Can resource dependence explain not-for-profit organizations’ compliance with reporting standards? Sandra Verbruggen, Johan Christiaens, Koen Milis

HUB RESEARCH PAPER 2009/24 OKTOBER 2009

Can resource dependence explain not-for-profit organizations’ compliance

with reporting standards?

Sandra Verbruggen (HUBrussel, UGent), Johan Christiaens (UGent), Koen Milis (HUBrussel,

KULeuven en Univ. Tilburg)

Abstract

Not-for-profit organizations worldwide are confronted with an increasing demand for accountability

and improved financial transparency. Financial reporting by not-for-profit organizations is no longer

an exception, it has become a rule. The usefulness of a financial report to an organization’s

stakeholders is depending on its quality. The latter is safeguarded by reporting standards as well as the

commitment of the organization to fully implement these standards. In this research, it is hypothesized

that the dependence of the not-for-profit organization on external resources influences the degree to

which new reporting standards are implemented. Although resource dependence has been used in

earlier in research, no empirical research linking this theory to compliance with financial reporting

standards has been done so far.

Using a unique setting in which a large number of non-profit organizations are confronted with new

financial reporting regulations, the effect of resource dependence on accounting and financial

reporting compliance is documented.

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1. Introduction

Organizational behavior of not-for-profits (NFPs) has been the subject of extensive research. Quite

often, resource dependence theory has been used as a theoretical framework to explain several aspects

of organizational structure and performance. Executive leadership (Heimovics, Herman & Jurkiewicz,

1993), market orientation (Macedo & Pinho, 2006) and board involvement (Hodge & Piccolo, 2005),

board size and board structure (Stone, Hager & Griffin, 2001) as well as financial vulnerability

(Trussel, Greenlee, Brady, Colson, Goldband & Morris, 2002) have been linked to and explained by

dependence of not-for-profit organizations on external resources. However, up to now very little

attention was paid to resource dependence theory as an explanation of compliance with financial

reporting standards. Therefore, the main goal of this paper is to build on this theory in order to provide

insight into the efforts made by not-for-profit organizations to ensure compliance with (reformed)

financial reporting regulation. This compliance is necessary to safeguard the quality of financial

reports and the usefulness of these reports to the stakeholders of the organization who are calling for

increased accountability (Benjamin, 2008) and improved transparency. An empirical research

approach was applied to provide evidence on the relationship between resource dependence and

accounting compliance.

Resource dependence theory has been introduced by Pfeffer and Salancik (1978). Their theory is built

around the central hypothesis that organizations are constrained by external pressures and demands.

Consequently, “the key to organizational survival is the ability to acquire and maintain resources”

(Pfeffer & Salancik, 1978, p. 2). Resource dependence can be linked to the idea of coercive

isomorphism. This concept has been developed by DiMaggio and Powell (1983) as part of their

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institutional theory, explaining why organizations are driven to similarity, a process they call

‘isomorphism’.

According to resource dependence theory as well as institutional theory, the choices of an organization

are limited by external pressures. In the case of institutional theory, these pressures stem from the

institutional environment that sets and enforces the rules. This can be the government as well as

pressure groups or public opinion. Resource dependence theory stresses the pressures shaped by those

who control scarce resources (Oliver, 1991). In the case of non-profit organizations, both loci of power

(at least partially) coincide, since the government quite often is the institution that sets the rules and

holds the money. Therefore, resource dependence and institutional theory provide a theoretical

background to explain non-profits’ compliance with financial reporting regulation.

The remainder of this paper is built up as follows: section 2 gives an overview of previous research. In

section 3 research hypotheses and methodology are explained. The empirical framework and data are

to be found in section 4, followed by analysis and results in section 5 and 6. Conclusions and issues

for further research end this paper.

2. Previous research

2.1 Institutional Theory and Resource Dependence Theory

The central question in institutional theory is ‘why are (administrative processes in) organizations so

similar?’. In the view of Weber (1967) this is due to ever growing bureaucracy. This bureaucracy is

triggered by three causes: (1) competition amongst firms in the marketplace; (2) competition among

states, resulting in an increasing need to control staff and citizens, and (3) demands for equal

protection under the law. Weber also argues that the capitalist market economy is the principal reason

for bureaucratization.

When we consider accounting and financial reporting as an element of bureaucracy, these statements

appear to be valid as well. Financial market participants demand financial information to be

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transparent, unambiguous and timely. To achieve this, governments and standard setters around the

world set rules and regulations to make sure financial information is comparable for similar entities

and satisfies the various stakeholders.

