Resource Dependence

The resource dependence of a NFP relates to the reliance which the organisation has on its stakeholders for resource inflows (Malatesta and Smith 2011); and is a pertinent factor when examining the accounting disclosure practices of the NFP (Verbruggen et al. 2009; Verbruggen et al. 2011). In considering the influence of the resource dependence of an organisation on its disclosure practices, prior studies have explored a range of factors, namely revenue concentration (Verbruggen et al. 2011; Whittaker 2013), extent of government funding (Desai and Yetman 2005; Gordon et al. 2002; Trussel and Parsons 2007; Fischer et al. 2010; Verbruggen et al. 2011; Zainon et al. 2014) and financial leverage (Bradbury 1992; Meek et al. 1995; Cormier and Magnan 2003; Linsley and Shrives 2006; Abraham and Cox 2007; Rajab and Handley-Schachler 2009; Marshall and Weetman 2007; Deumes and Knechel 2008; Kammal Hassan 2009; Taylor et al. 2010; Casey et al 2011; Elshandidy et al. 2011; Jitaree 2015).

This sub-section develops hypotheses which measure the influence of the resource dependence of a NFP on its extent of accounting disclosures, by considering each of resource dependence factors: revenue concentration, extent of government funding and debt levels.

5.2.2.1 Revenue concentration

The revenue concentration of a NFP refers to the extent to which the revenue sources of the organisation are diversified (Tuckman and Chang 1991; Parsons 2003; Huang and Hooper 2010; Frumkin and Keating 2011; Surysekar and Turner 2012). NFPs deal with a competitive fundraising environment, limited resources and increasing demands for their social supports (NFF 2011). Also, they rely on different sources of resource inflows to produce their mission-related outputs (Arshad et al. 2013), making revenue concentration a pertinent factor when exploring the factors influencing the extent of accounting disclosures made by NFPs. The revenue concentration of an organisation is a direct indication of its financial vulnerability

(Greenlee and Trussel 2000). An organisation, with a high revenue concentration, is an organisation which has only few sources of revenue inflows, and which is highly dependent on few resource providers (Trussel and Parsons 2007). Conversely, a NFP with a low revenue concentration is an organisation which has diversified sources of revenue inflows and has greater ability to sustain operations in future periods (Tuckman and Chang 1991; Kingma 1993; Chang and Tuckman 1994; Jegers 1997; Greenlee and Trussel 2000; Frumkim and Keating 2002; Carroll and Stater 2009; Chikoto and Neely 2014).

NFPs with high revenue concentration, conform to stakeholders' expectations (Macedo and Pinho 2004; Verbruggen 2011) and these organisations signal their adherence to stakeholders' expectations, using disclosures (Holder-Webb et al. 2009; O’Brien and Tooley 2010, 2013; Parsons 2014; Zainon et al. 2014). These NFPs do so because stakeholders withdraw their support from an organisation that engages in activities which deviate from their expectations (Frumkin and Kim 2001; Hodge and Piccolo 2005; Hyndman and Jones 2011; Saxton et al. 2012); and extend their support to an organisation which adopt practices which align with their expectations (Forbes 1998; Parsons 2003; Krishnan and Yetman 2011). The financial disclosures of a NFP encourage stakeholders' confidence in the operations of the organisation and eventually increase the resource inflows to the entity (Gordon et al. 2010; Salterio and Legresley 2011).

The relationship between the revenue concentration of a NFP and its extent of disclosure are still at its preliminary stages: only two studies (Behn et al. 2010; Whittaker 2013) have so far examined the relationship between these two variables; with most studies having explored the relationship between the revenue concentration of a NFP and donations received by the NFP (Trussel and Parsons 2003; Surysekar and Turner 2012). In the Australian NFP context, there has been no study which has explored the relationship between the revenue concentration of an organisation and its disclosure practices.

Given the lack of Australian studies addressing the potential impact which the revenue concentration of a NFP has on the disclosures adopted by the NFP, this study develops its third hypothesis by considering two studies: Behn et al. (2010)

and Whittaker (2013). Both studies examined NFP revenue concentration and disclosures and observed a positive relationship between the revenue concentration of and the extent of disclosures made by NFPs. Hence, the next hypothesis is:

H3: The higher the revenue concentration of a NFP, the higher its extent of accounting disclosures.

5.2.2.2 Extent of government funding

The extent of government funding received by a NFP determines the extent of resource dependence which the organisation has on the government38 (Nah and Saxton 2013). For NFPs, government funding represents an important source of resource inflows (Marudas and Jacob 2009; ACNC 2015b). Government funding to a NFP has a positive influence on stakeholders' perception of the legitimacy of the organisation and eventually, on the overall resource inflows of the NFP (Smith and Gronbjerg 2006). Conversely, when the government withdraws its support from a NFP, in most instances, the financial resources and sustainability of the organisation are adversely affected (Tinkelman 1998; Fisman and Hubbard 2003; Core et al. 2006).

