THE IMPACTS OF ACCOUNTING INFORMATION ON NON-PROFIT MAKINGS ORGANIZATION A CASE STUDY OF GRACE OF GOD MISSION AWKUNANA
CHAPTER TWO
LITERATURE REVIEW
THE CONCEPT OF FINANCIAL RECORD-KEEPING/EVOLUTION OF RECORD KEEPING
The origin of recording according to Okafor et al (1996:1) can be traced back to ancient civilization in Babylon, Egypt, Rome and Greece. Early Babylonians had begun by 4500BC, to levy and collect taxes and records the receipts and disbursements. The development of “papyrus” and “calamus” as paper and pen respectively by early Egyptians is a great impetus to record keeping.
Before the advent of writing, man could talk and could express himself in drawing but he could not write. Therefore, record keeping could be dated back to about 300BC with the discovery of
“hieroglyphics and cuneiform” writing by early Egyptians and Babylonians respectively. The introduction of the decimal system by the Arabs as early as 850AD greatly enhanced the development of recording keeping.
The emergency of money as a medium of exchange has provided impetus for development of accounting and record keeping (Okafor, 1996:1). It becomes necessary to record business events on monetary aspect rather than on physical quantities. Moreover, the industrial revolution of 18th century which brought about ample growth in the world trades and industry provided an important stimulus to accounting and record keeping.
The businesses have been on continuous growth and expansion, resulting in increased need for information through proper recording. Before this era, businesses were on small scale and individual proprietors were so personally involved in the business tat the need for information was less required. The industrial revolution was in effect the basis of the modern business enterprises ranging from partnership to joint stock companies. In view of Okpe (1998:1), described business organization as the vehicle for mobilization of funds and human resources”. He further stressed that it involves the principle of stewardship or accountability which marks a step further in the development of accounting and record-keeping.
There is great need for effective and efficient communication network between the enterprises and the interested parties especially for showing how the resources are utilized.
In the opinion of Okpe, (1998:1), he stressed that of the man or an entity just going into business, experience has clearly indicated that an adequate record keeping system helps to increase the chances of survival and reduces probability of early failure. Similarly, for established industrialist, it has been clearly demonstrated that a good record keeping system increases his chances of staying in business and or earning desirable profits.
Record-keeping can help owner managers of small enterprises keeping their business on a sound basis.
THE NATURE AND CHARACTERISTICS OF FINANCIAL SYSTEM OF NON-PROFIT ORGANIZATIONS
The non-profit making organizations are established mainly to render services and not to make profits (Freeman, 1988:14) the objectives of most non profit organizations are to provide as many goods or as much service each year as their financial and other resources permit. They typically operate on a year-to-year basis, raising as much financial resources as possible and expending them in serving their constituency. The non-profit organizations include a wide variety of organizations in the present social and economic environment. They include government units – Federal, State and other educational institutions, hospitals and health care organizations, voluntary association, research organizations, foundation and other social and cultural organizations.
According to Freeman (1988:16), he observed that financial management of a non-profit organization typically focuses on “acquiring and using financial resources upon sources and uses of working capital, budget status and cash flow rather than on net income or earning per share”. There is no profit motive and there is no individual share holders to whom dividends are paid.
In essence, businesses are organized for profit, the church for Christian services. Again businesses may be re-organized, sold or liquidated, churches are difficult to re-organize or liquate and their properties are rarely considered as cash assets. The use of funds is restricted when given by donor for specific purpose. In other words, some assets are restricted for a particular purpose like in a club, the members may be assessed for certain capital improvements such as the construction of a swimming pool, the proceeds from the assessment will be set in a restricted fund to be used only for that particular purpose.
In view of James et al (1976:24) in their handbook titled “The Modern Accountant Handbook” the measurement of the benefits resulting from sacrifices of the non-profit organizations are much ore difficult since the attainment of goals can be measured only in term of “performance” to compare to that of commercial enterprises which can be measured as net income. The commercial organizations do have the responsibilities to report on the stewardship of their resources, the emphasis of their accountability is on the utilization of the resources to earn a profit. But in non-profit organization, the emphasis is placed on accountability and stewardship.
It is important to understand that the standard of reporting for non-profit organizations have developed differently from commercial accounting standards because there is a difference in emphasis in the objectives for recording the date and because of legally binding restrictions in non-profit organizations which have no real counterpart in business enterprises. One of the characteristics of non-profit organization is that those contributing financial resources to the organization do not necessary receive or proportionate share of its goods or services (Freeman, 1988:40).