DiMaggio and Powell (1983) argued that the causes of bureaucratization and rationalization have

changed and that they occur as the result of processes that makes organizations more similar, but not

necessarily more efficient. These processes are mainly driven by the state and the professions. These

authors use the concept of isomorphism, ‘a constraining process that forces one unit in a population to

resemble other units that face the same set of environmental conditions’ (DiMaggio & Powell, 1983,

p.149). They acknowledge the existence of two types of isomorphism, competitive and institutional.

Competitive isomorphism emphasizes market competition and is closely related to the process of

bureaucratization that Weber describes as a result of the company’s search for efficiency. Institutional

isomorphism supplements these views and explains the politics of organizational structuring and

bureaucratization as a result of a search for legitimacy. Three forms of institutional isomorphism are

identified: coercive, mimetic and normative isomorphism. Coercive isomorphism stems from pressures

on the organization by other organizations on which the former depends. Mimetic isomorphism is the

process in which organizations deal with uncertainty or ambiguity by ‘copying’ other organizations.

Normative isomorphism stems from professionalization. Formal education and professional networks

lead to the proliferation of insights, models and normative rules.

The idea of coercive isomorphism can be linked with resource depencence theory (Oliver,1991;

Carpenter & Feroz, 2001). According to resource dependence theorists, organizations are driven to

compliance with the requirements of strategic resource providers in order to deal with the pressures of

uncertainty and scarcity in their environment (Froelich, 1999). These resources can be material

resources (money, human resources), information and social or political support (legitimacy).

Organizations will survive if they can manage the flow of resources, by maintaining autonomy and

manage their dependencies on external groups (Greening & Gray, 1994). The degree of dependence

increases with concentration and importance of the provided resources (Froelich, 1999), which means

that organizations that depend heavily on one or very few resource providers are likely to experience

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stronger constraining influences from their environment. This is illustrated by the research of Meyer

and Rowan (1977) who indicated that the use of Generally Accepted Accounting Principles (GAAP) is

deemed helpful in retrieving financial support from external resource providers.

These central ideas of accounting and financial reporting as a tool for safeguarding resources lead to

the central hypothesis of this research: efforts made by organizations to comply with new financial

reporting and accounting standards are driven by their dependence on external resources.

2.2 Compliance with accounting and disclosure regulation

Defining quality of accounting and financial reporting as well as measuring them has been the subject

of extensive research. Given that ‘beauty is in the eye of the beholder’, financial reporting quality can

be defined differently for different users, sectors, countries, legislations or research agendas. However,

two broad methodological approaches can be identified. Some authors measure quality of financial

reports using one single measure, while others capture quality using an index that combines different

aspects of disclosure and/or GAAP compliance.

Recent US non-profit financial reporting research has focused on elements of expense misreporting

and accruals quality as a ‘single measure’ of quality of financial statements. Roberts (2005) and Jones

and Roberts (2006) have explored misreporting of expenses of joint fundraising and charitable

activities. Krishnan, Yetman and Yetman (2006) found evidence of understating fundraising and

administrative expenses in order to increase program expenses and program ratios. Yetman and

Yetman (2006) also used accruals quality as well as understated fundraising and administrative

expenses as a measure of reporting quality. Trussel (2003) assessed the likelihood that charitable not-

for-profit organizations manipulate financial information. In a non-US setting , Jegers and Houtman

(1993) based their research on the number of logical and arithmetical errors in hospitals’ financial

statements.

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Using an index to measure compliance with (new) accounting and disclosure standards is a time-

honoured methodology in public sector accounting research. Ingram and Copeland (1981), Ingram

(1984), Robbins and Austin (1986) and Allen and Sanders (1994) are examples of a first wave of

public sector accounting research, focusing on disclosure of financial information by public

authorities. More recently Krishnan and Schauer (2000) and Pina and Torres (2003) employed a

similar methodology in non-profit and international settings. Broadening the index from compliance

with disclosure requirements to financial reporting compliance in general, Christiaens (1999) and Da

Costa Carvalho, Camoes, Jorge and Fernandez (2007) turned their attention to the implementation of

business-like accounting principles in the public sector. Their compliance indices absorb disclosure

requirements as well as other features related to compliance with newly introduced accounting and

reporting standards. In addition to elements of disclosure, essential characteristics of financial

reporting according to accrual accounting are listed. Examples include the presence of debtors and

creditors in the balance sheet, timeliness of reporting, mechanical accuracy of financial statements,

etcetera.

