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INTERNAL CONTROL PRACTICES IN ISLAMIC NON-PROFIT ORGANIZATION IN MALAYSIA
Muhammad Iqmal Hisham Kamaruddin Nathasa Mazna Ramli
Universiti Sains Islam Malaysia (USIM) ABSTRACT
Islamic non-profit organizations received lot of Islamic charity funds such as zakat, waqf and sadaqah. Zakat and waqf mainly govern by government authorities which are State Religion Islamic Councils (SRICs). However, sadaqah funds management given to Islamic non-profit organizations to handle with it. This sadaqah funds are mainly to be distributed to the needs for achieving social objectives set by these Islamic non-profit organizations. For an organization, internal control identified as one of the elements to assure good management practices. Therefore, in order to ensure sadaqah funds are fully utilize and social objectives of these Islamic non-profit organizations are achieve, good internal control needs to be practiced by these Islamic non-profit organization. Thus, this study explores current internal control practices by Islamic non-profit organization in Malaysia to identify its implementation and practices in internal control aspect. Five main control activities recognized as measurement indicators which are segregation of duties, authorization of transactions, documentations and records, physical control over assets and independent checks. This exploration on internal control practices had been done in the one selected Islamic non-profit organization by using case study method.
Surprisingly, unexpected result produced. Some challenges and issues related to internal control practices also been highlighted. This study also provides new empirical evidence for internal control practices.
Keywords: internal control, Islamic non-profit organizations, sadaqah
 Muhammad Iqmal Hisham Kamaruddin, Faculty of Economic and Muamalat, Universiti Sains Islam Malaysia, Nilai, MALAYSIA
 Nathasa Mazna Ramli, PhD, Senior Lecturer, Faculty of Economic and Muamalat, Universiti Sains Islam Malaysia, Nilai, MALAYSIA
512 INTRODUCTION
Recently, there are a lot of crises relating to Muslims in the world, such as Palestine- Israel conflicts, civil war in Syria, war against Syiah Houthi rebels, Islamic State of Iraq and Syria (ISIS) terrorisms across Muslim countries such as Iraq and Syria and the latest one is Rohingya fugitives across the South China Sea. These crises cause to a millions of Muslim who not only lost their relatives but also their belongings from these crisis.
These crises results heavy damages and casualties. To overcome these losses, there are lots of humanitarian reliefs and aids are supplied for those affected that comes from various organizations whether government, privates and non-profit sectors. These aids are majorly contributed by non-profit sectors especially for organizations who objectively related to these humanitarian reliefs. There are lots of aids such as in term of money, volunteers, shelter, clothes, foods, medicals and other types of aids given by these organizations to support the affected Muslims.
These contributions involved lots of funds by those organizations who receive the funds from public at large. These funds basically are known as sadaqah from Islamic perspective. Funds contributed can be in term of cash, goods and other kinds. Previous studies shows that there are inefficient management of Islamic non-profit organizations, particularly in waqf institutions by (Ihsan and Hameed, 2011; and Hisham and Shahul, 2006) and zakat institutions (Ab Rahman et al., 2012; and Lubis et al., 2011). However, for sadaqah institutions, the studies on its management are limited compared to these other types of Islamic non-profit organizations.
Although there are limited studies regarding management of sadaqah funds for Islamic religious type of non-profit organizations, it still can be an issue especially regarding its fund managements as it involved with a lot of money. This sadaqah funds management involves collecting, managing and distributing activities which need to be assured. One way to assure good management of sadaqah funds is by having good internal control practices.
This paper focus on the internal control practices by one of the Islamic religious type of non-profit organizations. The Islamic non-profit organization is related to humanitarian reliefs’ objectives in Malaysia. Previously, internal control practices of non-profit organizations are mainly focus on other types of institutions for example religious institutions such as Jerusalem Temple (Fonfeder, Holtzman and Maccarrone, 2003), U.S Catholic churches by (West and Zech, 2007), churches at the Greater Accra by (Shaibu, 2013) and state mosques in Malaysia by (Sulaiman, Siraj and Ibrahim, 2008). However, to date, there is no study done related to internal control practices for other Islamic non- profit organizations types including humanitarian reliefs’ objectives.
In the next section, this paper discussed overview of internal control. Then, it continues with relationship between internal control and religious types of non-profit organizations.
