Archives Des Sciences Vol 65, No.

5;May 2012

Applying Stakeholder Approach in Developing Charity Disclosure

Index
Saunah Zainon (Corresponding author)
Accounting Research Institute, Faculty of Accountancy, Universiti Teknologi MARA
40450 Shah Alam, Selangor, Malaysia
Tel: +6019-776-2627 E-mail: saunah5885@yahoo.com

Ruhaya Atan
Accounting Research Institute, Faculty of Accountancy, Universiti Teknologi MARA
40450 Shah Alam, Selangor, Malaysia
Tel: +6019-759-8710 E-mail: ruhaya@salam.uitm.edu.my

Yap Bee Wah

Department of Statistics, Faculty of Computer & Mathematical Sciences, Universiti Teknologi MARA
40450 Shah Alam, Selangor, Malaysia
Tel: +6012-634-4464 E-mail: beewah@tmsk.uitm.edu.my

The research is financed by the Prototype Research Grant Scheme (PRGS) under the Ministry of Higher
Education (MOHE), Malaysia

Abstract
The objective of this paper is to develop the Charity Disclosure Index (ChDI) by applying a stakeholder
approach. The large scale web survey was used to obtain the weight by its importance from the
institutional donors as respondents, representing the key stakeholders of the charity organizations. This
paper offers an acceptable charity disclosure instrument with the assignment of weight, based on the
stakeholder approach. The results indicate that the stakeholders had assigned the financial information
and governance information as the highest weight out of five categories of information in the charity
organizations. This study focuses on a single country study. Therefore, findings of this study might not
be comparative to other country that use different disclosure index. Nevertheless, it presents the original
work of self-developed ChDI instrument to measure the extent of charity disclosure in which it can be used
as a basis to improve the quality of charity reporting.

Keywords: Charity Disclosure Index, Instrument, Stakeholder, Reporting

1. Introduction
Disclosure of information is essential for the functioning of efficient charity organizations. Information is
disclosed through regulated financial reports, including financial statements and notes to the accounts,
service efforts and accomplishment (SEA) reports and other regulatory filings. In recent years, the nature of
charity organizations has changed from merely the traditional financial reporting model to the performance

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reporting of information (Beattie, McInnes, & Fearnley, 2004). Performance reporting information
emphasizes backward-looking, quantified, financial, forward-looking and non-financial in nature. This is to
satisfy the stakeholders’ needs for information that provide disclosure of information for accountability and
transparency. In recent times, demand for disclosure by charity organizations has also increased due to
the increased in charity organizations wrongdoings and fraud (Cordery & Baskerville, 2011). Thus,
disclosure continues to become a major mechanism to sustain charity fraud and improving charity reporting
quality.

In addition, recent action of South East Asia countries such as Singapore and Thailand through their
Charity Councils have been actively reviewing and improving their non-profits regulatory framework and
enhancing their disclosure policies. In contrast, Malaysia, as one of the South East Asia countries where
the levels of transparency and governance controls are not prescribed by law, is lacked by the disclosure
policy. Hence, proactive action should be taken to improve the situation because accountability,
transparency and good governance are the keys to enhance the relationships between NPOs and
stakeholders. This proactive action may be taken by means of information disclosure. However, some
relevant questions are still open, such as the measurement of information for disclosure quality for charity
organizations. Another limitation encountered in charity disclosure studies is the difficulty in measuring
the extent of disclosure. This is because measurement of information disclosed by charity organizations is
a complex task since there is no uniform disclosure index can be applied in charity organizations.

This paper stimulates the interest and motivation of charity organization disclosure studies to coincide with
the moves of accounting and regulatory bodies to enhance accountability. In order to reduce information
asymmetry, an organization must consistently provide stakeholders with reliable and relevant information.
This is particularly to fulfill donors accountability by developing a disclosure index through the improved
in reporting (IASB, 2009; Narain, 2009) based on Malaysia regulatory environment. The objective of this
paper is to describe the process of developing the Charity Disclosure Index (ChDI) instrument, which
attempts to consider the needs for information of the stakeholders. This paper contributes to the existing
literature in three unique ways. First, as far as our knowledge reaches, there is no disclosure index
designed for charity organizations. This help assist the difficulties associated to information disclosure
measurement in charity organizations. Second, ChDI developed in this study has a multidimensional in
character that covers comprehensive elements of information such as the background, financial,
non-financial, governance and future information. Third, this index is developed using both the
qualitative and quantitative research methods and finally, a further contribution of ChDI is it should be a
value in an attempt to fill a gap in charity disclosure measurement instrument.

The rest of the paper is organized as follows: for the next section in Section 2 we review the literature
related to our research. Section 3 describes the process of developing ChDI and the final section
concludes the paper.

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2.0 Review of Literature

Some researchers have argued that for the charity organizations, the discharged of accountability by means
of disclosure may attract the existing and potential donors (Banks, Fisher, & Nelson, 1997; D Coy, 1995;
Waters, 2010). Disclosure of information becomes important in tandem with the financial meltdowns
seen and related to non-profit organizations (Chandranayagam, 2010). He stated that “there just does not
seem to be enough transparency and publicly available information on projects done by non-profit
organizations, or projects in which such charitable organizations have invested.” Such disclosures aim to
demonstrate accountability and transparency, reporting the proper utilization of resources. Evidence from
previous studies showed that non-profits’ lack of disclosure and asymmetric information dissemination
among stakeholders may not only cause to inefficient resource allocations (Behn, DeVries, & Lin, 2007)
but leads to undermine the credibility of non-profits. Therefore, there is a concern to measure the extent
of disclosure in charity annual reports. In particular, this can be done through the use of disclosure index
to measure the extent of disclosure.