In aforementioned studies both simple and compound indices are used. However, Robbins and Austin

(1986) and Ingram and DeJong (1987) found no significant difference between performance of simple

and compound indices.

3. Research question, contribution, methodology and hypotheses

3.1. Research question , contribution and methodology

Building on resource dependence and institutional theory, this research focuses on revealing whether

these concepts can provide insight into the efforts made by non-profit organizations to ensure

compliance with accounting and financial reporting standards. This leads to the following research

question: Can resource dependence and institutional theory help us explain the level of

compliance with accounting and reporting standards in not-for-profit organizations? The

question comprises two components: measuring and explaining the level of compliance. The first part

of the research (measuring compliance) has a longstanding tradition. Therefore, the method used in

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this paper builds on previous work. Explaining the level of compliance using resource dependence and

institutional theory in an empirical setting contributes to the literature on both theory and practice of

non-profit organizational behavior.

The compliance index, presented in appendix, is an instrument to measure compliance with new

accounting legislation or standards. Characteristics (such as timeliness, reliability, comparability, etc),

described in Generally Accepted Accounting Principles (GAAP) as being essential for qualitative

financial reporting, are embedded in the index. Therefore, the focus of this compliance index is

broader than merely meeting disclosure requirements and therefore shows large similarities with

indices used by Christiaens (1999) and da Costa Carvalho et al. (2007). Other previous research on

which the index is based includes Ingram and Copeland (1981), Ingram (1984), Robbins and Austin

(1986), Dixon, Coy and Tower (1991), Jegers and Houtman (1993), Krishnan and Schauer (2000),

Giroux and McLelland (2003), Pina and Torres (2003).

To explain the level of compliance, resource dependence and institutional theory are used in an

empirical setting in which 925 NFPs are confronted with invasive and new accounting and reporting

legislation. The degree to which NFPs are devoted to complying with the regulation is essentially the

choice of the organizations, since external monitoring is lacking. This unique empirical setting allows

for testing the effect of resource dependence and institutional theory on not-for-profit organizational

behavior.

To empirically test the effect of resource dependence and isomorphism, several quantitative proxies of

resource dependence (dependence on governmental funds, financial loans and donations, professional

board) and coercive isomorphism (audit) and are identified. The link between the degree of

compliance with financial regulation and these variables is tested using regression techniques (similar

to e.g. Allen and Sanders, 1994; Christiaens, 1999; Giroux and McLelland, 2003).

3.2. Hypotheses

Using resource dependence theory, we hypothesize that organizations which depend heavily on

government funding will be more willing to make the necessary efforts to comply with new rules and

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make sure that their financial reporting is up to a high standard. If not-for-profits believe that the flow

of governmental funds is conditional on conformity with the new accounting regulations, than this is

also a form of pressure on the organizations to comply and adjust their structure and activities to be

able to do so.

H1. The level of compliance will be higher when NFPs are depending more heavily on

governmental resources.

Financial institutions are professional users of financial statements. They have the knowledge, the

ability, the experience as well as the custom to scrutinize financial statements before making

investment decisions. Leverage has been used in previous research, for example by Robbins and

Austin for governments (1986), by Jegers and Houtman for hospitals (1993) as well as by Yetman and

Yetman for NFPs (2006).

H2. The level of compliance will be higher when NFPs are depending more heavily on debt-

financing by financial institutions.

Previous research has resulted in mixed evidence on the effect of financial information on private

donations to non-profit organizations. Several studies show that donations are positively influenced by

higher efficiency ratios (e.g. Weisbrod & Dominguez 1986; Posnett & Sandler, 1989; Tinkelman,

1999; Marudas & Jacobs, 2004). A recent field experiment by Parsons (2007) indicates that financial

accounting information seems to have very limited effects on individual donor decisions.

Mixed evidence in previous research as well as the fact that in this paper’s empirical setting the private

donors are confronted with ‘raw’ (i.e. no efficiency ratios, just balance sheet and income statement)

accounting information for the very first time lead to hypothesis 3.

H3. The level of compliance will not be higher when NFPs are depending more heavily on

financing by donations of the public in general.