The non-profit organizational financial reporting should provide the economic resources, obligations and net resources of an organization and the effects of transactions, events and circumstances tha change resources and interests in those resources
(Harry, 1993:16). The performance of an organization during a periodic measurement of the changes in the amount and nature of the net resources of a non-business organizations, and information about its service efforts and accomplishment provided that the information most useful in accessing its performance. How an organization obtains and other factors that may affect an organization’s liquidity should include an explanations and interpretation to help users understand financial information provided.
In relation to James et al (1976), the objective of record keeping and the presentation of data is to make available meaningful financial information. This requires appropriate and adequate disclosure of the information required by the users of financial data. The purpose of preparing and presenting such data are comparable to the purposes of presenting financial statements for commercial profit seeking corporations.
Because of both and special nature of the data required and historical developments specialized accounting principles and reporting practices can and, in a number of instance, do differ materially from the principles and reporting practices of commercial organizations.
The emphasis in a non – profit organization accounting is on “stewardship” rather than on matching cost with revenues. This emphasis arises from the fact that non-profit organizations receive funds for which they must maintain accountability. This takes the form of general accountability and specific accountability. The non-profit organization (school or colleges, church, hospital, community funds etc) are established to carry out special functions and to meet the designed objectives of the organizations. The organizations have the general accountability to use the funds and resources it receives for the established objectives. In some cases, funds are contributed for use in a specific accountability to be certain that the specific requirements on the donor are carried out.
The general characteristics of recording and reporting data for the various types of non-profit organizations are similar; the historical development of accounting principles and procedures has resulted in a variety of record-keeping procedures and forms of presentation of the financial data. Recognizing the need for uniformity in reporting some of the organization groups (e.g. colleges and universities, hospitals, states and local government, churches, voluntary health and welfare organizations) developed manual doe use by their groups.
FINANCIAL DECISION MAKINGS PROCEDURES IN RELIGIOUS ORGANIZATIONS
The financial decision making in religion organizations like Christian religions is being taken by the church officials in charge of finance with the overall conclusion by the pastor or pastor for the particular church. Before any expenses or project is to be executed, the pastor in conjunction with finance council will deliberate on it and decide the amounts that are to be expended. This forms a basis for controlling excessive spending and relating actual income to it expenditure. Most of the churches operate a bank account of which the pastor or the pastor forms the signatory to the account along with the person that handles the cash. Thus financial decision making in religious organizations involves taking risks.
According to Anyafo (1997:25) in his book “God’s People Finance”, decision making is not an easy task, it is even more difficult when it has to do with money. We are talking about financial derivation by risk taking. Financial decision making is made most of the time under conditions of uncertainty. Because of uncertainty of outcome, there is risk. A systematic approach to solving decision problems under conditions of uncertainty is referred to as decision analysis (Anyafo, 2001:8). It seeks to prescribe a decision for the individual that is consistent with his or her preferences and attitude towards risks.
Real life decision problems; financial or otherwise involves the selections of a course of actions from among two or more alternatives. This can be classified into two or more categories:
i. Decision-making under uncertainty: This entails the selections of a course of actions when we do not know the certainty the results that each alternative action will yield. However, it is assumed that the outcome of whatever course of action we selected is affected only by chance and not by an opponent or competitor.
ii. Decision-making under conflict: This is similar to decision making under uncertainty in that we do not know with certainty the result each available alternative course of action will yield. However, the reason for this uncertainty is different in the case of decision making under conflict. In such cases, we are in effect confronted by one or more opponents or competitors. The outcome of our chosen course of action depends on decisions made by our opponents. Decision problems of this type fall under the discipline known as game theory.
Because Satan is an opponent, the Christian is confronted most of the time with decision making under conflict. Nevertheless, the bible assures that you are of God, little children, and have overcome them; because greater is He that is in you than he that is in the world (1 John 4:4). The Christian is well equipped to take risk because greater is Jesus Christ that is in Him than Satan that is in the world. Making money involves risk-taking of some degree. Every child or God has the privilege of transferring these risks to Jesus Christ who stretches out His hands to take over the risks with the words come unto me, all ye that labour and are heavy laden, I will give you rest (Matthew 11:28).
