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An empirical study on the

determinants of information
disclosure of Malaysian
non-profit organizations

Determinants of
information
disclosure
35

S. Zainon
Faculty of Accountancy, Universiti Teknologi MARA, Segamat, Malaysia

R. Atan
Accounting Research Institute and Faculty of Accountancy,
Universiti Teknologi MARA, Shah Alam, Malaysia, and

Y. Bee Wah
Centre of Statistical and Decision Science Studies,
Faculty of Computer and Mathematical Sciences, Universiti Teknologi MARA,
Shah Alam, Malaysia
Abstract
Purpose The purpose of this paper is to examine the determinants of the extent of disclosure by
non-profit organizations (NPOs) in Malaysia due to the growing interest in the disclosure practice
studies of NPOs and given the importance of disclosure to ensure accountability and transparency.
Design/methodology/approach This study involves three phases. First, the paper identifies
information items NPOs need to disclose. Second, the paper conducts an online survey to determine
the ratings of importance for the disclosure items. Third, the paper measures the extent of disclosure
from the annual returns of 101 Malaysian NPOs for the year 2009. The paper uses hierarchical
regression analysis to determine the significant determinants of information disclosure.
Findings The key determinants are establishment of an external audit, financial performance and
government support in terms of grants. The results show that the presence of external auditors
promotes better reporting practice. Malaysian NPOs that receive funding and those with better
financial standing disclose more information.
Research limitations/implications The sample only covers NPOs with tax-exempt status in the
state of Selangor and Wilayah Persekutuan in Malaysia. The sample size of 101 registered NPOs limits the
generalization of the results. Inclusion and analyses of additional NPOs may offer generalizable results.
Practical implications This study provides empirical evidence concerning the establishment of
external audit for better information disclosure. It also provides 88 items that are important and
required by stakeholders.
Originality/value The study is based on 88 items of information according to the needs of
stakeholders for information. The NPOs reporting index can assist the preparers of charity reporting
in fulfilling the stakeholders requirements. The reporting index can also be used to assess the
information disclosure of NPOs in Malaysia.
Keywords Governance, Reporting, Disclosure, Non-profit organizations, Information
Paper type Research paper

1. Introduction
Non-profit organizations (NPOs) are charitable corporations or societies that aim to
carry out any social mission for the good of the community. The NPOs in Malaysia
operate at the local, national or international level and they command a significant
presence in the country. The Societies Act 1966 and Societies Regulations 1984 under

Asian Review of Accounting

Vol. 22 No. 1, 2014
pp. 35-55
r Emerald Group Publishing Limited
1321-7348
DOI 10.1108/ARA-04-2013-0026

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the Malaysian Ministry of Home Affairs govern the NPOs in Malaysia. The main
statutes dealing with the establishment and regulation of NPOs in Malaysia are
the Societies Act 1966 (Act 335) and Societies Regulations 1984 and the Income Tax
Act (ITA) 1967 issued by the Inland Revenue Department (IRD). Few NPOs register
under specific acts (e.g. the Sports Commission Act, the University and University
Colleges Act 1971 or Youth Commission Act), while others register themselves
under the Companies Act 1965. NPOs practice of disseminating information to
stakeholders reflect the organizations accountability and transparency. Recently,
both the Malaysian regulatory bodies and academic researchers show interests in the
governance of NPOs.
This study examines the extent and determinants of NPOs information disclosure.
NPOs may receive funds from various resources, such as donations, membership
fees, fundraising revenue or grants to help the organizations provide their services.
The basic resources of funds are from individuals or corporate donations (Froelich,
1999). Other common resources of funds are in the form of grants from the government
or private foundations. Alternatively, NPOs may be involved in commercial activities,
such as fundraising activities or programme campaigns to increase their donations.
The NPOs in Malaysia may also obtain government grants from the Welfare
Department under the Ministry of Women, Family and Community Development.
NPOs receive variety of resources such as membership fees, donations or funds from
fundraising activities. One of the issues often raised is whether these organizations
have been efficiently utilizing the resources that they have been receiving from the
government, as a local funder, and from charity donors. Donors suffer from
information asymmetry and misallocation of gifts because NPOs delay or limit their
release of information. Thus, NPOs would perform better by communicating relevant
information to potential donors.
Disclosure is a fundamental precondition for accountability. NPOs annual reports
serve as the main medium of communication through which the NPOs communicate
information and activities to their stakeholders (Hyndman and Anderson, 1995).
The content of NPOs annual reports serve as a basis for the NPOs financial reporting
framework. A noteworthy contribution to such framework has been provided by
Hyndman (1990, 1991) who developed a priori model for reporting to the stakeholders
of NPOs. However, critics argue on the effectiveness of using annual reports as a means
of discharging accountability to stakeholders (Hooks et al., 2002). This is due to the
complex financial statements that are contained in the annual reports, thus leading
to the necessity of developing a more comprehensive list of items that needs to be
disclosed by NPOs.
In developed countries, for example, the USA, NPOs are required to file Form 990 to
disclose their financial information. However, Malaysias law lacks such comparative
financial disclosure or uniform framework for NPOs. The absence of regulatory
requirements implies that there is insufficient information available about the
effectiveness of individual NPOs, their programmes and stewardship of community
resources used, including when these resources comprise public monies or public
company shareholder funds. In addition, it is important to have policies and procedures
in place that support relevant, accurate and up-to-date information. This ensures
that the financial information used by NPOs is meaningful and helpful to stakeholders
who are also decision makers. A deficiency in governance and a poor financial
reporting system may also conceal any form of money laundering and fraud
within NPOs.

