity Commission and the Office of the Scottish Charity Regulator, 2013)As cited in the International financial reporting for not for profit commissioned by (CCAB) (2014), (Unerman and O’Dwyer, 2006) argue that there are three levels of accountability beliefs across a spectrum. They include, broad relational accountability (accountability to all stakeholders affected by the actions of an entity); mission critical accountability (accountability only to those stakeholders who can influence the achievement of the organisation’s objectives); and narrow financial accountability (accountability to maximize economic return). While the spectrum of users is broad for NGOs, EYGM Ltd (2010) notes that there are proposals to narrow the definition of users of financial statements in IFRS conceptual framework to investors, lenders and creditors.
3.0 CONCEPTUAL FRAMEWORK AND RESEACH DESIGNThe dependent variable in the study is; Adequacy of the Current Financial Reporting Frameworks used by Malawian NGOs in Preparing GPFRs.The independent variables are • Adequately addressing distinct nature and objectives of NGOs• Key NGO special transactions and financial issues taken into consideration.• NGO diverse and distinct GPFRs user needs met satisfactorilyThis is represented diagrammatically in figure 1.
BelowFigure 1: Schematic diagram showing the relationship between variables The research is intended to focus on local NGOs in Malawi and will be done through a sample survey. A survey is being proposed because of the volume of the study population and resource constraints. It shall follow the deductive approach to research. The research is an explanatory research and will be undertaken to establish and measure correlation between the individual independent variables and the dependent variable. The variables are going to be operationalized by identifying their measurable values so that quantitative data is collected. In order to collect data a questionnaire will be developed based on: the research questions, theory and literature review. The questionnaires will be send to respondents through email for them to respond electronically.
Before the questionnaire is rolled out, it is going to be pre-tested among a small group of respondents and refined. The planned respondents are preparer of GPFRs in the sampled NGOs. These are being considered because they have technical experience in preparing and presenting the GPFRs and can be proxies of the diverse users of the GPFRs as getting views of the diverse users will be constrained by time and other resources. The study population for the purpose of the research is Local NGOs in Malawi and have been active in the past three years. The population frame will be built by looking at NGOs that have fully paid their annual subscriptions with the Council for Non-Governmental Organisation in Malawi, CONGOMA for the past three consecutive years. This basis has been arrived at because for the NGO Board to register an NGO and renew its annual registration, it requires the NGO to be in good standing with CONGOMA. The sample size will be determined after establishing the desired precision level, the confidence level, the number of elements, resource constraints and variability in the population after stratifying and sampling error. Data collected from the questionnaires will be validated.
Data will then be analysed using statistical software to determine correlation relationships.The main challenges envisaged are resource constraints in terms of financial and time. This research design has mitigated this by proposing distribution of questionnaires through email. It is expected that this will reduce the resource requirements. The email based distribution has challenges of non-response. This will be mitigated by building in a non-response factor to the sample size.TimescaleIt is expected that the research will take six months from developing a research proposal to the final submission of the thesis.
The detailed plan of activities is outlined in a table below.Activity/timeframe in Months Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18Writing the research proposal Submitting the research proposal for approval Critical literature review Incorporating comments Data collection Data analysis Data Interpretation and Deduction Drafting thesis Reviewing the draft Submission of final version Tentative Defence Resources required for the research:For the research to be undertaken successfully the following resources will be required;1. Statistical data analysis software2.
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