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Government Funding Impact on Nonprofits Organizations Administrative Efficiency

The increasing dependence of local, state, and federal governments on service contracting has transformed the nature of governance and caused the progressive state to hollow out. The nonprofit sector landscape has also changed since nonprofit organizations have increasingly been tasked with conducting functions traditionally known for the public sector (Frumkin & Kim,2002). The government, over the years, has gradually shifted much of its duties to providing essential human services to nonprofit organizations since these entities have appeared to be more effective vehicles for public purpose fulfillment. Nonprofit organizations enjoy several perceived merits, including being more flexible, innovative, and responsive to the local community’s needs. Consequently, criticism of nonprofit organizations has developed to be a vital managerial option for government at every level, one that promises to uphold quality and minimize costs, hence meeting both taxpayers and service recipients (Frumkin & Kim,2002). Although some have disputed that nonprofit organizations are practical tools for public managers seeking to execute projects, the impact of government funding on nonprofit organizations’ operations has recently become controversial. The research has revealed perils and opportunities in nonprofit organizations increasing ties with the government. This report will examine the impact of government funding on nonprofit organizations’ administrative efficiency. Before exploring the main topic, this report will also provide the distinguishing features of governmental and nonprofit organizations from business organizations and identify the authoritative bodies tasked with setting financial and reporting standards for both government and nonprofit organizations.

Distinguishing features of governmental and nonprofit organizations

According to Reck, Lowensohn, and Neely (2019), governmental and nonprofit organizations vary differently from business organizations. To Understand how these entities vary from business entities, it is crucial to understand the unique financial and accounting reporting principles that have changed for governmental and nonprofit organizations. In Statement of Financial Accounting Concepts No.4, the FASB (Financial Accounting Standards Board) highlighted the following distinctive features for governmental and nonprofit entities from profit entities. First, receipts of greater resource quantity from resource providers who do not expect to be given either economic benefits or repayment equal to the resources provided. The second distinctive characteristic is that the functional purposes are rather than just providing services or goods at a profit (Reck, Lowensohn & Neely, 2019). Moreover, governmental and nonprofit organizations differ from profit organizations as they lack defined ownership interests that can be transferred, redeemed, or sold or even demonstrate entitlements to a residential distribution of resources shared in the incident of organization liquidation.

Additionally, the Governmental Accounting Standards Board (GABS) differentiates government organizations in America from nonprofits and business organizations by emphasizing that government exists in a setting that ultimately powers citizens’ hands. Electorates give that power to public officials via the election process. The power is shared amongst the legislative, judiciary, and executive government branches. Thus, the executive’s actions, including financial decisions, are restricted by legislative actions, and legislative, and executive actions are subjected to judicial review. Furthermore, the federal government usually imposes constraints on local and state governments. In the U.S, the higher government level dictates or promotes lower government level activities (Reck, Lowensohn & Neely, 2019). Also, higher government levels can partially or wholly fund the activities by a comprehensive system of intergovernmental subsidies and grants that needs lower levels to take accountability to organizations providing resources and citizenry.

Moreover, revenue generated from each government’s level is mainly raised from taxes. People who pay taxes are needed to provide resources to governments, although they frequently have limited choices regarding government services and the degree to which they obtain them (Reck, Lowensohn & Neely, 2019). In addition, the comparative absence of taxpayers’ choice has also been highlighted in GASB, which states that many governments do not operate in a competitive market, experience virtually no liquidation threats, and lack equity owners.

Authoritative bodies tasked with setting financial and reporting standards

According to the America Institute of Certified Public Accounts (AICPA) rule 203 of the Professional Conduct Code, the three authorized agencies that set financial and reporting standards included Financial Accounting Standards Board (FASB), Governmental Accounting Standards Board(GASB), and Federal Accounting Standards Advisory Board (FASAB) (Reck, Lowensohn & Neely, 2019). These bodies establish generally accepted accounting principles (GAAP) for local and state governments, the federal government, and profit, nonprofit, and nongovernmental organizations. In accounting practice, the power to establish accounting principles implies the power to develop financial and accounting reporting standards. In addition, for publicly owned business organizations, the standards of FASB get officially acknowledged as authoritative by the SEC (Securities and Exchange Commission).

The power to establish reporting and accounting standards for nonprofit entities is divided between GASB and FASB since many nonprofit entities are governmental, such as government hospitals, public universities, and colleges. The FASB establishes reporting and accounting standards for nonprofit entities, which are governments’ independent Accounting (Samuel, Covaleski, & Dirsmith,2009). Governmental nonprofit entities, which include nonprofit organizations supported or funded by governments, must follow reporting and accounting standards formulated by the GASB.