The studies on information disclosure focus on the determination of the disclosure

index using the unweighted or weighted index (Coy et al., 1993; Gandia, 2011; Gandia
and Archidona, 2008; Wei et al., 2008). Similarly, this study develops a disclosure
index, which considers the rating of information items according to the importance
determined by stakeholders. Using the developed disclosure index, this study
investigates the effect of some organizational-specific attributes concerning the extent
of information disclosure by NPOs in Malaysia.
This paper is organized as follows: Section 2 provides a literature review on
information disclosure and the determinants of the disclosure index. Section 3
discusses the research design. Section 4 explains the theoretical framework and
research hypotheses. Section 5 discusses the results, and Section 6 concludes the paper.
2. Review of literature
Disclosure is a means of discharging accountability to the stakeholders. According
to Keating and Frumkin (2003), the stakeholders, such as investors, creditors, donors,
clients and the government, assess the performance of organizations by analysing
the disclosure of information in annual reports. These performance assessments
influence stakeholders to support donations to the organizations in the future
(Gandia, 2011; Parsons, 2007). There have been few studies that are related to the
disclosure levels and the amount of future donations received (Gandia, 2011; Parsons,
2007; Tinkelman, 1996). However, there is further evidence that the stakeholders
and regulators are more interested in the information concerning the efficiency and
effectiveness with which non-profits operate (Cherny et al., 1992; Drtina, 1984).
Various determinants may affect the extent of information disclosed by NPOs.
Some researchers acknowledged that determinants, such as the enforcement of law
provisions through legal Acts and Statutes (Andres-Alonso et al., 2006; Gandia, 2011;
Guo, 2007; Herman and Renz, 2000) could enhance accountability, governance and
stewardship in NPOs, particularly in the management practice of NPOs.
The information disclosure of NPOs may attract or increase the contributions
of donors if the donors are assured of the effectiveness of the reports of NPOs
(Buchheit and Parsons, 2006). Some disclosure studies have analysed the effects of the
extent of disclosure of information on the private donations received. In these studies,
the disclosed information includes the financial information as one of the main focus
areas (Behn et al., 2007; Parsons, 2003; Trussel and Parsons, 2008), disclosure of
performance information in service effort and accomplishments (Buchheit and
Parsons, 2006; Gordon et al., 2002; Parsons, 2007) and its relationship with governance
(Andres-Alonso et al., 2006; Krishnan et al., 2006; Reid and Turbide, 2012).
Regulators and oversight bodies (such as the Charity Commission for England
and Wales) recognize the need for monitoring to reduce information asymmetry
through the disclosure of information. This is because the main purpose of NPOs
is to serve the public community and not to maximize shareholders wealth as in the
profit organizations. NPOs receive benefits in terms of tax-exemption status when
they comply with the rules and requirements of the IRD. Donors also benefit in
terms of donations made by them to these tax-exempt NPOs contributions are
tax deductible.
One of the important determinants studied in the non-profit literature includes the
importance of information in resource allocation decisions. Anthony and Young (2003),
and Gordon et al. (1993) reported that the availability of information appears to be
a key determinant in the efficiency of resource allocation decisions (Cutt et al., 1996)