In the context of charity, disclosure plays an important role in the aspect of charity governance and
accountability (Saxton & Guo, 2011; Sinclair, Hooper, & Ayoub, 2010). Disclosure also fills financial
reporting function. Disclosure through financial reporting can be employed to reduce the undesirable
influences of information asymmetry. However, the most difficulty encountered in charity disclosure
studies is on disclosure measurement for a better disclosure quality. Disclosure quality is a complex
concept, multifaceted and subjective (Beattie et al., 2004). Often, there is lack of theory in support that
enables the construction of disclosure index for this concept. The extant of literature adopts a variety of
approaches to disclosure measurement, under the implicit assumption for disclosure quality. According to
Beattie et al. (2004), the approaches to measure disclosure can be classified in two categories: subjective
ratings and semi-objective approach.

The first approach has been to use subjective ratings that refer to analysts’ score on disclosure quality
rankings. This approach is not without conceptual problems involve the subjective judgement and
self-selection bias. In order to overcome limitations of subjective ratings, the second approach has been to
use researcher-constructed disclosure indices or semi-objective approach. Under this approach,
self-constructed disclosure index is developed by the researcher to measure the level of both mandatory and
voluntary information. Semi-objective approach also includes the use of tools such as thematic content
analysis, readability studies, linguistic analysis and disclosure indices (Urquiza, Navarro, & Trombetta,
2009).

2.1 Disclosure Index

One way of measuring information disclosed is through the use of disclosure index. An index comprises
numbers that encapsulate, in single figures, objects in the set that one wants to measure and that are capable
of measurement (D. Coy & Dixon, 2004, p. 82). The extensive used of disclosure index not only in
corporate annual reports (Alanezi & Albuloushi, 2011; Ho & Wong, 2001; Marston & Shrives, 1991), but
also applied in the context of various categories of non-profits such as colleges, universities, schools and

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museums. For example, the colleges and universities (D. Coy & Dixon, 2004; Gordon, Fisher, Malone, &
Tower, 2002; Posey, 1980), the schools (Tooley & Guthrie, 2001), the museums (Christensen & Mohr,
2003; Wei, Davey, & Coy, 2008) and the charities (Connolly & Hyndman, 2000, 2001, 2004; Jetty &
Beattie, 2009).

It is common to design an index that takes into account several items of information, which are
dichotomous measured in terms of two possibilities of disclosure (value of 1 for disclosure) and
non-disclosure (value of 0 for non-disclosure). Various scholars have adopted a dichotomous approach in
order to assess the extent of disclosure in annual reports (Gandia, 2011; Gordon et al., 2002; Wei et al.,
2008). Alternatively, items of information are weighted in correspondence with their relative importance.
This alternative approach of a weighted disclosure index were used by Chow and Wong-Boren (1987),
Coy, Tower and Dixon (1993), and Fischer, Gordon and Kraut (2010) although there is no consensus about
the convenience of weighting them. In fact, in some cases, the researcher argued that predetermined the
weights are subjective (Ahmed, Dey, Akhter, & Raza, 2011). Furthermore, it is also argued weighted
indices have no difference or empirical advantage over an unweighted index (M. Fischer et al., 2010).

Table 1. Non-profits Studies using Disclosure Indices

Author/s Country Sector Weighted (W) or No. of
unweighted index items
(UW)
M. Fischer et al. United States College and universities W 75
(2010)
Hyndman (1990) United Kingdom Charities W 14
Jegers and Houtman Belgium Nonprofit hospitals UW 21
(1993)
Coy et al. (1994) New Zealand Universities W 26
Coy (1995) New Zealand Universities W 58
Coy and Dixon (2004) New Zealand Universities W 43
Dixon, Coy, and New Zealand Universities UW 52
Tower (1991)
Gandia (2011) Spain NGOs W 78
Krishnan and Schauer United States Nonprofit health and UW 8
(2000) welfare
Tooley and Guthrie New Zealand School W 20
(2001)

Table 1 presents some of the non-profits studies that employ an index based on certain level of coverage for
certain topics. The number of disclosure index items varies from one author to another. The highest
number of index items proposed by Gandia (2011) contained 78 index items, followed by Fischer et al.
(2010) for 75 index items. The least number of index items developed by Krishnan and Schauer (2000)
for 8 items. Majority (70%) of the index is weighted index, indicating that the attention is given or being

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emphasized for weighted index, in particular the weight of importance for information given by the
stakeholders. This shows stakeholders have long been considered as important target group for items of
information in disclosure (Elkington, 1993).

2.2 Items of Information for Disclosures

The direction for non-profit disclosure movement began with a call for better reporting within charity sector
in the United Kingdom (UK) with the first study by Bird and Morgan-Jones (1981). Their study found
great diversity in financial accounting practices of charities which, in turn, affect the use and understanding
of the disclosures by stakeholders. The findings of Bird and Morgan-Jones’s resulted in the introduction
of the 1988 Statement of Recommended Practice (SORP) by the Accounting Standards Committee (ASC,
1988), which was subsequently revised in 1995 (Charity Accounting Review Committee 1995), in 2000
(Charity Commission 2000) and in 2005 (Charity Commission 2005).