Due to the strategy and absence of connections to any government or organization, the FASB and GASB are recognized as independent standards-setting boards within private industry. Before establishing the FASB and GASB bodies, reporting and accounting standards were formulated by groups backed by professional organizations. The groups affiliated with GASB included the National Committee on Municipal Accounting and National Council on Governmental Accounting (Samuel, Covaleski, & Dirsmith,2009). Other groups affiliated with FASB included the Committee on Accounting Procedure and the Accounting Principles Board.

Federal laws assign responsibility for developing and upholding a comprehensive financial structure for the federal government to the following officers: the Secretary of the Treasury, the Director of the Office of Management and Budget, and the Comptroller General. These three officials founded FASAB in 1990, and it was tasked to set accounting standards and principles for the federal government together with its organizations. It is crucial to note that the financial and accounting standards at the federal level must be consistent with those set by GASB and are relevant to FASB (Reck, Lowensohn & Neely, 2019).

Government funding impact on nonprofit organizations efficiency

  • The theoretical perspective of Nonprofit Organizations being funded by the government

Nonprofit organizations being financed by the government are not value-neutral. There is specific nonprofit organizations’ activity that public funds support while other are ignored. For instance, government tends to finance more in health care and human services, and public funds have become a vital source of nonprofit organization revenues in these fields. Contrary, public funding of advocacy and even arts organizations is relatively low. Government dependence on the nonprofit industry’s service delivery infrastructure is wildly variable and contingent on several factors, such as the perceived problem’s social urgency and market failures in the sector (Frumkin & Kim,2002). The study about funding levels given by the government to nonprofit organizations and their impact has generated divergent opinions. Some experts see the potential opportunities for nonprofit organizations, while others believe the act brings significant issues. It is crucial to explore these two competing perspectives to set up an empirical test of government funding’s impact on nonprofit organizations’ efficiency.

In rationalizing the impact, one must begin by situating the subject within the new institutional framework in organization analysis that provides a theoretical foundation for perceiving that government funding can lead to bureaucratic affinities in nonprofit organizations. With the stressing of satisfying behavior, legitimacy, symbols, and structural decoupling, the new institutionalism model denoted a significant departure from competing theories, including population ecology, resource dependency theory, and transactional costs economics (Frumkin & Kim,2002). These rival theories are formulated as more or less rationalizing models. Contrary, institutionalism theory views an organization as pursuing a practice that can have little to do with optimizing efficiency. The theory suggests that most organizations are not usually adopting structures, processes, and strategies that improve their performance; instead, they respond to and look for ways to manage pressures in reacting to external business factors (Frumkin & Kim,2002).

According to Frumkin and Kim (2002), institutional theory suggests that government action has always been perceived as integral in initiating other organizations’ structural change. Government actions, including inspection, regulation, licensing, and funding, are examples of levers that affect both profit and nonprofit organizations. In some situations, forced isomorphism becomes vital in the nonprofit organization’s evolution. When organizations are exposed to external force scrutiny, regulation, and evaluation, they are most likely to respond defensively and incline towards isomorphic change (Frumkin & Kim,2002). More pressure from the external environment forces organizations to change their internal practices to eliminate or diffuse this pressure. Organizations, for instance, are forced to comply with the laws and regulations set by the government to survive and minimize possible conflicts with the government. However, because organizational action is decoupled from purpose, the process can cause inefficiency (Frumkin & Kim,2002). The institutionalism theory foundation premise assists us in framing the issue discussed in this report. The theory emphasizes on unintended impact of government backing of nonprofit entities. Furthermore, institutionalism theory lays the foundation for several field research of nonprofit organizations assessing the public funding problem.

  • The negative impact of government funding on nonprofit organizations’ efficiency

Frumkin and Kim (2002) confirmed that studies on the connection between nonprofit organizations and government reveals several effects hypothesized by institutional theory, specifically coercive and normative isomorphism. The involvement with financing from the government has caused significant external pressure on nonprofit organizations to professionalize their services and even introduce bureaucratization into their organization. Government organizations frequently include specific regulatory and evaluative bindings in their contracts to maintain uniformity in service delivery. These legal binding might include accounting and financial management requirements, minimum quality standards maintenance, essential project objective promotions, and strictly following national policy goals, including equal opportunity and environmental protection. To meet these complicated procedural and regulatory standards, nonprofit organizations must hire more experienced employees and fewer volunteers. Due to this, cases of public funding have mainly been used to facilitate professionalization, and bureaucratization of nonprofit entities has been on a rising trend (Anheier, Toepler & Wojciech, 1997). The urgency of increasing professionalism and bureaucracy can result from the client base widening. When nonprofit entities accept government funding, they frequently serve customers differently from those they were serving before. To deliver services to these customers, nonprofit organizations mainly increase their employees’ qualification requirements and back them sufficiently (Anheier, Toepler & Wojciech, 1997). The organization might be forced to increase the salary of their highly qualified employees, which might be costly because the government might not cater to wages.

