Influences of the Sarbanes-Oxley Act on Ethical Financial Operati

Chapter 1: Introduction to the Study

The lack of accountability and transparency in nonprofit organizations (NPOs)

generates questions of leadership and ethical financial operations in human service

organizations. In 2002, the Sarbanes-Oxley (SOX) Act was passed in an effort to reform

the practices of corporate boards (Jackson, 2006). Legislators believed that the SOX Act

could improve accountability and transparency practices through mandatory auditing and,

more importantly, the creation of independent boards (Fogel & Geier, 2007). Leaders

determine values, culture, and shape organizational strategies, including their

implementation and effectiveness (Germano, 2010), yet there is no universal agreement

on the most effective leadership style (Amanchukwu, Stanley, & Ololube, 2015).

However, researchers have identified some basic requirements for a leader to be

effective, such as integrity, ethics, trust, transparency, and accountability.

When nonprofit leadership is ineffective, some NPOs can experience fraudulent

activities from their leaders. For example, between 2012 and 2015, three nonprofit

executive directors (EDs) in the state of Alabama were indicted on charges of securities

fraud, wire fraud, conspiracy, money laundering, and filing false tax returns (Oliver,

2016). Alabama was not alone. The lack of ethical financial operations diverted a

significant amount of funds from NPOs. Since 2008, NPOs were required to report any

diversion or unauthorized use of the organization's assets or funds totaling more than

$250,000. During that time, Flaherty and Stephens (2013) identified more than 1,000

nonprofits throughout the United States, including three Alabama NPOs, that reported

diversions from 2009-2013. Most of these diversions were due to theft or embezzlement

(Flaherty & Stephens, 2013).

Losses due to fraudulent activities have a tremendous impact on the nonprofit

sector because any losses directly affect the accessible resources used for tax-exempt

purposes (Greenlee, Fischer, Gordon, & Keating, 2007). Waste occurs in NPOs when

funds are misappropriated, there is a lack of management, or there is inadequate oversight

by nonprofit EDs. On the other hand, abuse may not necessarily involve fraud or

violation of laws or provisions but focus primarily on deficient behaviors that are

inconsistent with sound fiscal financial operations and misuse of authority (Flaherty &

Stephens, 2013). Regardless of the source, any mismanagement can result in drastic

impacts on the nonprofit sector.

The available resources used to fund NPOs play an important role in preserving

the sustainability of the organization. Understanding the common forms of fraud, waste,

and abuse will allow the governing boards of NPOs to become more vigilant and increase

reporting and prevention. The current study has the potential social significance of

fostering ethical behavior, ensuring accountability and transparency, and promoting

effective financial operations. By EDs taking preventive measures within their own

NPOs, they help protect their organization and simultaneously make a valuable

contribution in the fight against fraud, waste, and abuse.

In response to the Enron, WorldCom, and other corporate and accounting

scandals, the SOX Act was passed in 2002 (Peavler, 2014). Although most of the

provisions of the SOX Act applied only to for-profit organizations, the passage of this act

had implications for NPOs, as well. The act stated that if NPO leaders failed to secure

effective governance of their organizations, the government would be forced to regulate

nonprofit governance (Peavler, 2014). Seven provisions of the SOX Act required NPOs

to establish procedures that ensured (a) an independent and competent audit committee,

(b) written responsibilities of auditors, (c) all financial statements were certified by an

independent auditor, (d) prevention of insider transactions and conflicts of interest, (e)

disclosure of all internal control mechanisms and financial material, (f) protection for

whistle blowers, and (g) proper document destruction (Peavler, 2014).

Chapter 1 includes the background, problem statement, purpose of the study,

research questions and hypothesis, theoretical framework, nature of the study, definitions,

assumptions, scope and delimitations, limitations, and significance. It ends with a

summary and transition to Chapter 2.

Background

The key to success in a nonprofit organization is its ED and staff. The ED works

for the board and is the board’s primary staff person (Drucker, 1990). The ED is

responsible for leading the staff and representing the organization. As the leader, the ED

is also responsible for making ethical decisions regarding the financial operations of the

organization. In this case, good leadership is key. According to Eldakak (2014),

leadership is heavily researched in the 21st century because it is a complex phenomenon.