Determinants of
information
disclosure
37

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and in mitigating information asymmetry (Parsons, 2007). In addition, the information

is found to be useful for assessing accountability and for decision making (Hancock
et al.., 2010). Prior studies provide support for the usefulness of information for
the stakeholders. They need a range of information for multiple informed decisions,
such as for funding decisions (Gandia, 2011), contracting or regulating decisions (Watts
and Zimmerman, 1986). Greenlee and Brown (1999) claimed that the widespread
availability of accounting reports and other financial statements have an impact on users
for decision making. Other studies (Hyndman, 1990, 1991; Christensen and Mohr, 2003;
Gordon and Khumawala, 1999) reported that non-profits that publish adequate attract
more donors.
The reviewed literature provides evidence that the general purpose of financial
reports is for the need for information by the users. The needs of users could be
summarized as information to satisfy their interests concerning the financial viability,
fiscal compliance, management performance and the cost of services provided by
NPOs (Anthony, 1978; Daniels and Daniels, 1991). This is also pointed out by Sutcliffe
(1985) who said that the information needs of the users:
[y] are likely to overlap since, to some extent, they are all interested in confirming that
resources have been used economically, efficiently and effectively for the purposes prescribed,
in assessing the ability of, and resources necessary for, the entity to continue to provide
services in the future and the nature and cost of those services (pp. 16-17).

It is thus clear from these findings that the demand from the stakeholders to acquire
such information is considerable. The disclosure of information is considered an
indispensable activity in that the organizations surrender information (accountability)
and the stakeholders can then value the effectiveness and efficiency of the
organizations (Gandia, 2011). On the other hand, accountability entails the duty to
provide an account by no means necessarily a financial account or reckoning of those
actions for which one is held responsible (Kearns, 1996). This accountability involves
two responsibilities or duties; the responsibility to accept obligations or forebear
from taking those actions, and the responsibility to account or report for those actions.
However, a large number of NPOs still refuse to disclose any information to the public,
particularly financial data. Furthermore, NPOs information disclosure remains
optional in Malaysia.
3. Methodology
The study on information disclosure of NPOs in Malaysia involves three phases.
Phases I and II involved the development of the NPOs reporting index. In Phase I,
the list of information items was identified through the review of the literature
concerning information disclosure and interviews with stakeholders. In Phase II, we
survey NPO donors to confirm the items identified in Phase I and to obtain the weights
of importance for each item. In Phase III, we measure the extent of disclosure by
completing the disclosure score sheet or, NPOs reporting index. Details of the NPOs
reporting index developed are attached in the Appendix. Figure 1 depicts the phases
involved in the study for which the explanation follows.
Phase I qualitative method
In this phase, we conduct semi-structured interviews with institutional donors
and NPOs to determine the items of information needed by the stakeholders
(i.e. institutional donors). Based on the interviews and review of the literature, a total of
88 items were identified (Saunah et al., 2012).

Phase I
Phase II
Identify the
stakeholders
needs for
information
from NPOs
annual reports
Review of
Literature
Interviews

Phase III

List of
informati
on items
(88)

Donors online
survey to obtain the
rating of importance
(or weights) for the
items in NPOs
reporting index

NPOs Reporting
Index

Determinants of
information
disclosure
39

Analyse annual
reports of NPOs

Extent of information
disclosure

Relate the extent of

information disclosure to IVs

Figure 1.
Phases of the study

Phase II survey
In this phase, we carry out an online survey to institutional donors to determine
the weights of importance for the items in the NPOs reporting index. A total of 590
online questionnaires were sent to the public-listed companies (institutional donors).
Out of 140 returned questionnaires, only 117 (19.8 per cent) were found usable. The
respondents were officers attached to the corporate social responsibility or corporate
sustainability department.
Phase III content analysis
In Phase Three, we obtain empirical evidence through content analysis of NPOs
annual reports to determine the extent of information disclosure. Content analysis
provides a useful way to examine the content of documents or archival records in a
systematic, objective and quantitative manner (Hall et al., 2003). We differentiate each
annual report by assigning one NPO reporting score.
Sample and data collection
The population comprised charity organizations that are registered with the ROS
and are eligible for tax-exempt status under the subsection 44(6) of the ITA 1967. The
organizations must be established in Malaysia for charitable purposes only and carry
out charitable activities in Malaysia in order to be eligible for approval under
subsection 44(6) of the ITA 1967. The charitable activities can be classified under four
headings: the relief of poverty; the advancement of education; the advancement
of religion; and other purposes beneficial to the community, not falling under any of the
preceding headings. As of April 2011, 1,292 registered NPOs were granted the status of
tax-exempt. However, only 101 of these registered NPOs (36 from the state of Selangor
and 65 from Kuala Lumpur) had completed annual reports for the year ended 2009,
which were taken as samples for this study.

