Formal controls at not-for-profits require careful implementation, CGMA study shows

Developing formal performance measurement and management controls can help not-for-profit organisations (NPOs) succeed in an increasingly competitive environment. But unless they are implemented carefully, formal management controls also can damage the relationship amongst staff members that NPOs create by encouraging commitment to their philanthropic missions.

That balancing act is among the key findings in “Performance Measurement and Management Control in Non-Profit Organisations”, a new CGMA report.

“Formal controls can have both positive and negative effects on mutual trust,” said Matthew Hall, an accounting professor at the London School of Economics and Political Science, who conducted the research with Robert Chenhall and David Smith of Monash University in Australia. The report was sponsored by the AICPA and CIMA as part of the CGMA joint venture.

“Some controls – like mission statements, indicators that track client progress, and meetings to reflect on values – help to reinforce trust,” Hall said. “Other controls, such as budgets, can damage mutual trust, but only when they are introduced without proper involvement of staff and a clear understanding of how they can help improve operational activities.”

The push for more transparency

The global recession has complicated the financial situation of many NPOs. Demand for many not-for-profit services has increased at a time when individual donations and government funding have decreased.

As donors become more discerning – and as competition for grants and other sources of revenue increase – NPOs face increasing pressure to demonstrate that they are delivering services and aid in a cost-effective way.

Applying performance measurement and management control systems can help NPOs deliver services more efficiently and effectively, according to the CGMA report. But such formalised approaches are relatively new for many NPOs and sometimes clash with the informal controls that customarily have been applied at NPOs, the report says.

Involving staff members in choosing formal performance measures and the design of management controls can help reaffirm core values and show employees and volunteers how controls address operational concerns, the report says.

Developing belief systems to incorporate financial concerns alongside traditional philanthropic goals also would help NPO managers, according to the report.

Numerous opportunities exist for management accountants to assist in this process, the report says. Among them are:

  • Planning and control when formulating proposals for funding.

  • Clarifying within the NPO the importance of economic efficiency as an organisational value alongside traditional values.

  • Developing measures that help evaluate performance and aid in efficient allocation of funds.

  • Linking non-financial operational performance to financial concerns.

Making the case

The CGMA report is based on case studies from two NPOs. One is a division of a welfare NPO in Melbourne, Australia, that consists of a manager, a four-person administrative staff, five programme coordinators and 32 case workers. For the purposes of the study, this division was called Tennant.

The other is Voluntary Service Overseas (VSO), an international development organisation that links volunteers with partners in developing countries. The majority of VSO’s staff of more than 500 is located in London.

At Tennant, well-developed formal controls helped demonstrate the NPO’s ability to provide services. These processes helped confirm to other service providers and government departments that Tennant had a strong reputation for delivering high-quality services.

But the researchers also observed that, at Tennant, ensuring that financial matters receive proper attention from managers frustrated employees who didn’t see how financial issues could help them deliver services to their clients. As a result, staff morale and solidarity between managers and case workers was damaged.

“Our findings in no way suggest that NPO employees are not good stewards of their money,” Hall said. “To the contrary, our evidence shows a heightened concern with achieving as much as possible from the limited funds available. What we do see is that financial concerns are often perceived as a constraint on NPO activities by frontline staff. This is where belief systems can help to show that being more cost-conscious can help the NPO to achieve more rather than less.”

The study of Tennant and informal discussions with other NPOs show that increasing pressure to corporatise structure and management can conflict with customary modes of operation that generated internal harmony and strong relationships with external networks.

The ‘quality framework’

VSO, meanwhile, was successful at defusing discontent that surfaced during development of a new performance measurement system called the “quality framework”. About 40 indicators were used to score the performance of VSO’s programme in each country it serves.

The process to develop the quality framework helped the staff bond because staff members were able to advocate for particular indicators to be included, according to the report. Staff members also were allowed to include a narrative element to supplement the indicator scores.

A potential source of tension arose when some staff, especially at the head office, wanted to use spreadsheets to show “league tables” demonstrating how the performance of VSO’s programmes in each country compared to one another. Staff in the individual countries resisted this idea because they believed the comparison was flawed due to different contexts in each country.

Ultimately, the tension was avoided when the “league table” idea was replaced with a practice that highlighted the top-performing countries and their methods, according to the CGMA report. Staff members were able to learn from the top performers without creating a ranking that could have stigmatised those with lower scores.

The quality framework at VSO was observed as helpful in showing funders that the NPO was serious about improving its work.

Changing attitudes

The report concludes that NPOs face a dilemma with regard to formal performance-measurement and management-control systems. The scarcity of charitable funds requires careful analysis of costs and benefits of programmes and discussion of possible cutbacks, according to the report. Formal accounting is required to determine and manage the benefits in this environment, the report says.

But the report says the experience at Tennant shows that financial controls may require a change in attitudes and values toward financial responsibility and efficiency. Developing that efficiency focus before implementing financial controls, then using controls in a participative way can enhance success, the report says.

Hall said that the hesitation by the two NPOs studied to import practices from the business sector are the result of two factors.

“One, NPOs typically do not have the money to employ lots of accountants who could help with implementing these practices, and funders typically do not provide money for such things,” he said.

Secondly, the wholesale importation of practices from the for-profit business sector does not seem appropriate, Hall said. Such practices “have the potential to be helpful, but our findings indicate that they require careful adaptation to the NPO context and proper resourcing,” he added.

Ken Tysiac ( is a CGMA Magazine senior editor.