Under government findings, costs incurred by nonprofit organizations might increase due to labor-intensive work linked with some public support. Accounting and reporting for public finances usually need a significant amount of effort and time aimed at compliance. It is unsurprising for larger nonprofit entities to have employees that do nothing except soliciting, managing, and reporting on the utilization of government grants and contracts (Lu & Zhao, 2019). Similarly, massive programmatic and fiscal accountability requirements can also impact management practices within nonprofit organizations. Better formalism in an organization’s internal processes is always required to acquire and maintain public contracts. Therefore, due to these demands, some managers from nonprofit organizations have perceived government funding negatively. These managers have rated government funding as less linked to mission, burdensome, and costlier to maintain than alternative funding sources like earned income, private contribution, and corporate grants (Lu & Zhao, 2019). Nonprofit entities’ ethnographies have revealed that employees complain that administrative or reporting protocols like government funding are always complicated, detailed, and tedious. With government funding, nonprofit organizations usually must provide monthly performance reports within tight schedules, but reports must be detailed enough and follow the recommended format. Meeting all these requirements might remove administrative employees from achieving the core organizational mission of delivering services to citizens.

Lu and Zhao (2019) also revealed that government funding could influence nonprofit organizations’ internal governance systems. When a nonprofit entity enters into a financing arrangement with the government, the increasing contract demands complexities can quickly start taking significant board efforts and time. Occasionally, these demands might force nonprofit organizations to change the initial composition of their board to improve the agency’s capacity to meet compliance requirements. These demands are usually met by increasing administrative expertise within a nonprofit organization’s staff and board (Lu & Zhao, 2019). Therefore, nonprofit organizations have always spent substantial resources at board and staff levels to understand complex public financing sources, ensuring continuous funding in the future, and maintaining present contracts.

When nonprofit organizations experience structural changes due to their connection with the government, conflicts within the entity’s culture might arise. Government funding can ignite tension between boards and staff management committees about responsibilities and roles (Frumkin & Kim, 2002). The antagonistic relations between two committees usually originates with compliance problem concerning government funding. The created management strain can be severe, including a reduction of commitments and motivation within the workforce. When a nonprofit organization is institutionalized and formalized due to its involvement with government funding, it is most likely for professional and voluntary staff to become less motivated.

Although government funding imposes administrative expenses on nonprofit entities, the government funding effects should be understood within a two-ways relation context. Usually, governmental and nonprofit organizations wholly or partially depend on each other regarding resource sharing. Despite this association, both entities experience some loss of autonomy due to the interdependent connections that dictate their fate. To maintain this connection, public sector organizations lack a considerable edge over nonprofit organizations, which develops a significant disparity in power, including the capacity to impose auditing and oversight demands. The government has long controlled accounting and reporting standards which have increased the burden on nonprofit entities without often giving effective oversight means for the government. Audit requirement is an example of the predominant accounting form used (Lee, Park, & Gong, 2022). Overall, nonprofits organization that relies heavily on government funding might suffer high administrative costs and incur more excellent managerial overhead rates than nonprofit entities that receive no or lesser government funding.

  • The positive impact of government funding on nonprofit organizations’ efficiency

Not all government literature –on nonprofit organizations’ relations concludes that government funding weakens nonprofit organizations’ ability to operate efficiently. Some study has claimed that the flow of public funds to nonprofit entities enables nonprofit organizations to expand their operations and attain a greeters degree of operational efficiency and improved effectiveness. Some experts have stated that government funding creates a mutually beneficial partnership between government and nonprofit sectors in refuting concerns of public-nonprofit relations like loss of autonomy, increased bureaucracy, and mission distortions (Frumkin & Kim, 2002).

First, nonprofit organizations rely on the government to improve the efficiency and quality of their services. Government is in the capacity to produce a more reliable stream of resources that can be channeled to support nonprofit organizations in their service delivery. Resources are always limited, which makes most nonprofit organizations face a resource challenge, which limits their ability to operate and deliver services efficiently. With support from the government through funding, nonprofits are more likely to benefit as their primary challenge of reliable resource sources, including financial, would be solved (Frumkin & Kim, 2002). In turn, the government will also benefit from nonprofit organizations as the burden of delivering essential services would be relieved by the government. Therefore, the partnership forged between government and nonprofits organization is beneficial and satisfies both sides.