Next, background of the selected Islamic non-profit organization for this study is elaborated. Further, discussion regarding its current internal control practices being
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touched. Some arising issues for current internal control practices are then highlighted and some suggestions to overcome these issues are proposed for better internal control practices in the future.
OVERVIEW OF INTERNAL CONTROL
Internal control is one of the essential elements for every organization to operate in good practices, including for non-profit organizations. Petrovits, Shakespeare, and Shih (2011) stated that by having a good internal control practices, it can avoid deficiencies reflected by poor internal control practices that can results in decrease of public supports especially by donors. Donations support is the core element for most of the non-profit organizations to survive and delivers its services toward public.
There are lots of definitions that can be used in describing internal control. However, most of the definitions are similar and the one that generally accepted is defines by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In its Internal Control – Integrated Framework, COSO (1992) defines internal control as a process, effected by an entity’s board of directors, management and other personnel – designed to provide reasonable assurance about the achievement of the entity’s objectives with regard to: (1) reliability of financial reporting; (2) effectiveness and efficiency of operations; and (3) compliance with applicable laws and regulations. These three main objectives are applicable to all types of organizations including non-profit organizations.
These three main objectives of internal control also been supported by other accounting professional bodies such as the International Federation of Accountants (IFAC). In its final procurement in Professional Accountants in Business Committee International Good Practice Guideline, IFAC (2012) stated that internal control should be used to support the organization in achieving its objectives by managing its risks, while complying with rules, regulations, and organizational policies by treating internal control as part of risk management and integrate both in its overall governance system.
By having good internal control practices, Doyle, Ge and Mcvay (2007) stated that it will aims to detect and prevent any possible errors that will cause a misstatement in financial reporting. Moreover, Sulaiman, Siraj and Ibrahim (2008) stated that proper internal control will cause an efficient and effective donation funds utilization which gives assurance to public especially donors.
According to COSO (1992) in its Internal Control – Integrated Framework, there are five components of internal control that need to be focus which are: (1) control environment;
(2) risk assessments; (3) control activities; (4) information and communication; and (5) monitoring activities. Spillan and Ziemnowicz (2011) stated that all of these five components are important and need to be reviewed quarterly of its implementations to ensure good practices and its relevancy.
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Despite all these five components of internal control, the most basic and important component that is related to daily management of sadaqah funds for non-profit organizations are control activities. This is because control activities are involved with flow of operation in sadaqah funds management from collecting, managing and distributing part of sadaqah funds. Moreover, control activities also involved as a procedures and policies for organizations to comply with it.
Control activities basically can be divided into five activities. In the latest edition of COSO (2012) Internal Control – Integrated Framework, a range of diverse activities or economic events in control activities are highlighted which are: (1) segregation of duties;
(2) authorization and approval; (3) verification and reconciliation; (4) physical control;
and (5) supervisory check.
Segregation of duties refers to separate action taken for any economic events that occurred. The segregation is to ensure documents or information recorded by these actions is the same and true. While, authorization and approval refers to an action taken to ratify that a transaction are valid. Verification refers to an action that compares for two or more documents or information. This is to ensure that all document or information are match, and if any mismatch occurs, follow-up action needs to be taken.
Reconciliation refers to comparing process for two or more data elements. Should any mismatch data are identified, action will be taken to bring those data elements into agreement. The next control activity is physical control which refers to assets such as cash, inventories, equipment, securities and other tangible assets are physically secured.
Lastly, supervisory check refers to an assessment to monitors whether transactions are performed correctly and completely according to policies and procedures given.
Although every organization may adopt different kind of control activities reflect to differentiate characteristic for each type of organization, these basic control activities are supposed to exist in each organization. The existence of control activities also need to be ensured at satisfactory level in order to gain good internal control practices for non-profit organizations. Existence of control activities could also give assurance and good impressions toward public regarding sadaqah funds management. By having these elements in sadaqah funds management operations, it will indirectly help to enhance the effectiveness and efficiencies of financial accountability for non-profit organizations.
INTERNAL CONTROL PRACTICES IN RELIGIOUS TYPES OF NON- PROFIT ORGANIZATIONS
According to United Nations (2003) in its Handbook on Non-profit Institutions in the System of National Accounts, non-profit organizations are legal or social entities created for the purpose of producing goods and services whose status does not permit them to be a source of income, profit, or other financial gain for the units that establish, control or finance them. Non-profit organizations can be set up of private foundations including corporate foundations, community foundations and independent public-law foundations.