We hypothesize that external audits are a form of coercive isomorphism. When financial statements

are required to be audited by an external, professional audit firm, the government enforces compliance

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with their new accounting regulation. In its final report to the U.S. Congress in June 2005 the Panel on

the Nonprofit Sector (2005) stated that ‘having financial statements prepared and audited in

accordance with Generally Accepted Accounting Principles and auditing standards improves the

quality of financial information available to governing boards, government officials, and the public

(p.5)’

H4. The level of compliance is higher when NFPs are coerced to comply with accounting

regulations through the obligation of external auditing.

Most studies take the size of the company, government or organization into account, hypothesizing

that compliance is positively associated with size. Size can be measured in different ways: total assets

(or the natural logarithm of total assets), total revenue (Krishnan & Schauer, 2000) or staff number

(Da Costa Carvalho et al., 2007). Since the number of related organizations is also an indication of the

size of a group of organizations, rather than size of a single NFP, this is also taken into account in the

study. We hypothesize that:

H5. The level of compliance increases with the size of the organization or the group to which the

organization belongs.

The effect of the size of an organization can be interpreted in various ways. It can be suggested that

large organization have the necessary resources in terms of finance (assets or revenue) to ensure

qualitative financial reporting. Another resource is knowledge and experience. Since the board has to

approve the financial statements before they are made public, the knowledge and experience of the

members on ‘doing business’ and on financial reporting might be crucial to the quality of the reports.

A more professional or experienced board might also have impact on the attitude towards financial

reporting obligations and the consequences of below-standard financial administration, decision-

making and reporting. This level of professionalism is proxied by the fact that the board holds at least

one institutional member. Therefore, we hypothesize that:

H6. The level of compliance increases when institutions serve as members of the board.

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4. Empirical framework

4.1 Background

Recent changes in the Belgian accounting regulation for NFPs provide a unique setting for compliance

research. Whereas financial reporting rules and regulations have been reformed and harmonized quite

strictly for Belgian for-profit companies since the late 70’s, the original Not-for-Profit legislation of

1921 introduced less specified and only general accounting and reporting rules. Only in specific

circumstances NFPs were obligated to disclose financial reports. This free-of-obligations situation has

changed significantly for Belgian not-for-profits (NFPs) since the introduction of a new Law on 2 May

2002. The situation evolved from a heterogeneous and rather unclear regulation to the obligation to

use accrual accounting, draw up standardized annual accounts and make them publicly available via

the website of the National Bank of Belgium. The public in general, as well as any bank, sponsor,

governmental department or oversight body, can now be informed about the financial position of

NFPs.

Apart from the fact that the quality of annual accounts is only subject to external audit in the case of

very large organizations, compliance is basically a choice and responsibility of the organization. Non-

profit organizations that have existed for several years are now confronted with new legislation that

urges them to adapt their practice or routine. The efforts made to comply are at the discretion of the

NFP but can be measured by the quality of their annual accounts.

The annual accounts are publicly available in a PDF-format. To be useful for statistical analysis, the

relevant information was keyed into statistical software (manually). Because of possible input-

problems that might have a structural influence on the element of accuracy, several checks were

performed, covering all items of all non-compliant cases.

4.2 Descriptive statistics on the NFPs

At the end of August 2007, two months after the official deadline to deposit the annual accounts at the

National Bank, 4,916 accounts were available. There are two schemes of standardized annual

accounts: the abbreviated scheme (obligatory for large NFPs, voluntary for small NFPs) and the full

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scheme (obligatory for very large NFPs, voluntary for large and small NFPs. Only the full scheme of

accounts contains the necessary data to calculate the independent variables described in section 6.1.For

that reason and because of the possibly large variation in the data, all of the 943 full scheme accounts

of 2006 have been taken into account in the study.

The variance in size of the NFPs that filed a full scheme of annual accounts is immense. Balance sheet

totals range from 65 thousand euro to over 1 billion euro. The number of employees varies from zero

to over 8000.

For some NFPs it was not clear whether the accounts were in euro or thousands of euros. Therefore,

the 5% highest and 5% lowest balance sheet totals and revenue amounts were omitted from the study.

This was also the case for the 5% highest number of staff (not 5% lowest, since a large number of

NFPs reports no staff at all) since analysis revealed probable errors in the data. This decreases the

number of cases from 943 to 925 very large organizations (a mere 2% decrease in sample size because

of overlap in the balance sheet and revenue criteria).