Other studies conducted by Hines and Jones (1992) and, William and Palmer (1998), also found varying
practices among the United Kingdom (UK) charities. Hines and Jones (1992) found that the original
SORP (1988) had little impact in reducing the variations in practices and this was supported by William
and Palmer (1998). Both studies suggested a change in direction towards improving the quality of
reporting through the user needs model. Soon after, research on charity onwards appears to follow user
needs model as suggested by them. Studies by Connolly and Hyndman (2003, 2004), and Christensen and
Mohr (2003), for example, have specifically examined the extent of narrative disclosure presented in
charities’ annual reports. Specifically, Connolly and Hyndman (2003, 2004) investigated the level of
disclosures, with specific information about background and performance indicators within the annual
reports narrative section. They found that the charities were only reporting background information but
seems to lack in disclosure of performance, with regards to efficiency and effectiveness. They concluded
that even the charity management are aware of the needs of users, but no provisions are made to meet the
performance disclosure of information.

Similarly, the study conducted by Christensen and Mohr (2003) in the United States (US), showed that the
contents of 172 not-for-profit museums annual reports were highly variable. They vary in overall content
of annual reports, from short descriptions of museum’s aims and activities to a comprehensive overview of
the charity’s mission, objectives and accomplishments. Financial data disclosure of information also
differs from no information to a complete set of audited financial statements. A content analysis study by
Connolly and Dhanani (2004) in assessing the disclosure patterns of accounting narratives within 71 UK
fund-raising charities revealed that: practices vary considerably, disclosure patterns are diverse depending
on the type of information disclosed; and charities report are mainly descriptive in nature, does not compare
activities and operations over time and does not provide explanations for significant changes reported.

Hyndman (1989) initially examined ten types of information in meeting stakeholders’ needs. In a later
study Hyndman (1990) identified four more information commonly disclosed by charities. He concluded
that charity reports are led by financial information, which stakeholders perceive as relatively less
important than the non-financial information. His studies proposed a priori model of reporting based on

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information types suggested and needed by stakeholders. In addition, Hyndman recommended the need
towards moving the central focus from financial to non-financial disclosure for quality reporting.
Similarly, Khumawala and Gordon (1997) found that donors are more interested in non-financial
information such as the purpose of the organization, service efforts and accomplishments, the statement of
activities, programs provided, organizational goals and achievement, and the classification of expenses.

Kilcullen et al. (2007) identified four types of information – the first type of information identified is on
donation and grants or non-reciprocal transfers (NRT) including additional disclosure on the contribution
of volunteers in hours and dollars, the uses of NRT and the sources of funds. The remaining type of
information in their study also covers the financial and the non-financial information on the service
performance, fund accounting and budget information. The four types of information were from the
guidance provided to not-for-profit entities by standard setters from New Zealand, the U.S.A., Canada and
the U.K. and prior research on charities by Hyndman (1990) and, Khumawala and Gordon (1997).

The studies on information disclosure were further extended recently by Hancock et al. (2010) who
investigated the extent to which information is useful for assessing accountability and for decision making.
He found that the users and preparers have different perspectives, and they are able to differentiate the
usefulness of information for the purpose of decision making and accountability. Respondents are also
able to distinguish between different types of information for each category.

As evidence from the above literature, there appears a great motivation towards identifying items of
information to be considered by the charity in their disclosure reporting and the next section describes the
process of developing the charity disclosure index instrument for charity organizations.

3.0 The Process of Developing the ChDI

The main objective of this study is to describe the process of developing the ChDI. ChDI is the
instrument in the form of disclosure index that can be used to measure the extent of charity organizations
disclosure of information in their annual returns. A disclosure index indicate the extent to which the list of
selected items are disclosed in annual reports (Marston & Shrives, 1991). Coy (1995, p. 121) states that a
disclosure index is: ‘... a quantitative-based instrument designed to measure a series of items which, when
the scores for the items are aggregated, gives surrogate score indicative of the level of disclosure in a
specific context for which the index was devised.....’

The development of the ChDI in this study was initiated through a four-step process taking into
consideration the views from the needs of the stakeholders on their needs for information. The four-step
processes are as follows:

1. Identification of information items from review of literature, the statutory and regulations, and
semi-structured interviews with the key stakeholders.
2. Identification of measurement, structure and scoring procedures.
3. Assignment of weights.

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4. Assessment of validity.

Many of early works view disclosure from the perspective of the information provider. As a result, the
disclosure studies may not say much about how the disclosures match the stakeholders’ needs for
information. Therefore, the development of ChDI contains both the qualitative and quantitative research
methods to take into account the stakeholders’ needs for information. Figure 1 below presents the process
of ChDI development.

Figure 1. The Process of ChDI Development

Process Description of Instrument Information Item Status

Process
New Retained Modified Deleted

Process 1 A. Identification of
Initial ChDI
information 34
items from
review of
literature , the
statutory and
REVISION

regulations
B. Semi-structured
Interviews with 38 0 0
key stakeholders

Process 2 Identification of
Measurement,
Structure and
Scoring Procedures Validated CHDI

Process 3 Assignment of
Weights

Process 4 Assessment of
Validity

A. Expert Review 21 85 28 2
Validated and tested
ChDI
B. Survey 3 88 0 0

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3.1 Process 1A - The Identification of Information Items

Although there was no commonly specific theory used to determine the number of items for disclosure
index (Hooks, Coy, & Davey, 2002), the list of information items is primarily determined through a
review of literature. The number of information items developed by Coy (1995) contained 58 items in
Public Accountability Index (PAI), which were grouped into three broad categories: the Overview,
Financial and Service disclosures. The use of PAI in a study of annual reports in universities is built on
the predecessor of Modified Accountability Disclosure (MAD-score) index which consists of 26 items (Coy
et al. 1994). Hyndman (1990), on the other hand, used only 14 items of information in a charity
disclosure study. Figure 2 below presents the sources of the information items for the ChDI, mainly derived
from the Societies Act 1966 (Act 335) & Regulations, Malaysia Income Tax Act (ITA) 1967 and
Hyndman’s priori model.