However, the financial decision making in Catholic Church is being taken by the District Finance Councils of the district with the district pastor as the chairman. The District council decides the financial strength of the district by consulting the Finance Committee and discusses all financial prospects of each organization or society that make up the district and act accordingly. Thus, the District Council calls for tenders, selects and approves one and authorizes treasurer and district pastor to pay on completions of the project. The district finance council discusses relevant issues concerning the church with the district pastor and decides how the matter will be solved financially. In other words, the district pastor does not have sole authority to the church’s funds but takes directives or works along with the district council on issues concerning finance. Because of the vital importance of the financial decisions to the church. It is essential to set up a sound and effective organization for the finance functions.
FINANCIAL CONTROL: INTERNAL AND EXTERNAL
The establishment of church is mainly channeled towards bringing souls to God and not for profit making (Olademej, 1985:35). Though the fund for managing its affairs has to be controlled, there is the necessity for an effective approach to the exercise of appropriates and effective controls over the finance of the church. Control is a management activity of comparing actual output or performance with pre-determined or planned situation and analyzing any differences for purpose of managerial corrective actions and co-ordination. Such controls are of two types viz.: internal controls and external controls. Internal control must be such that it will establish the credibility and project the image of the church as semi-autonomous
organization able to plain their financial programmes and collect and disburse their monies in a controlled and systematic manner designed to achieve their objectives without waste or loss and at a minimum cost. Millichamp (1986:42), internal control system is defined as the whole system of controls, financial and otherwise established by the management in order to carry on the business of the enterprise in an orderly and efficient manner, ensure adherence to management policies, safeguard the assets and secure as far as possible the completeness and accuracy of the record. The individual components of an internal control system are known as “control”.
More so, a good system of supervision and control over church fund is necessary in order to be able to prevent fraud and detect errors as soon as possible. They advocated for the appointment of church auditors both internal and external. The duties of the accountants will not stop with the preparation and submission of income and expenditure accounts but also must find the best way to present and communicate to members the financial statement of the church at various levels of expenditures and to the appropriate bodies.
It is however, pointed out that managers should see that money is being expended in a systematic way and should make sure that church items are not consumed too fast. Thus, for financial control purpose, the manager or whoever is in control of church’s fund should try to control cost by eliminating unnecessary spending and making sure that money donated by people are judiciously utilized for the purpose it was received.
In essence, the existence or effective internal and external control of this nature should be of considerable importance to the progressive development of sound financial management. The most important to the internal financial control fund in catholic churches are the preparation of annual and supplementary estimate of income and expenditure and the operation of a system designed to ensure that actual expenditure does not exceed the approved estimates. Also, that of revenue reaching the budgeting figure so that the finance of the church will be well managed.
Each individual district in the diocese sends their yearly budgets to the diocese. In the district level, there is internal control where the financial secretary collects, records and deposits money into the bank account of the district. The district pastor and treasurer or one other person are the authorized signatories to the account. Also another form of internal control is the appointment of financial committee who have special responsibilities for the maintenance of effective system of financial control.
In terms of external control, the diocese controls over the finances of the districtes. Each district pastor is expected to present an annual budget of his district to diocese, and also expected to render an annual or semi-annual account of all income and expenditures of the district. The districtes should be encouraged to stand on their own feet and prove that they have demonstrated a sound understanding of their financial responsibilities and of public accountability.
2.10 FINANCIAL REPORTING AND ACCOUNTING RECORDS IN NON-PROFIT ORGANIZATIONS
In “Government and Non – profit Accounting Theory and Practice by Freeman Craig and Lynn (1988:50) the authors stipulated that the financial reporting of non profit organization each included religious organization (church) emphasized that such reporting should provide the following information:
- The economic resources, obligations and net resources of an organization and the effects of transactions, events and circumstances that change resources and interest in those resources.
- The performance of an organization during a periodic measurement of the changes in amount and nature of the net resources of a non-business organization and information must be useful in assessing its performances.
- How an organization obtains and spends cash or either liquid resources, its borrowing and repayment of debt and others factors that may affect an organization’s liquidity should include explanations and interpretation to help user understand financial information provided.
According to encyclopedia of accounting system volume 1, a
simplified treasurer’s financial report is prepared at the close of each month to provide each member of the board of trustee with monthly information on the cash transactions of the various funs. Certain trustees may feel that knowledge of the amounts received during the month, the disbursement made during the months, and the balance on hand at the end of the month is sufficient. A balanced sheet is prepared at the close of each month to provide on comparative basis monthly information on the assets, liabilities and fund balances so that the current financial standing of the entire church organization may be determined.