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4. Theoretical framework and research hypotheses development

The theoretical framework of this study assists in the development of the predicted
relationships among the governance mechanism, performance, organizational type and
the extent of disclosure. Past studies indicate that the availability of past experience
with NPOs and information on specific projects has a significant effect on the value of
satisfaction. These studies indicate that satisfaction and benefits derived from
a donation have a direct impact on the behavioural intention to donate (Gipp et al.,
2008). The two theories used in this study are the stakeholder theory and the resource
dependence theory (RDT). The stakeholder theory is based on the accountability
relationship of NPOs to the stakeholders via the use of information disclosure.
The framework for the study is developed within the scope of upward accountability
(Edwards and Hulme, 1996), on the concerns of NPOs accountability towards their
stakeholders. Pfeffer and Salancik (1978, p. 2) clearly noted that the key to
organizational survival is the ability to acquire and maintain resources. The RDT
emphasizes the impact of external funding on how organizations operate, and proposes
two broad principles: first, organizations are constrained by, and depend on, other
organizations that control resources, and second, organizations attempt to manage
their dependencies on external groups. In a similar vein, Heimovics et al. (1993)
suggested that RDT has been explicit that organizations must be accountable to the
stakeholders for their actions. The stakeholder theory and RDT provide an
adequate disclosure framework for this study for the analysis of funding (funded and
non-funded NPOs), governance (internal governance board involvement vs external
governance external audit) and financial performance.
To assess the extent of disclosure by the NPOs, this study considers two different
groupings of the sample (that is funded and non-funded). They are different in terms of
the sources of the financial support that they receive. Funded NPOs are defined
as those organizations receiving financial support in terms of grants from the
government (that is either from the federal or the state government) or private grants.
On the other hand, non-funded NPOs are those not receiving any financial support in
the form of grants. Despite their differences, both types of NPOs share the same
governance mechanism and audit status. Figure 2 depicts the relationship among the
variables in the theoretical framework.
DV
IVs
Internal
NPOs
Governance
External
Extent of
Information
Disclosure

Financial Performance

Organizational Type

Funded/Non-funded

Figure 2.
Theoretical framework
Control Variable: Age and Total Assets

Total extent of disclosure

Disclosure indices were implemented in many disclosure studies (Chow and
Wong-Boren, 1987; Ghazali, 2008; Haniffa and Cooke, 2002; Ho and Wong, 2001) on
the grounds that the underlying variable is not amenable to measurement (Marston
and Shrives, 1991, p. 197). In a similar context, the disclosure index has been applied in
the not-for-profit disclosure studies. The index also has applications within the diverse
settings in the NPO sector, such as in NPOs reporting. Previous literature on NPOs
has highlighted the use of indices to measure the extent of annual reporting disclosure.
The disclosure indices can be segregated either by dichotomous scoring (unweighted
index) or assigning each item some weightage in computing the index numbers
(weighted index). In this study, we use NPOs reporting index, fields 498 items and
the disclosure index to calculate the actual scores of an organization compared to the
scores that the organization is expected to obtain. Hence, for each organization j
( j 1, 2, y ,101), the weighted disclosure index is calculated where the index I j for
each set of annual returns is defined as:
Number of items disclosed
Total number of items 498
Pn
Xij
 100
i1
498