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There are many types of non-profit organizations with different objectives and purposes.
In Malaysia, all non-profit organizations can be categories into four main categories which are: (1) societies; (2) associations; (3) foundations; and (4) companies limited by guarantee (CLBG). Majority of these non-profit organizations are providing services toward certain individuals or groups or public at large. All of these services basically being done by people who are volunteers to accomplish any activities and programs by non-profit organizations.
Despite categories of non-profit organizations, the organizations basically involved with funds management as fund is a crucial element for sustaining the survival of non-profit organizations. Studies such as Sloan (2009) and Abraham (2003) identified that positive accountability ratings for non-profit organizations are positively increase the donation received by non-profit organizations. This positive accountability can be achieved by having good internal control practices.
There are several previous studies that focus on internal control practices in religion- based non-profit organizations. Fonfeder, Holtzman and Maccarrone (2003) for example, investigate control activities of Jerusalem Temple for Jewish religion. They find that control activities for record keeping are not been performed well. In addition, the control activities are only focusing on certain type of charity funds, which is money without any details for other types of funds such as fixed assets.
Another study is by Shaibu (2013) that focus on control activities in three churches at the Greater Accra for Cristian religion. Some weaknesses in control activities such as absent of office or specific place for clerk accounts to collecting and manage charity funds identified. These weaknesses, therefore, will increase the tendency of losing the charity funds. There are also other ineffectiveness practices such as when the churches giving out the procurements of the churches projects and activities. The project and activities are given only to members and improper recording of recipients’ transactions. This study also concludes the trustworthiness of the public towards the collectors of charity funds are very weak due to these weaknesses.
Sulaiman, Siraj, and Ibrahim (2008) investigate 10 state mosques in Malaysia which is related to Islamic religion. They highlighted weaknesses such as shortage of staff due to limitation of funds for hiring purpose, lack in staffs’ and committees’ knowledge for adequate internal control practices and unstandardized financial reporting. This finding turns to the needs in having proper control activities in the mosque. They suggest some control activities such as physical custody of cash and cheques, segregation of duties, recording of transactions and authorization of payments for sadaqah funds managements.
These previous studies show that there are still lacks of internal control practices especially in control activities for religion-based non-profit organizations. The lack of control activities exist regardless of religion types. Thus, it is believed that proper internal control is needed especially to enhance financial accountability of non-profit
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organizations. In the long term, it will positively increase the effectiveness and the efficiencies of non-profit organizations. In addition, these previous studies also shows that studies on internal control practices for other types of non-profit organizations need to be explored.
RESEARCH OBJECTIVES AND DESIGN
This research is aimed to explore current internal control practices by an Islamic non- profit organization. Currently, there is no specific guideline or standard for internal control practices by non-profit organizations in Malaysia. Thus, it is believed that current internal control practices by non-profit organizations in Malaysia are unstandardized based on different types of non-profit organizations. This study, therefore identify two research questions which are:
RQ1: What are the existing practices of the internal control practices in Islamic non-profit organizations in Malaysia?
RQ2: What are the issues and challenges of the internal control practices in Islamic non-profit organizations in Malaysia?
For the purpose of this study, one selected Islamic non-profit organization were investigated, to answer both research questions, namely, Organization A. Organization A had been selected as a sample for this study as this Islamic non-profit organization deals heavily on sadaqah funds. The sadaqah funds management by Organization A includes collecting, managing and distributing activities, which are the focus to answer the research questions.
This study opts to use case study method to explore current internal control practices by Organization A. Benbasat (1984); Kaplan (1986); Yin (2003); and Yin (2014) suggested case study as the best method for exploring a specific system practices in organization.
This is because case study is an empirical investigation of a current phenomenon or a system in depth within its real-world. Thus, to explore the control activities of Organization A, case study is the suitable method.
Specifically, this study employs single case study as stated by Yin (2014). A single case study is analogous to a single experiment and many of the same conditions that justify a single experiment also can become a single-case design (Yin, 2014). This study also employs exploratory case study as suggested by Baxter and Jack (2008), where exploratory case study had been used to find an answer regarding real-life interventions that are too complex by using surveys or experimental strategies.