5. Analysis and results : level of compliance

An index was developed to test whether or not basic GAAP are applied by the NFP and whether or not

disclosure is at a level that ensures the usefulness of the financial statement. The index (cf. appendix)

consist of 19 tests to assess the level of timeliness, reliability, comparability, relevance, completeness,

entity, matching, classification and mechanical accuracy of the accounting and financial reporting

process. All but one of these tests result in a dichotomous score where 1 represents compliance or

disclosure and 0 a lack of compliance or disclosure. The length of the annual accounts is expressed as

a score ranging from 0 to 1 (with 0.25 intervals) according to the quartiles of the distribution of this

variable.

<<< Insert table 1 around here>>>

Table 1 summarizes the results on each part of the index. For every item, the number of tests as well as

the minimal, maximal, mean and median scores are presented. The spread of scores is for most tests

equal to the number of tests, indicating that there are organizations that do not comply with any of the

items as well as organizations that are fully compliant. It can be noted that reliability and relevance are

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the only two principles for which more than half of the NFPs do not meet all of the criteria. Other

principles such as classification, matching and completeness result in a better score.

<<< Insert table 2 around here>>>

A more detailed analysis of the compliance index is put forward in table 2. It can be noted that almost

40% of annual accounts are not containing information on accounting procedures for valuation or

accounting policies. About the same percentage (34%) does not disclose on the reasons for provisions,

when these appear on the balance sheet.

Also very remarkable is the fact that 28% of organizations do not disclose ‘funds of the organization’

(comparable to equity funding in companies). A possible explanation is the fact that none of the

different sector-specific regulations, in place before the new common law regulations, demanded such

information to be disclosed (Christiaens, Vanhee, Verbruggen & Milis, 2008).

Almost one out of three annual accounts has not been audited or has a qualified opinion/disclaimer. In

an assessment of reliability, this comes down to the conclusion that doubts can be expressed on the

reliability of the annual accounts. However, when analyzing completeness of the annual accounts, a

different picture emerges. In 69 cases an audit was mandatory, but no audit report was published while

in 43 cases, the audit was performed voluntarily, the name of the auditor was mentioned in the annual

accounts, but the report was not made public.

The item of ‘mechanical accuracy’ consists of 20 tests aiming to assess the logical and arithmetical

coherence of the annual accounts. A score of 1 indicates that the organization complies with all

accuracy tests, whereas annual accounts containing at least 1 logical or arithmetical error were scored

zero. The results in table 2 indicate that one out of three annual accounts contains at least 1

‘mechanical’ error.

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The overall compliance index score (figure 1) ranges from 8.75 to 18.5 (note that the maximum score

is 19), with a median of 14.75 and a mean of 14.5. The average adequacy of annual reports is rather

high, but there is quite important variance in the level of compliance with the different elements of the

index (cf. supra).

<<< Insert figure 1 around here>>>

6. Analysis and results: explaining the level of compliance

6.1 Model specification

Ordinary least squares regression was used to explain the level of compliance with accounting and

financial reporting requirements. The dependent variable (the score on the compliance index) is

explained by the variables described below and put forward in the hypotheses in section 3. The model

is specified as follows:

Compliance index = β0 + β1 SUBS + β2 DEBTS + β3 PUBLIC + β4 AUDIT + β5 SIZE + β6 GROUP

+β7 BOARD

6.2 Descriptive statistics on the independent variables

To test the hypotheses that are dealing with dependence on material resources, three variables are

defined: the dependence on governmental resources (measured as the percentage of subsidies as part

of total revenue: SUBS); the dependence on financial loans (financial debts as a percentage of total

liabilities: DEBTS) and the dependence on donations by the public (PUBLIC). This last variable is

transformed to a dichotomous variable (donations lower or higher than 5% of total revenue). The

impact of audit (hypothesis 4) is measured by the presence/absence of an external auditor (AUDIT).

To test for the effects of size (hypothesis 5), two variables are introduced in the model: SIZE

represents the natural logarithm of revenue of the organization (Krishnan & Schauer, 2000), GROUP

is the number of affiliated organizations and is a proxy for the size-effect of the group (since the

sample does not contain consolidated accounts). Whether or not there are institutional members of the

board (companies, governmental institutions) is represented by the variable BOARD.

<<< Insert table 3 around here>>>

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Table 3 summarizes the characteristics of the independent variables as well as their expected

correlation with the compliance index.

6.3 Correlations and regression results

Correlations between compliance index and independent variables as well as between combinations of

independent variables are shown in table 4. All pairwise correlations are below 0.5, indicating that

problems of multi-collinearity are not likely to occur.