Disclosure Index; Ij

where n total number of items, Xij 1 if ith item is disclosed and otherwise.
Governance
Governance is the distribution of rights and responsibilities among and within the
various stakeholder groups involved, including the way in which they are accountable
to one another. Governance also relates to the performance of the organization, in terms
of setting objectives or goals and the means of attaining them (Hyndman and
McDonnell, 2009, p. 9). Governance indicators include transparency and accountability
as major pillars. To begin the development of verifiable hypotheses on the relation
between the governance and organizational disclosure of information, the governance
mechanism is divided into two groups: internal and external governance.
Internal governance
An important governance mechanism used to monitor and control the NPOs is the
internal governance, represented by the board of trustees[1]. Theoretically, a larger
board of trustees is needed to increase revenue support. Pfeffer (1973, p. 349) argued
that boards can be as one possible mechanism linking the organization with its
environment and therefore larger board size is needed to tie non-profits to broader
stakeholders and funding bases in the community. Provan (1980) supported this
argument and found that the revenue generated is indeed related to the size of their
board of directors.
Provan further argued that a larger board would facilitate a wider community
representation. Recent evidence from empirical investigations also seems to support
that the revenue is positively and significantly associated with board size (Chen, 2009;
Olson, 2000; Stone et al., 2001). This study proposes that as more members are
added to the board, there would be better levels of monitoring. A larger board of
trustees may also be important because of the increase in the levels of fundraising
and improved performance. However, opposing evidence was also found in studies

Determinants of
information
disclosure
41

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relating performance to board size (Andres-Alonso et al., 2006; Callen et al., 2003)
and disclosure to board size (Gordon et al., 2002). Further empirical investigation is
therefore needed. Given the strong theory in support of a positive relationship, we
hypothesized that:
H1a. NPOs with large boards of trustees disclose information to a greater extent
than those with small boards of trustees.
A non-profit governing board not only functions as the governing body of the
organization, but also performs a networking function through links with various
stakeholders and the environment (Callen et al., 2003). Much of the literature on
governing boards addresses the effect of outside directors as a monitoring device.
Although the presence of some insiders with specific knowledge about the function of
the organization for strategic decision making is essential, external directors do
provide a certain level of independence for monitoring managerial activity (Baysinger
and Hoskisson, 1990). External directors, who are either elected or appointed during
the annual general meeting (AGM), can be of a diverse nature different races, gender,
experience and qualifications. The composition of the board from outside is perceived
as a tool for monitoring management behaviour, resulting in more disclosure of
information. Thus, we hypothesize:
H1b. The presence of institutional donors on the board of trustees will be positively
related to the extent of disclosure of information.
External governance
An external audit is considered as an essential component in corporate governance and
the establishment of the external audit has been advocated in NPOs. However, the
external audit in NPOs may function differently from the corporate sector, particularly
in compliance with statutory requirements. The IRD requires the NPOs in Malaysia to
have an audited financial statement for the purpose of application for tax-exempt
status. This function is performed by an external audit in an effort to enhance the
standards for non-profit accountability and ensuring the quality of financial reporting.
Pridgen and Wang (2007) found that the external audit does not improve
accountability, as measured by the reported internal control weaknesses. Given the
function of an external audit within the non-profit context, Iyer and Watkins (2008),
and Yetman and Yetman (2004) argued that the existence of an external audit may
improve internal control and thus considered it as an effective monitoring device for
improving disclosure quality. This leads to the following hypothesis:
H2. The establishment of an external audit is positively associated with the extent
of disclosure of information.
Financial performance
Performance is an important issue in NPOs because they are not only established
solely to generate profits, but are also established with specific social missions
and objectives to fulfil the needs of society. This study considers the financial and
non-financial performance. Financial performance is one of the major elements in the
accounting discipline to analyse performance and position in the non-profit sector.
Financial performance often refers to the financial capacity of the organizations, which