The data were collected through interview from a person in charge of the financial management in Organization A. The interviews focused on the control activities based on interview protocol and last around one hour. Interview protocol or known as interview guideline has been developed as suggested by Mason (2002) to ensure that data collection can achieve objectives of the study.
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Interview protocol questions are been made by focusing on the five modified control activities. These five control activities have been to suit with the characteristic of selected Islamic non-profit organization which is stressed on the element of sadaqah funds management. These five modification control activities are based on the element of control activities stated by COSO (2012) in its Internal Control – Integrated Framework which are:
a. Adequate segregation of duties – focusing on person in-charge tasks that are involved in collecting, managing and distributing sadaqah funds.
b. Proper authorization of transactions and activities – focusing on entitled power and limit of transactions given to person-in charge regarding sadaqah funds.
c. Adequate documents and records – focusing on proper documentations and records that involves sadaqah funds.
d. Physical control over assets and records – focusing on existence and usable of sadaqah assets.
e. Independent checks on performance – focusing on other parties who are verifying the internal control process regarding to sadaqah funds such as superior or other people who not involved in that particular transactions.
To ensure that every statement is recorded, the research interviews were taped. The interview was held on June 23, 2015 in selected Islamic non-profit organization in Malaysia.
PROFILE OF THE ORGANIZATION A
Organization A was incorporated in June 25, 2004 and officially launched in May 3, 2005 by former Prime Minister of Malaysia, YABhg Tun Dr. Mahathir Mohamad.
Organization A is one of the 45 branches of its parent, known as Organization B.
Organization B which is established earlier in 1984 is based at United Kingdom.
Organization B expands its operation in the Asia-Pacific region with establishment of Organization A. Organization A is registered as company limited by guarantee (CLBG) type of company under the Companies Commission of Malaysia (CCM).
The purpose of the Organization A is to continue humanitarian aids by Organization B in the Asia Pacific region. Functioned as both fundraising office (local and international projects) and field office (implementing local projects), Organization A contributes in implementing community, economic and social developments programs in Malaysia. As a fundraising office, most of the funds received recognized as Islamic charity fund which is sadaqah. There are also other types of funds such as waqf and zakat. Organization A also generates its own income from trading activities done through its social enterprise under Charity Shoppe and Event Division.
Since its inception, Organization A has been successfully distributing aids in various social projects worldwide by using sadaqah funds from the public. One of its main services known as mySEDEKAH, initiated in August 2013 which aimed around 9 million beneficiaries throughout the world. This service determines recipients’ accordance to the
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priority and current situation. To ensure that the objective of Organization A's establishment is achieved, various programs and activities are held either in local and international, especially to eradicate the poverty issues with the support of Organization B and other branches.
Organization A is led by a Country Director who is responsible to the Board of Director (BOD). The BOD consists of 6 members appointed both from Malaysian and also a representative from Organization B. The BOD is responsible in governing all programs and activities of Organization A. This board also responsible to the budget regarding the distributing of sadaqah funds based on programs and activities that had been planned by the management of Organization A.
Organization A had four divisions consist of Relief and Programs Division, Services Division, Fundraising Division and Charity Shoppe and Event Division. The one who is responsible in financial process is the Services Division. Under the Services Division, there are five departments which are Finance Department, Procurement Department, Account Department, Human Resources Department, and also Administration Department.
FINDINGS AND DISCUSSIONS
The findings from Organization A provide a summary from interview session with Head of Services Division who is responsible for financial matters in Organization A is presented in Table 1 below.
Table 1: Summary of Internal Control Practices in Organization A Control
Activities
Key Activities
Segregation of duties
ď‚· Financial manpower are about 1:5 ratio from total staffs.
ď‚· Financial manpower has specific work place.
ď‚· Collecting, managing and distributing sadaqah funds are being done by separate staffs/department or divisions.
Authorization of transactions
ď‚· Have Limit of Authority (LOA) tables for transactions and approved level start from manager to BOD.
ď‚· BOD plays roles in giving authorization power and approved annual budget for the usage of sadaqah funds.
ď‚· No limits in amount of sadaqah funds for each project done.
Documentations and records
ď‚· Well accounting software named Quick Book.
ď‚· Proper documentations and records.
ď‚· Implement receipts, procurement forms and quotations for receiving and distributing sadaqah funds.
Physical control over assets
ď‚· Safety boxes for sadaqah funds and petty cash.
ď‚· Special door access into financial documentations and records room.
