Assessment of Risk Using Financial Ratios in Non-Profit Organisations

Financial ratios have been widely used and regarded as a useful tool in predicting business failure, detecting fraud and evaluating performance. In the current study, financial ratios are used to assess risk of financial vulnerability. This study examines to what extent Non-Profit Organisations (NPOs) are exposed to risk of financial vulnerability. This study extends the work by Tuckman and Chang (1991) who developed financial vulnerability prediction model by using financial ratios as four financial indicators of financial vulnerability- Administrative cost ratio, Debt ratio, Revenue Concentration Index and Surplus margin. To provide a more meaningful investigation, the current study uses eight financial indicators -Debt ratio, Cash ratio, Revenue concentration index, Reliance ration ratio, Administrative ratio, Management cost rate ratio, Net Operating Margin and Primary Reserve Ratio. The financial data to compute the ratios were derived from annual reports of 134 NPOs registered under Companies Commission of Malaysia (CCM) for the financial period of 2011. This study finds that 14% of the samples NPOs are classified under high risk of financial vulnerability. Majority of NPOs (69%) are at moderate risk. The study indicates that NPOs are at risk because their revenues are not well diversified, revenues earned are highly depending on the major source of income, low administrative cost, and do not have any surpluses during financial shock. Overall, this financial vulnerability model provide useful device for NPOs to assess their level of risk and the regulators to enhance their monitoring system. Keywords: assessment of risk, financial ratios, financial vulnerability, non-profit organisation

Exploring Risk Management Disclosure Practices In Non Profit Organisations In Malaysia

This study examines the extent of risk disclosure of NPOs in Malaysia. The level of risk disclosure examined is based on six main risks; organizational risk, operational risk, compliance risk, financial risk, reputation risk and money laundering risk. The extent of risk disclosures are examined based on content analysis of annual reports of 50 NPOs registered under Companies Commission of Malaysia (CCM) as Companies Limited by Guarantee (CLBG) that had been chosen randomly for the financial period of 2011. The result of this study found that most of the organisations are more motivated to disclose financial item in order to comply with mandatory requirements of the financial reporting requirements and other regulatory requirements in Malaysia. However, there are lower incentives for voluntary disclosures under governance, operational, compliance, reputation and money laundering risks. Overall, the statistical results from six variables had indicated that there is lack of risk disclosure item reported in the annual report and it will increased the likelihood of risks that may harm the organisations. This study provides a significant feedback to NPOs in Malaysia to analyse the level of risk they exposed to as well as to formulate the best strategy in tightening their risk management as an early prevention to the likelihood of fraud occurrences. Besides, this study can help to facilitate the regulatory body such as CCM in formulating new requirements, policies, procedures, and guidelines and also to facilitate them in revising and strengthening the existing regulation for organisation to establish NPO and law enforcement in deterring fraudulent activities. Keywords:  Non-profit organisations, Unique Risks, Organizational Risk, Operational Risk, Compliance Risk, Financial Risk, Reputation Risk, Money Laundering Ris

Financial Vulnerability, Risk Management and Accountability of Non-Profit Organisations

The purpose of this study is to examine the relationships between financial vulnerability and accountability of non-profit organizations in Malaysia. Managing the risks associated with financial vulnerability can potentially enhance organizational ability in delivering its social objective and other accountability responsibilities. Information on financial vulnerability and accountability are obtained from the content analysis of annual reports of 130 societies registered with Companies Commission of Malaysia for the financial period 2011. Financial vulnerability indicators are efficiency, stability, solvency and margin while the extent of accountability is based on strategic accountability, fiduciary accountability, financial accountability, procedural accountability and best practice accountability. Results of this study revealed two important findings. First, the financial vulnerability indicators indicate that most NPOs in the sample are financially vulnerable. This in turn reduces their resources in fulfilling the various accountability responsibilities. Second, the only significant relationship between financial vulnerability measure, STABILITY and the extent of accountability indicate that the financial vulnerability model can be used by board members and management of NPOs in their decision making. Overall, findings in this study indicate that this model can be a useful tool that can facilitate screening, monitoring, and decision making processes for various stakeholders. Keywords: Financial Vulnerability, Risk Management, Accountability, Non-profit organisations