Figure 2. Sources of the Items of Information

Name of the organization.

Registered address of the organization.
List of office bearers’ name.
Statement of financial position or balance sheet.
Statement of receipts and payments.
Name of associated or affiliated society, association,
trade union, or any other body of persons,
incorporated or unincorporated, outside Malaysia.
Societies Address of associated or affiliated society,
Act 1966 (Act 335) & association, trade union, or any other body of
Regulations persons, incorporated or unincorporated, outside
Malaysia.
Minutes of annual general meeting (AGM).
Date of registration.
Description of financial support or aid by any
person outside Malaysia.
Description of financial support or aid by any
organization outside Malaysia.

Audited financial statements.

Section 44(6) Malaysia List of committee members stating the names, full
ITA 1967 addresses, identity card numbers, occupation and the
positions held in the committee.
List of activities.

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Statement of goals.
Statement of objectives.
Problem/need area information.
Measure (s) of output.
Measure (s) of efficiency.
Administration cot percentage information.
Priori Model of Simplified operating statement.
Hyndman (1990) Simplified balance sheet.
Statement of future objectives.
Budget information.

Basically, there are eleven items of information that need to be furnished by the registered charity
organizations under the Registry of Society (ROS). The information need to be furnished by submitting
Form 9 that consists of the Statement of Receipts and Payments of the last financial year, together with a
balance sheet showing the financial position at the close of the last financial year to the ROS within sixty
days after holding its AGM. This requirement is in accordance with Section 14(d) of the Societies Act 1966
(Act 335) & Regulations. However, the accounts submitted may not necessarily be audited. The other
statements that supplements financial statements such a Cash Flow Statement, Statement of Changes in
General Fund and Notes, comprising a summary of significant accounting policies and other explanatory
notes are not required by the ROS.

For tax-exempt purposes, the Inland Revenue Department (IRD) of Malaysia is the body that responsible
for granting the status. On the other hand, charitable organizations that may formally apply for tax
exemptions under Section 44(6) of the ITA 1967 from the IRD. However, the IRD guidelines for
application of Section 44(6) approval only requires general requirement of audited financial statements for
the preceding two years without the breakdown of the detail components of the financial statements to be
submitted. The other requirement for tax-exempt status application is the list of committee members (with
full details) and the list of activities of the organizations. In addition, Hyndman’s priori model was also
used as a benchmark in the identification of the items of information. As a result, the initial list of the
ChDI contained 34 items of information.

3.2 Process 1B – Semi-structured Interviews with Key Stakeholders

With the original list of 34 information items identified based on the review of the literature, the ChDI is
further developed through the interview process with the key stakeholders, represented by the institutional
donors. Semi-structured interviews were used to obtain items of information needs by the institutional
donors. The donors are major institutional donors with charitable donations of RM10,000 and above.
There were five companies that agreed to participate in this study. Three companies comprises of private
companies (family-owned business), in which the shares are not publicly traded. One of the companies is
an international foreign bank and the other is a main board public listed company.

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All interviews were conducted in the interviewee’s office to allow the researcher and participant to interact
more freely. The questions were open-ended. Each interview was recorded and transcribed. The
interview session took place between 45-90 minutes. The interviews were chosen as the most appropriate
research approach because the people being interviewed are informants towards donations decision making.
Moir (2004) who undertook exploratory interviews with three different types of organizations (a large bank,
an international accounting firm and a large law firm) to sensitize the issues and to develop ease of
interviewing and analyzing data. Semi-structured interviews in this study foster the structuring and finding
of common patterns in relatively unknown fields of research (Eisenhardt, 1989). Interviews can provide
important information which is difficult to obtain via survey.

Based on the interviews, four more items of information were added to the ChDI list. The extra
information needed by the institutional donors from the charity organizations are: award winning for
participation in projects, participation in regional events, involvement in international events and the
statistics of their clients. These four items of information were all non-financial information (performance
information) category items and were added into the existing ChDI resulting in 38 items of information
listed in the list.

3.3 Process 2 – Identification of Measurement, Structure and Scoring Procedures

The 38 items of information were then structured accordingly into its categories. Coy and Dixon (2004)
found it is useful to structure an index into separate categories. Thus, the ChDI is structured into five
categories as follows: Basic Background Information (BBI), Financial Information (FI), Non-Financial or
Performance Information (NFI), Future Information (FUI) and Governance Information (GI). BBI has a list
of 13 items. There are 30 items which fall under FI, 19 items for NFI, eight items under FUI and GI has 18
items. These categories are then structured accordingly based on its categories. Table 2 below
summarizes the major elements of the ChDI. Altogether there are 88 items of information listed in ChDI.