ď‚· Hired guards, door access, CCTV camera and tagging system for other assets safeguards.
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checks
ď‚· Internal auditors assigned by headquarter to do assessment for every two year.
ď‚· External auditor hired as part of obligation to submit annual reports to the CCM.
The findings from Organization A provide some insight of how sadaqah funds are managed and how far good internal control practices are practiced in Islamic non-profit organization in Malaysia. As discussed in prior literature, proper internal control cause an efficient and effective in utilizing sadaqah funds while give assurance toward public (Sulaiman, Siraj and Ibrahim, 2008). In order to gain deeper understanding on internal control, the five control activities as mentioned before in COSO (2012) Internal Control – Integrated Framework becomes the main indicators for this study. Those indicators are transformed into five main questions and are discussed below.
6.1. Segregation of Duties
Segregation of duties refers to manpower position. Segregation of duties is done by more than one person to complete a task to prevent abuse (Srinidhi, 1994). Different organization required different segregation of duties in internal control and there are no two or more entities have same internal control (Morehead, 2007). Its depends on various criteria in organization’s such as structures, size, complexity, purposes and management philosophy (Doyle, Ge, and Mcvay, 2006). Therefore, to gain understanding on the segregation of duties in Organization A, the following question being asked:
Q1: How is your organization’s financial department in term of segregation of duties’ practices?
The answers can be divided into three parts. The first part is relating to manpower and its positions. Currently, there are six staffs in Services Division from overall 30 staffs under Organization A. Each one is responsible with each five departments under the Services Division and the respondent as the sixth person who are in-charge for this division. As Organization A is categorized as small organization, it can be said that staffs for financial process are suitable with the total staffs hired by Organization A. The second part is about staffs’ work location. It was been told that each staffs had their own work station or specific place for them to carry their duties. The third part is about sadaqah flows in term of collecting, managing and distributing process. The respondent provides details explanation, where this part conversation is as follow:
Sadaqah funds can be in term of money and kinds. Most of the money received via online banking transactions. This method is done by identifying inflow of money in our specific receiving sadaqah funds bank accounts. Fundraising department identify it and records is being done by Finance Department. For cash received method, mostly it being held at our premise and the one who is responsible to receive it was staffs from Fundraising Division. Cash received are recorded into two forms, one as receipts for donors and another one passed to Account Department and the cash is passed to Finance Department for bank-in process.
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For other kinds, it depends on the size and value. Normally, kinds that are recognized for distributing process had been done in our Charity Shoppe premise and received by our Charity Shoppe and Event Division’s staffs. For bigger size of kinds, we have a warehouse that also being as Collection Centre that being the place to receive those kinds by Finance Departments’ staff.
From above statement, it can be said that collecting or receiving sadaqah funds of Organization A quite organize. Different staffs from different division are assigns to received and bank-in if it was cash. It also include different department to bank-in and record the amount of sadaqah received. So, it is in line with Fonfeder, Holtzman and Maccarrone, (2003) study in segregation of duties aspect. However, for bigger size of kinds, some lack procedures when it being received by finance departments’ staff which is more suitable to be done by Fundraising Division’s staffs. Another issue might arise if there are big kinds received at the Charity Shoppe premise. Further, there are no specific measures to classify kinds’ size. For managing and distributing sadaqah funds process, another part of conversation by the respondent is as follow:
We have budget that been prepared and approved annually. This budget are prepared by top management and presented into Board of Directors (BOD) for approval. Normally it been approved in first quartile of the year. The budget contains allocation for each division to be spent on activities and programs. If spending is over budget, there will be a special meeting to discuss on that particular issue. But until now, every our surplus spending still can be covered from overall revenues. For every spending, all related documents been sent to account department for record purposes.
From above statement, it can be said that managing and distributing sadaqah funds are based on budget that been approved by the BOD. This budget also stated the allocation or limitation for every division to use funds in supporting their activities and programs. This statement also shows that activities and programs are not restricted to certain divisions or in simply word, by specific staffs. However, this diverse practice possibly tends to unorganized for the segregation of duties in term of activities and programs’
implementations. Moreover, it could be a risk when staffs that join some activities and programs could possibly also the one who records the activities and programs spending.
This could tend into fraud risk. Besides that, there is no specific action taken into place for every surplus spending.