<<< Insert table 4 around here>>>

Table 5 presents the outcome of the linear model designed to explain the level of compliance with

accounting and reporting legislation based upon the variables discussed in section 6.1. The F-value is

significant at p<0.001, indicating that the model is well-specified. The R² adjusted of 0.213 is

satisfactory. Five explanatory variables are significant. None of the multicollinearity tests reveal

problems.

<<< Insert table 5 around here>>>

The most important explanatory factor is the use of an auditor. This confirms the results of Yetman

and Yetman (2006). Because this variable is also used in the compliance index, a sensitivity check has

been performed. (cf. infra). As hypothesized, annual accounts that were audited display significantly

higher levels of compliance. This validates the idea of coercive isomorphism having an influence on

the willingness of NFPs to comply with new accounting legislation.

The average level of reporting adequacy is higher for those NFPs that are part of a larger group. Note

that the size of the organization itself is not significant. This might be explained by the fact that

correlation between auditor and size is relatively high (0.426). These results are consistent with

previous research in for-profit or governmental settings. This finding allows us to confirm the fourth

hypothesis. Size of the NFP and especially the size of the group are positively influencing their

compliance to new accounting legislation.

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The findings also show that the presence of financial debts is significant in explaining the level of

compliance. NFPs that depend on financial debts are more inclined to comply with accounting and

reporting standards (hypothesis 2).

The results also indicate that organizations which are highly dependent on governmental grants and

subsidies are presenting more adequate financial reports. Dependence on public donations however, is

not significant in explaining the level of compliance. This is in line with thypothesis 3 but

contradictory to much of the previous literature on the effect of financial information on donations.

Having institutional members on the board of directors has a positive influence on reporting adequacy.

This variable was introduced as a measure of ‘professionalism’ of the organizations. This result is

similar to the conclusions of Christiaens’ study on public sector accounting reform (1999).

Overall, the statistical analysis of the data demonstrate that dependence on governmental resources

and financial loans urges the NPOs to assure the quality of their financial reports. Dependence on

donations from the public at large does not seem to have the same influence. This is in line with the

findings of Parsons (2007), but in contradiction with earlier research by, amongst others, Tinkelman

(1999), Okten and Weisbrod (2000) and Marudas and Jacobs (2004). This result might be explained

by the fact that the Belgian public is not yet used to non-profit financial statements as well as to the

fact that these are ‘raw’ accounting data that are not presented in easy-to-understand efficiency ratios.

6.4 Sensitivity checks

Although the use of indices is a longstanding tradition in compliance and disclosure research, a one-

fits-all index has not yet been developed. So far, different indices have been used to effectively mirror

the research question and empirical setting. To circumvent this issue, elements of earlier indices have

been combined. To make sure that the construct of the index does not influence the conclusions on the

main hypotheses build around resource dependence, several sensitivity checks have been performed

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resulting in the same conclusions on all hypotheses. Since audit is part of the compliance index as well

as one of the explanatory variables, a sensitivity check has been performed on an index that excluded

the audit-test. The combination of tests included in the index has been changed, omitting test with an

‘administrative’ nature. None of the combinations gave rise to different conclusions regarding the

hypotheses.

A sensitivity check has also been performed on the measure for dependence on public donations.

Instead of a dummy variable (for lower and higher than 5% of total revenue), actual percentages have

been used as well as a 20% and a 50% cut-off point. In neither case, the results for donations changed.

Lastly, building on previous research, measures of financial distress were added to the linear model.

Neither of these measures was significant in explaining the level of compliance.

7. Conclusions and issues for further research

Institutional theory and Resource Dependence theory have been used to explain several aspects of

non-profits’ organizational behavior. Yet there has been little previous research into the effect of these

theories on efforts by non-profit organizations to ensure compliance with accounting standards and

qualitative financial reporting. An empirical research approach was applied to provide evidence on the

relationship between resource dependence and accounting compliance.

To measure the level of compliance, a compliance index has been constructed. This index is based

upon earlier research in for-profit, non-profit and governmental settings and tries to capture different

elements of compliance with new accounting legislation. Disclosure requirements as well as technical

accrual accounting elements and basic GAAP compliance have been integrated in the index.