Table 2. Items of Information in ChDI

Category Items of Information
1. Name of the charity organization
2. Registered address of the organization
3. Nature of the organization services
4. List of office bearers’ name
5. Name of associated or affiliated society, association, trade union, or any other body
of persons, incorporated or unincorporated, outside Malaysia
Basic Background
6. Address of associated or affiliated society, association, trade union, or any other
Information
body of persons, incorporated or unincorporated, outside Malaysia
(BBI)
7. Minutes of AGM*
8. Legal and regulatory formation
9. Date of registration
10. Registration Number
11. Tax-exempt status

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12. Governing Act [eg. Societies Act 1966, Trustees (Incorporation Act (Act 258]
13. Type of organization (eg. public-funded organization or private-funded
organization)

1. Statement of Receipts and Payments

2. Description of financial support or aid by any person outside Malaysia
3. Description of financial support or aid by any organization outside Malaysia
4. Non-current assets
5. Current assets
6. Long-term liabilities
7. Current liabilities
8. Charitable funds
9. Statement of changes in charitable funds
10. Surplus or deficit
11. Cash flow from operating activities
12. Cash flow from investing activities
13. Cash flow from financing activities
14. Method of cash flow preparation
15. Financial resources
Financial Information
16. Disclosure of accounting policies
(FI)
17. List of expenses (without classification)
18. Functional classification of expenses into charitable expenses
19. Functional classification of expenses into administration expenses
20. Percentage of charitable expenses out of total expenses
21. Percentage of administration expenses out of total expenses
22. Benefit-in-kind (in monetary terms)
23. Financial risk management
24. Total sources of income (without classification of income)
25. Classification of income such as donation income
26. Classification of income such as membership fees
27. Classification of income such as fundraising income
28. Classification of income such as other income
29. Government grants
30. Private grants

1. Clients’ satisfaction
2. Well-managed clients’ complaints
3. Investment in technology and computer system
4. New programs and services generated for new clients’ needs
5. New programs and services launch

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6. Increase in clients each year

7. High level programs and service’s quality
Non-Financial 8. The use of performance criteria to evaluate programs and services
Information 9. Increase in number of staffs in training course
(NFI) 10. Improvement of skills and performance of staffs every year
11. High success rates maintained each year
12. High level program and services completion
13. Staff training
14. Non-financial resources (benefit-in-kind)
15. Participation in special projects
16. Participation in regional events
17. Participation in international events
18. Statistics of clients
19. List of activities

1. Budget information for future expansion

2. Strategic planning for organizational development
3. Statement of future activities that benefit clients
4. Vision statement
Future Information
5. Mission statement
(FUI)
6. Statement of objectives in a specific programs
7. Core values of the organization
8. Next year’s coming target future donations

1. Patron’s message
2. Statement of principal officers (eg. Chairman, President, Director, etc.)
3. Statement of key committee members
4. List of names of major donors
5. Sponsorship
6. Calendar of events
7. Community services
Governance 8. Internal audit committee
Information (GI) 9. Audit certification by independent auditor
10. Corporate partnership involvement
11. Founder of the organization
12. Patron of the organization
13. Committee members’ background
14. Committee members’ experience
15. Committee members’ qualification
16. Race of the committee members

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17. Gender of the committee members

18. Number of the committee members

Basic Background Information (BBI)

Basic background information such as the name, nature of the services, registered address and the list of
office bearers’ name are not only compulsory requirement by the Societies Act 1966 (Act 335) and
Regulations but served as useful information to stakeholders, such as the institutional donors because it
provides a basic context of the organization prior detailed information about the organization. With BBI,
the stakeholders may have the overall picture of the organizations’ service operations and status for them to
make donation decision making for that charity organization.

Financial Information (FI)

Financial information is essential for the stakeholders to know the economic situation of the organizations
and they are able to evaluate on the use of funds that controlled and monitored by the board of trustees.
The Societies Act 1966 (Act 335) & Regulations requires the financial information about the organization
from the Statement of Receipts and Payments and related items in the Balance Sheet such as the current
assets, non-current assets and related disclosures of accounting policies to provide the stakeholders with
important financial information.

Non-Financial Information (NFI)

The non-financial information category includes clients’ satisfaction, clients’ complaints, and an increase in
clients, staff training and non-financial resources. The non-financial information is often regarded as
important information in charity organization. Hyndman’s (1990) and, Khumawala and Gordon’s (1997)
reported that in charity surveys, non-financial information is regarded most important by the users
compared to financial information.

Future Information (FUI)

Hyndman’s (1990) priori model provide a basis for the future information that is not covered in the
financial information or non-financial information category. This is considered the most important
information for charity. Such information includes budget information, strategic planning, mission and
vision statement and the core values of the organization.

Governance Information (GI)

This information is mostly obtained from the panel expert review during the content validity process. In
well-organized charity organizations, it is essential to have good charity governance for accountability
purposes. Governance matters such as the name list of major donors, statement of principal officers,
community services, establishment of internal audit committee or the founder of the organization are all
information items that might be required by the charity stakeholders.

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3.4 Process 3 – Assignment of Weights

In computing the index score, either weighted or unweighted approach can be used to measure the extent of
disclosure. Previous studies have shown the use of weights (Fischer, Gordon, & Khumawala, 2008:
Fischer et al. 2010; Gandia, 2011; Gordon et al. 2002; Tooley & Guthrie, 2001) in measuring the extent of
disclosures in annual reports. The annual report is a vehicle for communicating information to enable the
performance and position of the organizations to be measured, classified, quantified and evaluated.