6.2. Authorization of Transactions
Authorization of transactions is another control activity that noteworthy. Basically, authorization of transactions especially financial transactions is refers to typical financial transactions involves a form of payment in exchange for goods and services at a point of sale (Sellen and Schmid, 2004). It can be either in term of cash, paper drafted check, electronic payment transfer and other forms. Thus, following question is being asked:
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Q2: How is your organization’s financial department in term of authorization of transactions’ practices?
The answer can be divided into three parts. The first part is about authorization of transactions process. It had been told that Organization A has the Limit of Authority (LOA) table depending on type and amount of transactions. The approval level starts from manager until the BOD. This authorization include in signing the check. Basically, approvals of spending are based on budget approved by the BOD. The second part is about the BOD involvement in authorization of transaction. As stated before, the BOD approved annual budget that includes the estimated amount of expenditure. BOD also gives authorization approval to the Country Director and the Head of Services Division.
This shows some involvement by the BOD in the usage of sadaqah funds. This is in line with Said et al., (2013) on needs of the BOD involvement in financial decision making.
The third part is about limits of amounts for sadaqah funds that can be used for each activities and programs. To answer, this part conversation by the respondent is as follow:
As mentioned before, Organization A is one of the Organization B’s branches.
Organization B endorses a list of projects at Project Menu (website page name).
This list consists of thousands projects proposed by field officers from all Field Offices in the worldwide. These projects are proposed to Organization B and after approval process, it is being listed in the Project Menu so that it can be accessed by all Fundraising Offices including Organization A. Then, it’s up to management from all Fundraising Offices to choose any projects that suits with their capabilities. These selected projects are then sent to the BOD in getting approval and this will be includes into annual budget. Normally, there is no limits amount of funds being used for each project. It’s more on Fundraising Offices’
capabilities to handle the selected projects. Once selected projects approved by the BOD, those projects will be unlisted from the Project Menu.
From above statement, it can be said that there is no restrict or limit in amount of sadaqah funds that can be used for any projects held by Organization A. This may cause possibly issue of unbalance sadaqah funds being used for each project. However, this is not so risky process as all projects listed are approve by Organization B. Its means that Organization B as a parent plays its roles to ensure each proposed projects are execute according to their shared objectives and goals.
6.3. Documentations and Records
Documentations and records process can be described as a process to communicate transactions that occurs into meaningful information to users. In order to have good quality in documentations and records, there are five characteristics as stated by Groth and Moreau, (2009). Those characteristics are immutable, attributable, finalize, autonomously creatable, and process reflecting. In order to identify documentations and records practices, the following question is being asked:
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Q3: How is your organization’s financial department in term of documentations and records’ practices?
The answer can be divided into three parts. The first part is about accounting software used. The respondent told that currently they used Quick Book accounting software supplied by Organization B. However, they are in progress in implementing new accounting software soon. This new accounting software has new features that it can be linked between Organization B with all its branches including Organization A. It also needs to send annual reports to Organization B and those reports are audited. This means that Organization B have a systematic process in documentations and records. The second part is collecting sadaqah funds documentations and records process. To answer, this part of conversation by the respondent is as follow:
Receipt is given to donors. Every sadaqah funds received by Fundraising Division, two copies of receipts are created. The original one for donors and the copy one send to Finance Department. Then, these copy receipts are being reconcile with bank statements for verification. If sadaqah funds received in term of cash, calculation process will be done by both representatives from Fundraising Division and Finance Department.
The above statement shows that Organization A has proper documentations and records practices in collecting the sadaqah funds. There also verification element. The third part is distributing sadaqah funds documentations and records process. To answer, this part conversation by the respondent is as follow:
We have our trusted suppliers. For every expenditure process, we asked our trusted suppliers to give their invoices as common practices. However, if our trusted suppliers are unable to supply certain goods and services, three quotations are requested from any other suppliers. Besides that, we also used procurement forms as common practices for expenditure process.
This above statement shows that Organization A applied quotation in its expenditure process. However, it just restricted to certain goods and services. Although they had their own trusted suppliers, some implication such as manipulation of prices can be happen that cause mismatch prices between goods and services consumed by Organization A.
6.4. Physical Control over Assets
Physical control over assets can be simplified describes as a process to securing assets.