To link resource dependence to accounting compliance, hypotheses were formulated. We hypothesized

that the level of compliance would be higher when NFPs depend more heavily on subsidies and

financial debts. Furthermore, we hypothesized that dependence on public donations has no relation to

compliance levels, based on the idea that the public in general uses other than financial data to decide

upon donations and is not used to interpreting balance sheets and income statements. The last

hypothesis related to resource dependence was linked to dependence on ‘knowledge’ or

‘professionalism’ as a resource. We hypothesized that NFPs with professional members on the board

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would present higher levels of compliance. To link coercive isomorphism (as part of institutional

theory) to levels of compliance, we hypothesized that the use of an external auditor would have a

positive influence on these levels. The size of the organization or of group to which the organization

belongs was expected to have a positive influence on reporting quality.

Using a unique empirical (Belgian) setting in which over 1000 NFPs are confronted with new

accounting and reporting legislation, with little or no external control over compliance, we tested

aforementioned hypotheses using OLS regression.

It can be concluded that dependence on governmental resources and financial loans urges the NPOs to

assure the quality of their financial reports. Dependence on donations from the public does not seem to

have the same influence. This is in line with the findings of Parsons (2007), but in contradiction with

earlier research by, amongst others, Tinkelman (1999), Okten and Weisbrod (2000) and Marudas and

Jacobs (2004). This result might be explained by the fact that the Belgian public is not yet used to non-

profit financial statements as well as to the fact that these are ‘raw’ accounting data which are not

presented in easy-to-understand efficiency ratios. In general, the hypotheses build on resource

dependence hold. This is also the case for the other form of coercive isomorphism: external audit of

financial statements and the dependence on knowledge (board composition) influence the level of

compliance with new financial reporting standards.

To enhance the validity of the index used, several sensitivity checks have been performed, using a

different combination of compliance-tests.

Our results lead to issues that need to be addressed in the near future. Firstly, only very large NFPs

have been analyzed. This means that the index can also be applied to the extensive dataset of large

NFPs, which can then be compared to measure the effects of differences in size, financial strength and

staff. Secondly, further research might reveal whether or not the form of presenting financial data

might be influencing the effect on donation decisions. Does the donor react the same way to ‘raw’

accounting data (balance sheet, income statement) as he/she does to easy to understand efficiency

ratios. The same argument can be made for ‘culture’ as an explanatory variable. Most research on

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donations has been performed in the U.S. and the U.K., where the attitude towards the non-profit

sector and donations as well as the involvement of the government in the sector might be different

from countries such as Belgium. Thirdly, the effect of audit as such has been documented in this

research. However, no specification has been made on audit fee, audit quality or industry

specialization.

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Appendix : Composition of the compliance index Principle Measure Variable type Previous research

using similar item Timely approval by the board

dummy (1= OK, 0= too late)

Timely handover at the National Bank of Belgium

dummy (1=OK, 0 = too late)

Timeliness

Made public within 7 months after end of accounting year

dummy (1=OK, 0= too late)

Christiaens (1999); Owusu-Ansah and Leventis (2006); Dixon et al. (1991)

Approval by an external auditor

all but unqualified reports are 0, unqualified report = 1

Krishnan and Schauer(2000), Robbins and Austin (1986); Giroux and McLelland (2003)

Reliability

Name of external accountant mentioned

dummy (1= yes, 0= no)

Giroux and McLelland (2003) assess certificate of achievement

Balance sheet previous year reported

dummy (1=yes, 0=no)

Krishan and Schauer (2000); Ingram and Copeland (1981); Christiaens (1999); Pina and Torres (2003)

Comparability

Disclosure of accounting policies

dummy (1=yes, 0=no)

Krishan and Schauer (2000); Ingram and Copeland (1981); Christiaens (1999); Da Costa Carvalho et al (2007); Pina and Torres (2003); Dixon et al. (1991)

Complete scheme used necessarily or voluntarily according to legal criteria

dummy (1= voluntarily, 0= mandatory)

Krishnan and Schauer (2000)

Number of pages quantitative: 0-0,25-0,5-0,75-1 According to the percentiles

Dixon et al. (1991)

Relevance

Euro or thousands of euro: mentioned correctly on first page?

dummy (1=yes, 0=no)

19

Appendix continued: composition of the compliance index Principle Measure Variable type Previous research

using similar item ‘Typical’ in accrual accounting is the presence ofdebtors and creditors

dummy (1=yes, 0=no) Ingram (1984); Da Costa Carvalho et al. (2007); Pina and Torres (2003)

Disclosure of social report

dummy (1=yes, 0=no)

Disclosure of audit report dummy (1=yes, 0=no) Krishnan and Schauer (2000); Giroux and McLelland (2003)