In most instances, when the government provides funding to a NFP, it scrutinises and monitors the disclosures of the organisation to encourage the NFP to be financially accountable (Trussel and Parsons 2007; Fafchamps and Owens 2009; Verbruggen et al. 2011). In addition, when a NFP receives state funding, the government39 imposes a range of different financial reporting requirements on the organisation (Trussel and Parsons 2007), to increase the extent of disclosures which the organisation is required to make (Liu and Anbumozhi 2009). In line with RDT, NFPs which have a high resource dependence on this source of revenue, tend to abide by the different financial disclosure requirements which are imposed by the government, such as “accounting standards” for NFPs and regulations requiring the disclosure of audited financial statements in the annual reports of NFPs; in order to

38 _{as a resource provider}

39

as a regulator

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minimise any risk of losing their inflow of government funding (Whittaker 2013, p.8).

It is acknowledged that government support and funding increase the extent of disclosures made in the SPFS which a NFP produces for the government (Trussel and Parsons 200740). Given the focus of the study is on GPFS (as further discussed in Chapter Six), only studies which explore publicly available information are considered. Two studies: Fischer et al. (2010) and Zainon et al. (2014) have been observed examined the relationship between extent of government funding received by an organisation and its extent of disclosures. The studies by Fischer et al. (2010) has explored the NFPs in the USA and by Zainon et al. (2014) have examined Malaysian NFPs; with no extant study which has addressed the impact of government funding on the disclosures made by Australian NFPs.

Acknowledging the lack of Australian studies on extent of government funding received by a NFP and the extent of disclosures made by the NFP, this study develops its fourth hypothesis by considering Fischer et al. (2010) and Zainon et al. (2014). Both studies observed a positive relationship between the extent of government funding inflows of a NFP and the extent of disclosures made by the NFP; where Fischer et al. (2010) measured disclosures in terms of financial statement disclosures whilst (Zainon et al. 2014) gauged disclosures by considering annual report information.

Following Fischer et al. (2010) and Zainon et al. (2014), it is next hypothesised:

H4: The greater the extent of government funding received by a NFP, the higher its extent of accounting disclosures.

40

Trussel and Parsons (2007) explored the financial reporting factors which affect donations to NFPs.

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5.2.2.3 Financial Leverage

The financial leverage of a NFP refers to ratio of the debt to the total assets of the organisation (Behn et al. 2010; Verbruggen et al. 2011; Saxton et al. 2012), where debt refers to total liabilities (Eng and Mak 2003).

NFPs are also financed by debt (Hodge and Piccolo 2005; Yetman and Yetman 2006; Verbruggen et al. 2011), making financial leverage a relevant factor in developing hypotheses which relate to the extent of disclosures made in the annual reports of NFPs. The debt providers of an organisation are interested in disclosures which describe the financial leverage of the organisation; namely, its ability to meet financial obligations (Haniffa and Cooke 2002; Parsons 2003; Ali et al. 2004; Vermeer et al. 2014). In general, the higher the leverage of an organisation, the greater the extent of scrutiny and monitoring it receives from different stakeholder groups (Jensen and Meckling 1976; Watts and Zimmerman 1990; Meek et al. 1995; Watson et al. 2002; Brammer and Pavelin 2006). An organisation, with high financial leverage, minimises the potential of any additional scrutiny from creditors, using disclosures (Jensen and Meckling 1976; Courtis 1979; Wallace et al. 1994; Ahmed and Courtis 1999; White et al. 2010; Abeysekera 2011) which communicate its ability to meet financial obligations when they fall due (Haniffa and Cooke 2002; Verbruggen 2011; Elzahar and Husainey 2012).

In general, empirical findings on the influence of the financial leverage of an organisation on its extent of disclosures, are mixed (Lu and Abeysekera 2014): some studies concluded a positive relationship (Bradbury 1992; Deumes and Knechel 2008; Kammal Hassan 2009; Taylor et al. 2010; Saxton et al. 2012; Elshandidy et al. 2013; Jitaree 2015), some have identified an insignificant relationship (Ahmed and Nicholls 1994; Raffournier 1995; Gordon et al. 2002; Ali et al. 2004; Hassan et al. 2006; Linsley and Shrives 2006; Abraham and Cox 2007; Rajab and Handley- Schachler 2009; Elzahar and Hussain 2012), whilst others have observed a negative relationship (Craswell and Taylor 1992; Meek et al. 1995; Cormier and Magnan 2003) between the financial leverage of an organisation and its extent of disclosures.

The NFP literature, on the other hand, has noted that NFPs with financial leverage are more likely to publish financial reports containing a greater range of information, including performance related disclosures (Behn et al. 2010; Verbruggen 2011). These studies have explored USA (Behn et al. 2010) and Belgian NFPs (Verbruggen 2011). The relationship between the financial leverage and disclosures of a NFP remains unexplored in the Australian NFP literature.

Hence, considering the studies by Behn et al. (2010) and Verbruggen (2011), the next hypothesis is:

H5: The higher the financial leverage of a NFP, the higher its extent of accounting disclosures.