is defined as the ability to develop and deploy financial capital (Hall et al., 2003). This
means that the overall financial resources (including the structure of financial
revenues) are very important to contribute to the sustainability of the organization.
The more financial resources are available, the money is available for organizational
programmes. Previous research has shown that funding levels (Trussel and Parsons,
2008) are the key drivers for organizational effectiveness. In respect of the revenue
structure, NPOs that depend on contributed income, such as donations, show that the
disclosure of financial information in the financial statements is very important since it
can influence a potential donors decision to donate. Previous studies provide evidence
that financial reports play a significant role in donation decisions (Hyndman, 1990,
1991; Khumawala and Gordon, 1997; Parsons, 2007). Through the financial reports
issued by NPOs, donors can obtain the necessary information for them to assess
and evaluate the performance efficiency of the organization. Therefore, based on the
findings from previous studies, it can be suggested that greater financial resources
would positively contribute to the overall disclosure functioning of NPOs. Accordingly,
we postulate the following hypothesis:
H3. Financial performance is positively associated with the extent of disclosure of
information.
Organizational type
It is possible that the disclosure in one type of organization is higher than in another
type of organization, depending upon the sources of their income. Previous studies
(Christensen and Mohr, 2003; Salamon and Anheier, 1997; Stone et al., 2001) have
looked at the relationship between government funds, United Way Funding and the
commercial income of NPOs. They found that there is a negative relationship between
commercial income and government funding, but no impact on the United Way
funding. In particular, the findings of Christensen and Mohr (2003) revealed that the
amount of financial data disclosure does not vary with the organizational type of
ownership (public and private) in respect of the extent of financial disclosure in
museum annual reports. With the increase in funding for the purpose of supporting
the delivery of social services by NPOs, the disclosure of information can be enhanced.
It can be implied that there is a difference in the disclosure between those organizations
that received funding and those that did not. The analysis of variance (ANOVA) used
to determine significant differences in earlier disclosure studies between public and
private colleges was found to be significant (Posey, 1980). Similarly, some studies have
reported that differences in the disclosure level exist between funded and non-funded
organizations (Desai and Yetman, 2005; Fischer et al., 2010; Gordon et al., 2002). Given
the above scenario, it is proposed that the stability of sources of income provided
through the funding will lead to a significant difference in the extent of disclosure
between funded and non-funded NPOs. Given the predominant positive relationship
found in the literature, we hypothesized that:
H4. The extent of disclosure is higher for funded NPOs.
5. Results
First, descriptive analyses prepare us to conduct hierarchical regression analysis. The
developed NPOs reporting index is divided into five categories: basic background

Determinants of
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disclosure
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information (BBI), financial information (FI), non-financial information (NFI),

future information (FTI) and governance information (GI). Table I provides the
summary statistics for the weighted index. The mean total weighted index is 141.16
out of the 498 maximum possible score. Overall, the scores for the weighted index
show a very low level of disclosure, with a minimum of zero for two categories of
information (NFI and FTI). The NFI and FTI categories of information are not required
by the regulatory body. Therefore, information may disseminate through other means
rather than in the annual reports.
The large standard deviations show there are large variations in the disclosure
practices among the sample organizations. This result is also consistent with the
literature that reported that the disclosure practices of NPOs vary greatly (Christensen
and Mohr, 2003; Connolly and Hyndman, 2001; Miller, 1997; Noraini et al., 2009).
Table II presents the descriptive results for the independent variables in the model.
The distribution of AGE, TASSETS and BSIZE are highly skewed, as shown
in Figure 3. Hence, these variables were transformed using log transformation.
Correlation matrix
Table III shows the Pearson correlation matrix of the weighted index with the
independent variables.
The results in Table III show significant positive correlations between the weighted
extent of disclosure (TWDISC) and some explanatory variables. TWDISC has a high
significant p-value with LnTASSETS ( po0.01) but low correlation (r 0.321).
TWDISC also has significant correlation with LnFINP (r 0.288, po0.05). The results
show that the extent of disclosure (TWDISC) with age and board size is significant but
that the correlations are not high (ro0.5 is not high).

Type of information

Table I.
Summary statistics for
weighted index

BBI
FI
NFI
FTI
GI
Total score

Number of
items disclosed

Mean

Median

SD

Minimum

Maximum

71
171
101
48
107
498

29.09
64.27
11.41
5.41
30.99
141.16

27.00
63.00
6.00
0.00
32.00
139.00

12.294
21.426
12.530
7.566
11.802
43.909

6
16
0
0
5

57
110
50
30
62
8

Notes: Total score 498 items; n 101; NPOs; mean number of items disclosed/101

Variable

Table II.
Descriptive statistics for
independent variables

Continuous independent variables

Board size (LnBSIZE)
Financial performance (LnFINP)
Size
Age (LnAGE)
Total assets (LnTASSETS)