Assets can be into tangible and intangible forms. The asset that is mostly concerned in Organization A is sadaqah funds or money itself. Other physical assets such as premise, warehouse, donated kinds and also documents and records need to be secured as well as sadaqah funds. Although previous studies such as by Amit and Schoemaker (2012) stated that there is no comprehensive general strategy or model in safeguarding assets, assets
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still need to be safeguard. In order to identify physical control over assets practices, the following question is being asked:
Q4: How is your organization’s financial department in term of physical control over assets’ practices?
The answer can be divided into three parts. The first part is about physical control over sadaqah funds in term of money. This part of conversation by the respondent relating to the question is as follow:
We have three safety boxes to keep safe sadaqah received in term of cash.
The biggest one is located in my office and its size is big that I can fit into that safety box. The second one located at Financial Department Room for keeping cash before bank-in process. The last one is located in Fundraising Division Room. If they received cash from donors and couldn’t submit to Finance Department for bank-in process, those cash will be saved to their safety box temporary. We also have petty cash for administration uses that also keep in safe.
The above statement shows that Organization A has physical control over sadaqah funds in term of cash basis. This physical control of cash is better compared to mosque practices studied by Sulaiman, Siraj and Ibrahim, (2008). However, it is not mentioned who can assess these safety boxes. This could be another risk that may be happen if other unrelated staffs also have access to the safety boxes. The second part is about physical control over documents and records. It had been told by the respondent that all documents and records for financial are secured at Finance Department as they had additional door access that only financial officers are authorized to get into it.
The third part is about physical assets over other assets. Basically, Organization A hired guards to keep guard their premise and warehouse. The guard also responsible in accompany financial officers for bank-in process. To enter their premise, it has door access and there is also CCTV camera placed in the main entrance for safety purposes.
Besides that, they also using tagging systems for their physical assets and they had the directory listing assets.
6.5. Independent Checks
Independent check is a monitoring process on ongoing operation and flows in an organization. Zhang, Zhou and Zhou, (2007) identify that there are three major in internal control weaknesses and one of it was lack in independence check or monitoring process.
Independence check is important in identifying risks and deals with it. Besides that, independence of the person who is responsible to monitor also need to be focused. In order to identify independence checks’ practices, the following question is being asked:
Q5: How is your organization’s financial department in term of independent checks’ practices?
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The answer can be divided into two parts. The first part is about independence check by internal auditor. To answer, this part of conversation by the respondent is as follow:
As a branch of Organization B, Organization A has been internally audited by internal auditors hired by organization B for every two year.
For your information, our internal auditor just had done their auditing work at our branches for last month.
This above statement shows that Organization A has internal auditor who check their operation. The independence of internal auditor is in good practices as it hired by their parent, Organization B itself. However, the assessment just be done once for every two years. It could have a risk as the time for each internal assessment quiet long.
The second part is about independence check by external auditor. Currently, Organization A hired external auditor to audit their annual reports. As CLBG and binding with the Companies Act 1967, Organization A need to submit their annual reports to CCM and for that purposes, external auditor need to be hired. However, the respondent told that their engagement with external auditor quite long and no rotation has been done. This issue also highlighted by their internal auditor and action will be taken.
Overall, there are some challenges in implementing internal control practices in Organization A. As stated by the respondent, it includes the size of the firm and its capabilities to hire an adequate staffs. To overcome, each staff needs to depend to each other in completing the process. There also some challenges in following internal control procedures when some emergency events are happening. However, it still can be controlled well.
CONCLUSION
This paper success to answer both research objectives listed. Current internal control practices and issues and challenges for the selected Islamic non-profit organization in Malaysia identified. For current internal control practices, all of the main control activities of internal control for the selected Islamic non-profit organization including segregation of duties, authorization of transactions, documentations and records, physical control over assets and independent checks are in proper practices. Although there are some weaknesses, the major focus on control activities related to sadaqah funds itself is in good practices. Thus, proper internal control practices are directly assuring the utilization of sadaqah funds in good practices.
This study has laid the groundwork for several strands for future research. Since this study based on only one Islamic non-profit organization in Malaysia, it unsuitable to give a picture that other Islamic non-profit organizations had same good practices in their internal control. Moreover, this study just focus on CLBG types of Islamic non-profit organizations. Another types of Islamic non-profit organizations also potentially to be research in internal control aspects. This study related to internal control also can be
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broad its scope to another religion types of non-profit organizations and also to other non- profit organizations as well.
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