To be an index, ChDI has to provide a single number that aggregate the scores of all information. The
weights for the reporting index will be derived from the importance of information (e.g. information by
category such as the BBI, FI, NFI, FUI and GI). Some items of information might be recognized or
considered to be more important than others by the stakeholders. Therefore, it is detrimental to treat all
items of equal value. Weightings allows greater recognition of items that are essentially extensive such as
the non-current assets compared to items that are inherently limited in extent such as movement in equity.
To calculate the disclosure index, the weightings indicate the importance of the information items and are
measured using a seven-point scale (1= not at all important to 7= extremely important). Study
participants were asked to rate the relative importance of each of the identified disclosure items based on
this seven-point scale. The overall median weighted score were computed to provide a single figure
which summarizes the responses and serves as a basis for comparing the level of importance the study
participants attribute to each item of information. A median was used to denote the weight of
importance for the information items because it is more representative and meaningful for the ordinal scale
data (Agresti, 2010).

3.5 Process 4A – Assessment of Validity (Expert Review)

The final step involved in developing the ChDI is to test the validity of the items. Validity refers to the
degree to which it measures what it is suppose to measure and the reliability of a scale indicates how free it is
from random error (Pallant, 2007). The main types of validity used in this study were both the face and the
content validity. Face validity is the degree to which a survey questionnaire or other measurement appears
to reflect the variable it has been designed to measure. On the other hand, content validity or logical validity
seeks to establish that the items or questions are a well-balanced sample of the content domain to be measured
(Oppenheim, 1992, p. 162). This is an important process since the quality of the research instrument
becomes a central focus point of the study. Therefore, before it was pretested, the questionnaire has been
reviewed by the experts in their own field for face and content validity. Both local and international experts
participated in the validity process of ChDI. Local panel experts included the institutional donor who was
also the member of the National Council of Welfare and Social Development (NCSWD) of Malaysia, the
charity representatives and academic researchers from accounting, management and law backgrounds. The
expert from the non-profit regulatory body, i.e. the ROS was also invited in reviewing this validity process.

The recognized local experts were asked to review whether all items of information had been covered, and
consequently, from the 38 items of information, two information items deleted, additional 21 new
information items and 28-modified items were added, giving 85 items of information in the list.
Example of deleted item was ‘Balance Sheet’ and this item was replaced by the details of the balance sheet

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items such as ‘the non-current assets, current assets, current liabilities and long-term liabilities.’ On the
modified items, the unfamiliar term by certain respondents such as ‘the ratio of charitable expenses’ was
changed to ‘percentage of charitable expenses to total expenses.” The ChDI was then sent for international
experts review.

Two international experts in survey research and non-financial performance measures were selected. The
ChDI was further improved by recommendation by the international expert to consider expanding the scale
measurement. The scale was then was then expanded to 7 points (1-Not at all important to 7-Extremely
important), this allowing the respondent to select some more point, with 4 being neutral. It was suggested
that a 7-point scale of evaluation would provide better accuracy to differentiate the total score of category
items and the aggregate total score of the index items (Ritchie & Eastwood, 2006). Other items in the
ChDI were considered adequate for the ChDI to be used as the instrument to measure the extent of
disclosure practices by the charity organizations. The index scores are considered reliable if the results
can be replicated by other researcher and valid if the index mean what the researchers intended (Marston &
Shrives, 1991). A reliable index is reached uniformly by determining scores for each of, possibly, many
component items, which have been identified as relevant to the set and the purposes of the index. This is
to ensure the practicality so that there will be enough variance in the responses.

3.6 Process 4B – Assessment of Validity (Survey)

The ChDI is intended to capture the institutional donors’ needs for information that should be disclosed and
the relative importance of the information items from the charity organizations. The validated ChDI were
then further validated through the survey before it is ready to be applied and used as validated ChDI. Since
the questionnaire design has impact on response rate and validity of the data (Rea & Parker, 2005), there
is a need to revise and improve the questionnaire design through pilot testing. The questionnaire was
revised and improved accordingly before it was distributed to respondents. Additional three items of
financial information considered important by the respondents such as the information on ‘cash flow from
financing activities,’ ‘private grants’ and ‘financial risk management’ were added as a result of pilot testing.
The revised and validated ChDI consists of 88 items of information. Figure 3 below summarizes the
category of information accordingly in the form of numbers and percentage.

Figure 3. Category of Information by Numbers and Percentage

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The above graph shows that the most of 34.1% items of information under the FI category, followed by the
NFI items (21.6%) and the least of 9.1% items of information in the FUI category. The extent of validity
and reliability of ChDI were further validated by means of large-scale data for the final survey in order to
confirm the importance of information needed by the stakeholders. For this purpose, data was collected via
a structured questionnaire using web application survey (perseus.surveysolutions®/EFM). This choice of
methods is chosen due to many claims made about the advantages of conducting surveys on the web.

The web or online survey is a cost effective way of administering a survey that allows large amount of
information collected. The web survey may also save time by allowing the researchers to collect data
while they working on other tasks or projects (Andrews, Nonnecke, & Peece, 2003). After an invitation
to participate in a survey is posted to the website, the responses to web survey can be transmitted to the
researcher through e-mail or immediately posted to an HTML document or database file. This would
allow the researcher to perform preliminary analyses while waiting for the desired number of targeted
responses.

As discussed above, web survey offers many benefits over traditional surveys. However, there are some
drawbacks that should also be considered by researchers using web survey methodology. Although many
problems in survey methods are also inherent in traditional survey methods, but some are unique to only the
computer medium. Sampling is one of the issues encountered in web survey method. Concerning sampling
representatives (Dillman, 2000; Swoboda, Muehlberger, Weitkunat, & Schneeweiss, 1997; Tse, 1998) that
many populations are geographically diverse, do not receive the attention they deserved since e-mail
sampling is necessarily limited to e-email users.