Completeness

Is there qualitative information about provisions in the notes

dummy (1=yes, 0=no) Christiaens (1999); Da Costa Carvalho et al. (2007)

Matching Presence of accrued/deferred charges/income in balance sheet

dummy (1=yes, 0=no) Christiaens (1999); Da Costa Carvalho et al. (2007)

Entity Presence of ‘Funds of the organization’ in the balance sheet (comparable to ‘capital’)

dummy (1=yes, 0=no)

Sign of debtors, creditors, cash and cash equivalent has to be positive.

dummy (1=yes, 0=no) Classification

Presence of transferred profit OR transferred loss (not both)

dummy (1=yes, 0=no)

Christiaens (1999); Ingram and Copeland (1981)

Mechanical accuracy

Twenty tests on logical and arithematical errors are conducted

Dummy (1= no errors, 0= at least one error)

Christiaens (1999) Jegers and Houtman (1993) Weets and Jegers (2000)

20

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24

Tables N° of items

tested Min/max score for the item

Mean Median

Timeliness 3 1 / 3 2.60 3 Reliability 2 0 / 2 0.77 1 Comparability 2 0 / 2 1.51 2 Relevance 3 0 / 3 1.89 2 Completeness 4 1 / 4 3.50 4 Matching 1 0 / 1 0.92 1 Entity 1 0 / 1 0.72 1 Classification 2 1 / 2 1.98 2 Mechanical accuracy 1 0 / 1 0.66 1 Table 1: summary of results of the compliance index Item Percentage with score 0 Percentage with score 1 Timeliness Time1 1.5 98.5 Time2 34.7 65.3 Time3 4.0 96.0 Reliability Reliab1 31.9 68.1 Reliab2 91.2 8.8 Comparability Compa1 9.6 90.4 Compa2 39.6 60.4 Relevance Relev1 61.1 38.9 Relev2 n/a n/a Relev3 4.1 95.9 Completeness Compl1 2.2 97.8 Compl2 0.8 99.2 Compl3 13.0 87.0 Compl4 34.4 65.6 Matching Match 8.0 92.0 Entity Entity 28.3 71.7 Classification Class1 0.6 99.4 Class2 1.0 99.0 Mechanical acc. Acc1 33.6 66.4 Table 2: details of the elements of the compliance index

25

Variable Mean Median Min/Max Percentage

of 0/1 Expected sign of correlation

H1 Dependence subsidies (%)

SUBS 40.0 22.0 0.0 / 100.0 +

H2 Leverage / dependence financial debts (%)

DEBTS 15.2 4.0 0.0 / 130.0 +

H3 Dependence donations dummy : less than 5% (0), more than 5% (1)

PUBLIC 83.2/16.8 Non-sign.

H4 Use of auditor AUDIT 17.6 / 82.4 + H5 Size: Natural log of

revenue SIZE 15.4 15.5 11.7 / 19.3 +

H5 Group size: number of related organizations

GROUP 1.6 0.0 0.0 / 21.0 +

H6 Institutional members on the board (Yes/ No dummy)

BOARD 96.1 / 3.9 +

Table 3: Descriptive statistics on independent variables and expected correlation with compliance level Index Subs Debts Public Audit Size Group Board Index 1 subs .158 1 debts .176 .170 1 Public .107 .080 .108 1 Audit .356 -.050 .114 .040 1 Size .189 -.014 .005 .008 .426 1 Group .232 -.107 -.073 .108 .193 .122 1 Board .086 -.091 -.056 .000 .034 .032 .078 1 Table 4: Pearson correlations of independent variables and compliance index

26

Variable Coefficient t-value p-value Variables in the model CONSTANT 12.696 16.712 0.000 AUDIT 1.430 8.939 0.000 SUBS 0.008 5.548 0.000 GROUP 0.100 5.555 0.000 DEBT 0.708 2.744 0.006 BOARD 0.816 3.006 0.003 Model statistics: F= 23.831 Significance F= 0.000 R² = 0.223 R²adjusted= 0.213 N=925 Variables left out of the model PUBLIC 0.215 1.1489 0.137 SIZE 0.009 0.169 0.866 Table 5: regression results: compliance index

27

Figures

INDEX_COMPLIANCE20,0018,0016,0014,0012,0010,008,00

Freq

uenc

y

60

40

20

0

Mean =14,55�Std. Dev. =1,728�

N =925

Figure 1: graphical presentation of compliance index scores

28