More so the accounting system of a religious organization (church) involves financial activities that are performed by the treasurer, the financial secretary and other committees. The treasurer keeps or oversees the keeping of the financial records, but is not usually burdened with details, especially the counting of collections opening of pledge envelopes and the like. He prepares or has prepared the quarterly statements on pledges and also monthly reports of receipts, expenditures and assets and liabilities to the board of trustees and he also signs cheques. The financial secretary on the other hand usually handles all accounting and book keeping matters fund in non profit organization accounting is a self contained accounting entity with its own assets, liabilities, revenue, expenditure or expense and fund balance or other equity accounts and within its own ledger.
A church as a religious organization is established mainly to win souls to Christ and not for profit making. Therefore, a church is not supposed to have profit and loss account but an income and expenditure account with a balance sheet. This then means that the system of accounting that is involved is a receipt and a payment account.
In addition, all those engaged in the finance of the church – the church stewards, the treasurers, the book keepers, and ministers should be guided how to keep accounts of funds raised by the church and how to manage them. For good accounting process, the book keeping of church funds will not be complete without the cash book, the ledger, the journals, analysis book, petty cash book or imprest books. At the end of the period, the treasurer or whoever is in charge with the book keeping will prepare an income and expenditure account.
In a religious organization (church) the financial reporting in Catholic church is done in district level and also in diocesan level where the financial secretary reports all financial mattes to the District Pastor who in turn reports to the Bishop at the diocesan levels. The District pastor relays and reports all financial records of the district to the bishop. The accounting is the guide post for managements. Every religious organization should know the financial implications of its operations. The financial scope is kept by the accounting system, it points on the problems faced or likely to be faced. The accounting system identifies and gathers data. In every district there is district council account that is all monies belonging to the district house account like offertory collections, stole fees, stipends and other sources.
It is the responsibility of the Diocesan Bishop through the diocesan finance council to audit annually the financial reports of every district and district projects. Also, it is the responsibility of the diocesan finance council to audit the financial council to audit the financial report of the bishop house, the diocesan secretariat and diocesan project. It is the consolidation of the diocese proper and districtes’ financial report that it sent to Rome annually at a particular time as stipulated by the congregation for Evangelization of Peoples.
With the establishment of District Finance Council in the
Diocese in compliance with Cannon 537, these councils are obliged to fulfill their tasks with the greatest possible transparency and responsibility (Cannon 1281-1289). They are to send report concerning all incomes received from all sources and the manner of their utilization, the financial report must be signed by the pastor, his assistant and by all members of the District Finance Council. For uniformity and comparative purposes, the congregation for the Evangelization of People has proved suggested outlines to be
followed for diocesan financial reports.
However, for the accounting record-keeping of the church te code does not prescribe any norm on the system to be adopted from common experience, no one system of rendering accounting is perfect. Not to have a system at all would amount to culpable inexcusable grievous fault.
Some dioceses in Nigeria adopt central fund system. Adequate funds are then made available to the pastors on pastoral duties in the diocese from the centre. Many dioceses, it appears, are not satisfied with these systems/records which entail levying every district and institution in the diocese on an agreed basis. Besides, how does one calculate what is adequate for a given district?
Moreover, in this system, pastors are normally placed on
salaries just like civil servants. This system of salaries to pastor is very odious to many because of many obvious disparities in status and abilities of pastor and above all the inequalities in the district stations.
Another system very much in vogue is the budgetary system. In this, the District Finance Council with their pastor draw up an annual budget in which every item of income and expenditures are paid to the diocesan common fund. Thus, for the district accounting books and records and returns, the district accounting books and records to be kept by the district are classified into two:
i. Account B - For pastor ii. Account A - For District Finance Council
For the Account A; books, records and returns, the sample formats are distributed and they are:
a. Account A: District Income day and analysis book,
b. Account B: District expenditure and somebody daily analysis book,
c. Account A: Cash and bank book,
d. Account A: General Ledger,
e. Official Receipts books,
f. Official payments voucher or petty cash voucher,
g. District Fixed Assets Register and Inventories,
h. Account A: Quarterly Remittance Returns,
i. Account A: Monthly Financial Returns,
j. Account A: District Bank Reconciliation Quarterly Statement.
For the Account B: books, records and returns (for pastors), the sample;
a. Account A: Income day and analysis book,
b. Account B: Pastor Maintenance Expense Day and Analysis
Book
c. Account B: Cash and Bank Book.
d. Payment Voucher.
e. Account B: Monthly Financial Returns.
f. Account B: Banks Reconciliations Statement