Kittleson (1995) argued that the US Postal Service is the best way of getting a satisfactory response rate
that could not be achieved among active e-mail users. Few studies that noted low e-mail survey response
rate, among others, Couper, Blair and Triplett (1997) achieved a 43% web survey response rate versus 71%
from mail, Schuldt and Totten (1994) reported only 19% compared to a 57% mail response and Swoboda et
al. (1997) received a 21% response rate from e-mail survey. In contrast to the results noted, there are
some web survey studies perform well beyond expectations. Indeed, some could reach as high as 70%.
An e-mail survey to Lotus Development Corporation employees conducted by Bachmann and Elfrink (1996)
achieved 56% response rate. Also, Kiesler and Sproull’s (1986) e-mail survey to college students
achieved a 67% response rate. Mehta and Sivadas (1995) concluded that e-mail surveys with pre-notice
and follow up prompts can generally achieve higher response rates.

This study uses the web survey design methodology for the purpose of assigning the weights for the
instrument through the conduct of larger scale web-based survey before it can be used. For this, the target
respondents are those institutional donors from the main public listed companies in the Bursa Malaysia and
the respondents were guaranteed of ethics and confidentiality; as they are assured that identifying
information will not be made available to anyone who is not directly involved in the study. This is the
principle of anonymity which essentially means that the respondents will remain anonymous throughout the
study.

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As at 10 May 2011, there are 839 main public listed companies in the Bursa Malaysia. Not all companies
having had established the corporate social responsibility department. However, the chosen companies
were based on the basis that the companies have made sum amount of donations as one of the corporate
social responsibility (CSR) pillars. Data collection for the web survey took about two months from 16th of
May 2011 to 15th of June 2011. Respondents were assured of confidentiality and anonymity of their
returned questionnaires. The response rate was very low in the first two weeks. During the two-month
period, three e-mail reminders were sent out to them in order to increase the response rate.

By 15th of June 2011, a total of 140 institutional donors participated. Out of 140 returned questionnaires,
16.4% were incomplete responses and therefore only 117 fully completed questionnaires can be used for
further analysis. This contributed to 13.9% of response rate. The respondents were majority from the
industrial products sector (35%) and consumer products sector (25.6%). This is followed by the trading
and services (12%), construction (9.4%), plantation (4.3%), properties (3.4%) and others (10.3%). Table 3
presents the result of median and standard deviation for the final survey.

Table 3. Median and standard deviations for information items listed in ChDI for Main Survey

Rank Information items Category Median Standard Min. Max.

deviation

Extremely
Important
1 Cash flow from operating FI 7.00 0.906 2 7
activities
2 Internal audit committee GI 7.00 0.772 4 7
3 Audit certification by GI 7.00 0.960 1 7
independent auditor
Very
Important
4 Improvement of skills and NFI 6.00 0.911 1 7
performance of staffs every
year
5 Staff training NFI 6.00 0.868 3 7
6 Statistics of clients NFI 6.00 0.902 3 7
7 List of activities NFI 6.00 0.923 1 7
8 Budget information for FUI 6.00 0.845 3 7
future expansion
9 Strategic planning for FUI 6.00 0.830 3 7
organizational development
10 Statement of future FUI 6.00 0.868 3 7
activities that benefit clients

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11 Vision statement FUI 6.00 0.835 3 7

12 Mission statement FUI 6.00 0.866 3 7
13 Statement of objectives in FUI 6.00 1.019 1 7
a specific programme
14 Core values of the FUI 6.00 0.881 1 7
organization
15 Next year’s coming target FUI 6.00 1.126 1 7
future donations
16 Patron’s message GI 6.00 1.445 1 7
17 Statement of principal GI 6.00 1.082 1 7
officers
18 List of names of major GI 6.00 1.190 1 7
donors
19 Sponsorship GI 6.00 1.064 1 7
20 Calendar of events GI 6.00 0.710 3 7
21 Community services GI 6.00 0.689 4 7
22 Corporate partnership GI 6.00 0.803 1 7
involvement
23 Founder of the organization GI 6.00 1.054 1 7
24 Patron of the organization GI 6.00 1.144 1 7
25 Committee members’ GI 6.00 0.655 4 7
background
26 Committee members’ GI 6.00 0.662 4 7
experience
27 Committee members’ GI 6.00 0.709 3 7
qualification
28 Number of committee GI 6.00 0.869 1 7
members
29 Name of the organization BBI 6.00 0.802 3 7
30 Registered address of the BBI 6.00 0.889 2 7
organization
31 Nature of the organization BBI 6.00 0.966 3 7
services
32 List of office bearer’s name BBI 6.00 1.105 1 7
33 Legal and regulatory BBI 6.00 0.847 1 7
formation
34 Date of registration BBI 6.00 0.970 3 7
35 Registration number BBI 6.00 0.854 3 7
36 Tax exempt status BBI 6.00 0.826 3 7
37 Governing Act BBI 6.00 0.826 3 7

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38 Type of organization BBI 6.00 0.805 3 7