Also, there are more potential benefits in public-nonprofit relationships than the actual risk in the massive financing relationship linking nonprofit entities with the government. A contented connection between government and nonprofit entities sharing common cultures acknowledges their independence and worries about not disrupting a symbiotic relationship. Access to government contracting assists nonprofit organizations in building their legitimacy and attracting resources, political power, and management capacity. Public funding might allow nonprofit entities to provide more basic services to low-income households, proving nonprofit organizations’ status as crucial and responsive community members (Anheier, Toepler & Wojciech, 1997). Nonprofit organizations that do not get public funding usually tend to concentrate less on the needs of less fortunate people in the community due to the issue of generating financial resources to support such operations. Government funding to nonprofit entities compliments the sectors helping these organizations to broaden their service delivery to the public (Anheier, Toepler & Wojciech, 1997). The more government funding to nonprofit entities, the more nonprofit entities can increase their service delivery to meet the needs of the poor.

Also, organization efficiency is rarely disrupted by public entities’ accountability requirements. The study reveals that there is a reduced regulation level and greater mutual dependence on nonprofit organizations’ contract agreements with the government (Lu & Zhao, 2019). The accountability requirements also ensure that nonprofit organizations create a positive administrative formalization that can effectively meet the organizational core goals. Formalization is an aspect of bureaucratization that can generate better accountability and reliability results. Even though formalization might restrict adaptability and flexibility, practice formalism does not prevent nonprofit organizations from attaining their increased degree of operational efficiency either (Lu & Zhao, 2019). In addition, formalization can improve nonprofit entities’ capability to manage more significant changes in the business environment, effectively manage more extensive projects, and embrace innovations. These are crucial in helping nonprofit organizations attain greater administrative efficiency and even programmatic effectiveness.

It is impossible to dismiss these competing claims. Although contemporary literature has revealed real risks in nonprofit organizations’ dependency on government funding, it is crucial to acknowledge that earlier optional diagnoses of these complicated connections exist. There are real risks of increasing the flow of public funds to support nonprofit organizations; however, it would be impossible for nonprofits to attain their highest operation efficiency without government funding. Significant government funding into nonprofit entities to support the delivery of human services puts nonprofit agencies in a situation where they can manage their operations and management. Shifting from amateur care forms provided mainly by volunteers to professional care forms provided by highly trained specialists might improve nonprofit organization efficiency. It might also generate specific sensitivity and discipline concerning the appropriate usage of public funds that can enhance efficiency. Providing substantial public funding to nonprofit organizations can grow their organizational size extensively and even attain economies of scale that would have been impossible without public fund support (Lee, Park, & Gong, 2022).

In conclusion, even though governmental and nonprofit organizations differ from profit entities, the two entities depend on each other for better public service delivery and improved efficiency. Similarly, governmental and nonprofit entities differ in different ways, as illustrated in this report. Both entities’ financial and reporting standards are set and controlled by three central authorized bodies, including GASB, FASB, and FASAB. These authoritative bodies set GAAP for all levels of government, profit, and nonprofit organizations. Recently, there has been an increasing trend of government funding nonprofit entities to provide public services. Government financing of a nonprofit organization has become controversial, with some claiming that nonprofit organizations involved in government funding reduce their efficiency. At the same time, others feel the efficiency of nonprofit organizations has improved due to public funding. Loss of independence, disruption of core organizational missions, and increased bureaucracy has been the main arguments for the negative impact of government funding on nonprofit entities. Contrarily improved efficiency, increased range of services delivery, and attainment of economies of scale are possible benefits associated with public funding to nonprofit organizations.


Anheier, H. K., Toepler, S., & Wojciech Sokolowski, S. (1997). The implications of government funding for nonprofit organizations: three propositions. International Journal of Public Sector Management10(3), 190–213.

Frumkin, P., & Kim, M. T. (2002). The effect of government funding on nonprofit administrative efficiency: An empirical test. Institute for Government Innovation, John F. Kennedy School of Government, Harvard University.

Lee, J., Park, Y. J., & Gong, X. (2022). How Do Government Grants Affect Nonprofit Financial Effectiveness? The Mediation Role of Process Accountability. Administration & Society, 009539972211128.

Lu, J., & Zhao, J. (2019). Does Government Funding Make Nonprofits Administratively Inefficient? Revisiting the Link. Nonprofit and Voluntary Sector Quarterly48(6), 1143–1161.

Reck, J. L., Lowensohn, S. L., & Neely, D. G. (2019). I am accounting for governmental & nonprofit entities. Mcgraw-Hill Education.

Samuel, S., Covaleski, M. A., & Dirsmith, M. W. (2009). Accounting in and for U.S. Governments and Nonprofit Organizations: a Review of Research and a Call to Further Inquiry. Handbooks of management accounting research3, 1299-1322.


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