Mean

Median

SD

Minimum

Maximum

2.5153
11.3098

2.4849
11.3504

0.44362
1.62332

1.61
7.01

3.87
14.95

24.45
13.3745

16.642
13.2711

19.00
1.182451

3
7.44

61
17.62

Notes: Total score 498 items; n 101 NPOs; mean number of items disclosed/101

20

40

60

TASSETS
Histogram of TASSETS

Histogram of AGE

100
96 37
49
94

86 97

83 38

AGE

10,000,000

20,000,000

10

20

30

30,000,000
22

40

64

56

50

40,000,000

50,000,000

38
37

30

52

46

27

50

Histogram of BSIZE

BSIZE

28

Determinants of
information
disclosure
45

Figure 3.
Distribution of AGE,
TASSETS and BSIZE

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The results show that LnFINP has a positive correlation with LnASSETS (r 0.266,
po0.05) but a significant negative correlation with LnBSIZE (r 0.219, po0.05).
As expected, there is a significant positive correlation between LnTASSETS and
LnAGE (r 0.352, po0.01). Similarly, there is a significant positive correlation
between LnBSIZE and LnAGE (r 0.478, po0.01). The correlation results show
the absence of multicollinearity since the strengths of the correlations among the
explanatory variables are all below 0.90 (Hair et al., 2010). Similar correlation results
are found between the unweighted index and explanatory variables.
Hierarchical linear modeling allows us to examine this data in a comprehensive
model and to evaluate the dynamics of the variables at different levels (Dong
and Stettler, 2011). Table IV presents the results of the hierarchical regression
modelling analyses.
In Model 1 (with control variables), only LnTASSETS is a significant predictor.
In Model 2, governance factors contribute to a significant R2 increase of 19.2 per cent.
^ 0:041, p 0.037) and EA ( b
^ 0:075,
The results show that LnBSIZE ( b
3
6
p 0.000) have a significant effect on the extent of weighted disclosure (TWDISC).
^ 0:033, p 0.052) is significant at the 10 per cent significance
Moreover, BID ( b
4
level. In Model 3 although the R2 increase (2.9 per cent), is not significant, financial

Variables
1.
2.
3.
4.
5.

TWDISC
LnBSIZE
LnFINP
LnAGE
LnTASSETS

0.064
0.288*
0.162
0.321**

0.219*
0.478**
0.079

0.148
0.266*

0.188
0.126

0.352**

Table III.
Pearson correlation matrix
Notes: n 101. * po0.05; ** po0.01
of weighted index

Predictors

Table IV.
Results of regression
analyses based on HLM

Constant
LnAGE
LnTASSETS
LnBSIZE
BID
EAUDIT
LnFINP
NFINP
TYPE1
TYPE2
R2
DR2
Adjusted R2

DV: TWDISC (weighted index)

Criterion variable
Control variable
Governance
Performance
Model 1
Model 2
Model 3
0.070
0.006
0.015*

0.106
0.088

0.155
0.007
0.010*
0.040*
0.033***
0.082**

0.298
0.192***
0.261

Notes: n 101, (Y TWDISC). * po0.05; ** po0.01; *** po0.10

0.087
0.012
0.007
0.033
0.025
0.080**
0.010***
0.006
0.327
0.029
0.276

Type
Model 4
0.095
0.006
0.003
0.012
0.025
0.081**
0.010*
0.008
0.041***
0.087**
0.499
0.173***
0.450

^ 0:01, p 0.063) is significant at the 10

performance in terms of total donations (b
6
per cent significance level. Finally, Model 4 indicates that TYPE2 of organization
^ 0:087, p 0.000) is significantly related to the extent of information disclosure.
(b
9
The TYPE of organization contributes to the significant R2 increase of 17.3 per cent.
The results show that LnTASSETS is not significant with financial performance
(LnFINP) when this variable is included in the model. In relation to R2, there is an
improvement from 10.6 to 49.9 per cent. The most notable improvement is the inclusion
of governance and type of organization.
The results presented in Table IV support three hypotheses (H2, H3, H4). First, the
extent of disclosure is higher for organizations: with the establishment of an external
audit; with better financial performance; and that received government support in
terms of grants. Second, the findings of this study offer accumulated evidence that
the organizational-specific attributes and the governance structure mechanisms are
reflected in the disclosure. Financial performance, as measured by the natural
logarithms of total donations (LnFINP), is one of the contributing factors towards the
extent of disclosure. This significant result supports the arguments put forth by
previous research on donations and disclosure (Behn et al., 2007; Gandia, 2011;
Parsons, 2003; Trussel and Parsons, 2008). Organizations that received higher
donations tend to disclose more information. They tend to be more accountable to their
donors and other stakeholders.
Organizations that established external audits also tend to disclose more
information. The results are consistent with previous studies undertaken in which
the extent of disclosure is higher when the establishment of an external audit may
improve the organizations internal control, and, consequently, improve the disclosure
quality (Iyer and Watkins, 2008; Verbruggen et al., 2011; Yetman and Yetman, 2004).
In addition, organizations that received financial support in terms of grants from
the government also tend to disclose more information. The results lend support
to the findings of Desai and Yetman (2005), and Fischer et al. (2010). Public-funded
organizations supported by government grants show a significant level of support to
the regulators call for more accountability and transparency in the disclosure of NPOs.
6. Conclusion
This study examined the determinants of the extent of disclosure by NPOs in Malaysia
and provided empirical evidence that external audit and funding have a positive effect
on information disclosure. This study highlighted the importance of information
disclosure by NPOs to strengthen accountability, transparency and financial support
from stakeholders. The results from this study can assist the preparers of charity
reporting in fulfilling the stakeholders requirements.
The best way to sustain the NPOs-donor relationships is for NPOs to strengthen the
relationship with donors through the disclosure of information (Nathan and Hallam,
2009). The disclosure of information further strengthens the mutual relationships
that meet the needs of both the donors and NPOs. As a donor, there are many tangible
benefits to giving, such as corporations can increase their profits by deducting
donations from their taxes and donations can play a role as a promotion or
advertisement to the corporation, and thereby reducing corporate operating costs.
Studies on donations as a social responsibility effort have shown evidence that
donations may also enhance social benefits. It follows that donors need details or
information from NPOs to establish a continuous relationship and financial support.
Failure by charities to provide the donors needs may cause the donors to walk away.