39 Statement of Receipts and FI 6.00 0.713 4 7
Payments
40 Surplus or deficit FI 6.00 0.978 1 7
41 Cash flow from investing FI 6.00 0.912 2 7
activities
42 Cash flow from financing FI 6.00 1.045 1 7
activities
43 Method of cash flow FI 6.00 0.875 3 7
preparation
44 Financial resources FI 6.00 0.772 3 7
45 Disclosure of accounting FI 6.00 0.860 1 7
policies
46 List of expenses (without FI 6.00 0.797 4 7
classification)
47 Functional classification of FI 6.00 0.701 4 7
expenses into charitable
expenses
48 Functional classification of FI 6.00 0.681 4 7
expenses into
administration expenses
49 Percentage of charitable FI 6.00 0.775 3 7
expenses out of total
expenses
50 Percentage of FI 6.00 0.822 3 7
administration expenses out
of total expenses
51 Benefit in kind (in FI 6.00 0.725 3 7
monetary terms)
52 Financial risk management FI 6.00 0.698 4 7
53 Total sources of income FI 6.00 0.701 4 7
(without classification of
income)
54 Classification of income FI 6.00 0.833 1 7
such as donation income
55 Classification of income FI 6.00 0.682 4 7
such as membership fees
56 Classification of income FI 6.00 0.682 4 7
such as fundraising income
57 Classification of income FI 6.00 0.695 4 7

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such as other income

58 Government grants FI 6.00 0.754 4 7
59 Private grants FI 6.00 0.748 4 7
60 Clients’ satisfaction NFI 6.00 0.701 3 7
61 Well-managed clients’ NFI 6.00 0.750 3 7
complaints
Moderately
Important
62 Increase in number of staffs NFI 5.00 0.844 1 7
in training courses
63 High success rates NFI 5.00 0.903 1 7
maintained each year
64 High –level programme and NFI 5.00 0.815 3 7
services completion
65 Non-financial resources NFI 5.00 0.751 3 7
(Benefit in kind)
66 Winner or participation in NFI 5.00 0.764 3 7
special projects
67 Participation in regional NFI 5.00 0.738 3 7
events
68 Participation in NFI 5.00 0.752 3 7
international events
69 Statement of key committee NFI 5.00 1.357 1 7
members
70 Race of committee GI 5.00 1.462 1 7
members
71 Gender of committee GI 5.00 1.399 1 7
members
72 Non-current assets FI 5.00 0.776 3 7
73 Current assets FI 5.00 0.779 3 7
74 Long-term liabilities FI 5.00 0.808 3 7
75 Current liabilities FI 5.00 0.919 1 7
76 Charitable funds FI 5.00 0.705 3 7
77 Statement of changes in FI 5.00 0.756 3 7
charitable funds
78 Investment in technology NFI 5.00 0.743 3 7
and computer system
79 New programmes and NFI 5.00 0.788 3 7
services generated for new
clients’ needs

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80 New programmes and NFI 5.00 0.782 3 7

services launch
81 Increase in clients NFI 5.00 0.715 3 7
82 High level programme and NFI 5.00 0.845 1 7
service’s quality
83 The use of performance NFI 5.00 0.894 1 7
criteria to evaluate
programme and services
Neutral
84 Name of associated or BBI 4.00 1.807 1 7
affiliated society outside
Malaysia
85 Address of associated or BBI 4.00 1.703 1 7
affiliated society outside
Malaysia
86 Financial support from BBI 4.00 1.799 1 7
person outside Malaysia
87 Financial support from BBI 4.00 1.758 1 7
organization outside
Malaysia
Slightly
Important
88 Minutes of AGM BBI 3.00 1.715 1 7

It was noted that the first three items that carried the highest weight (median of 7.00) were both from the
financial information category (cash flow from operating activities) and the governance category of
information (i.e. the internal audit and audit certification by independent auditor). Minutes of AGM, the
item of information that is required by the ROS carried the least weight (median of 3.00). The remaining
items of information follows their respective importance-weight assigned, making this instrument ready and
complete for practical usage.

4.0 Conclusion
One of the major purposes of disclosure in annual reports is to inform stakeholders about the organizations’
affairs. Therefore, it is likely that the stakeholders use the disclosed information to meet their interests
and needs. Because non-profits sector may possess characteristics that differ from profit sector, it is
important to have a specifically designed disclosure measurement instrument.

The process of ChDI development in this study has provided new insight regarding the assessment of the
stakeholders’ needs for information from the charity organizations. This is true for two reasons. First,
the items of information included in the index were based from both the review of literature, interviews and
subject to confirmation and scrutiny by the key stakeholders through a survey. Second, this process

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demonstrated a comprehensive reference made from both the primary and secondary information. Hence,
ChDI can be a meaningful instrument that can be used as to provide a framework to guide the preparation
of charity reporting. ChDI has its unique novelty by incorporating a polychotomous approach of 7-point
likert scale to assess items of information, meaning that ChDI is considered weighted-importance index that
generate ratio scale for the use in parametric statistical analyses.

The development of ChDI considering the key stakeholders in the process of developing the disclosure
indices to measure the extent of disclosure is very practical and applicable in the context of charity annual
reports, particularly in Malaysia. However, because of the nature of this study, it might not be possible to
make general statements about the information needs of all the diverse charity stakeholders. As to this
study without limitations, the researchers’ discretion on certain information items has been used but
notwithstanding the stakeholders’ opinions dominates the judgement and discretion.

One important issue that relates to the application of ChDI is whether the ChDI can be applicable in other
charity organizations from other countries, or on other parts of the NPOs, such as the human resource,
women, youth or culture categorization of NPOs. As far as NPOs are generally concerned, the generic
features on the basic and financial category of information can be applied elsewhere, but it would be
meaningful if some medication could be made to suit several special features based on other countries
environment.

The disclosure index developed in this study is also a valuable instrument to measure the accountability of
the information disclosed in the annual reports of charity organizations. It also provides an acceptable
charity disclosure instrument with weight assigned, which can be used by the regulators to assess the
adequacy of charity disclosure reporting.

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