Determinants of
information
disclosure
47

ARA
22,1

48

The results of this study, based on the content analysis of charity annual returns,
provide insights into the disclosure practices of charity organizations. Future studies
may improve by including variables such as culture, quality of disclosure practices
and the effectiveness of external audit. Although completely explaining the variation
in disclosure is a difficult task, this study does provide evidence that three
organizational-specific attributes (external audit, financial performance and
organizational type) significantly influence the extent of disclosure.
The findings presented in this study also reveal a number of implications for
improving accountability and transparency in reporting. For example, rules and
regulations are useful in providing guidance when conveying important information
in annual returns and accounts. However, some management consider this of little
consequence because their main concern is fulfilling the requirement of the ROS
when they prepare these reports. Since the findings indicate that the views of preparers
and stakeholders differ significantly, there are practical implications to be drawn
here. The emphasis on providing the information needed by the stakeholders
should be enforced by the regulators. Taken together, the existence of the expectation
gap between the management of NPOs as the annual reports preparers and the
stakeholders may be reduced by the regulators involvement. Regulators should
consider imposing new standards and regulations for the implementation of charity
annual reports.
Note
1. In non-profits, the equivalent of the corporate board of directors is the board of trustees or
the executive committee. The executive committee of 101 NPOs in this study is also known
as the governing boards, board of trustees and board of governors. The terms are used
interchangeably.

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Appendix

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Determinants of
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About the authors

S. Zainon is a Senior Lecturer at the Faculty of Accountancy, Universiti Teknologi MARA
(UiTM), Segamat, Johor, Malaysia. She is currently a PhD candidate at the Universiti Teknologi
MARA (UiTM), Malaysia. Her research interest and publications are in the fields of financial
reporting in non-profit organizations, social responsibility, governance and accountability.
S. Zainon is the corresponding author and can be contacted at: sauna509@johor.uitm.edu.my
R. Atan (PhD) is an Associate Professor in Financial Reporting at the Faculty of Accountancy,
Universiti Teknologi MARA (UiTM), Malaysia. She is a Chartered Accountant (CA) of Malaysian
Institute of Accountant and holds a PhD in accounting and finance from the University of
Birmingham, UK. She is a member of UiTM-ACCA Financial Reporting Research Centre, and
also a member of Asia Pacific Centre for Sustainability (APCeS), Accounting Research Institute,
Malaysia. She is now in the editorial advisory and review board of Journal of Financial Reporting
& Accounting. Her research interests and publications are in the fields of financial reporting
in private sector and the not-for-profit sector, corporate governance and corporate social
responsibility.
Y. Bee Wah (PhD) is an Associate Professor in the Centre of Statistical and Decision Science
Studies, Faculty of Computer and Mathematical Sciences, Universiti Teknologi MARA,
Malaysia. She is currently the President of SPSS Users Association (Kuala Lumpur and
Selangor) and a member of the International Statistical Institute and Malaysia Institute of
Statistics. Her research interests and publications are in simulation study, social studies,
business research and medical research. She is actively involved in conducting workshops using
SPSS, Clementine, AMOS and SAS EMiner.

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