To date, the existing research and literature has focused primarily on which behavior,

characteristics, and skills make for a successful and effective leader.

Past research has investigated the behavior of leaders (Barnett, 2010). However,

this work has predominantly focused on leadership in a vacuum. Researchers have not,

consequently, considered the impact of the SOX Act on leadership style as a predictor of

ethical financial operations.

According to the Urban Institute, National Center for Charitable Statistics, there

are more than 1.5 million nonprofits in the United States (McKeever & Pettijohn, 2014).

Although the bankruptcies of Enron and WorldCom contributed to the development and

passing of the SOX Act in the corporate world, the accounting scandals and financial

irregularities of the Red Cross and United Way were the reasons for the implementation

of SOX in nonprofit organizations (Lenn, 2013). Public scandals within these two NPOs

decreased the public's confidence in NPOs in general (Lenn, 2013). Specifically, the Red

Cross scandal entailed the misappropriation of funds by the ED and his secretary (Lenn,

2013). Similarly, the United Way scandal involved financial mismanagement in which

the ED of the organization took 1.5 million dollars in the span of 15 years (Lenn, 2013).

In fact, charitable organizations such as The Foundation of New Era Philanthropy,

National Association for the Advancement of Colored People, and the United Way have

all experienced financial irregularities (Kisow, 2011). These incidents demonstrate the

necessity for having a policy such as the SOX Act in place.

Researchers have addressed the relationships between leadership style, employee

perception, employee motivation, organizational performance, and financial performance

in NPOs similar to human service nonprofits (Sowa, Selden, & Sandfort, 2004). Jones

(2013) addressed the correlation between leadership styles and financial performance

within rural electrical cooperatives. Specifically, Jones included a recommendation for

future research comparing the influence of leadership style on financial performance of

rural electric cooperatives with the influence of leadership style within similarly

structured nonprofit organizations. Another recommendation for further study was to

explore the relationship between leadership style and financial performance from a

qualitative, phenomenological perspective (Jones, 2013). Researchers, such as Jefferson

(2014), have highlighted the effect that the ED’s leadership has on ethical operations and

performance in NPOs, whereas others such as Godfrey (2013) have noted the positive

effect of the SOX Act on ethical operations in NPOs. However, there was no research

found on the possible relationship of an ED’s leadership style (e.g. transformational,

transactional, and laissez-faire leadership styles) and adherence to the SOX Act in a

nonprofit organization to decrease the instances of fraud, waste, and abuse. These actions

are illegal and may present financial and reputational damage when money intended for

doing good goes elsewhere. The decrease in donations and funding due to fraudulent

activity warrants a study to determine if an ED that uses a transformational leadership

style is more likely to adhere to the SOX Act.

Role of Nonprofit Organizations

Nonprofit organizations serve the community without the accumulation of profit

(Beal & Griffin, 2012). Society supports NPOs via charitable donations; however, NPOs

should also provide some public benefit. There are numerous classifications of NPOs,

such as arts, culture, humanity, education, environmental, and animals (GuideStar, 2017).

The focus of my research project was human service organizations.

Human service organizations are agencies that address a wide range of individual

and family needs. Social service assistance is provided at the federal, state, local, private,

and nonprofit levels. These NPOs assist and promote self-sufficiency, health, community,

and family relationships. Although many of these organizations have various functions

from financial resources to counseling services, these human service organizations play a

pivotal role in the lives of low-income families and devastated areas where such services

are needed (Baapogmah, 2014). Also noted in Baapogmah’s (2014) study on operational

controls in nonprofit organizations, most nonprofits are 501C3 organizations and are

exempt from federal and state income, local property, and sales taxes. These exemptions

are given to relieve the government’s burdens, to benefit society, and to support

adherence to the provisions of the separation of church and state (Baapogmah, 2014). In

conclusion, the ability for nonprofit organizations to be a necessity in society

demonstrates there must be a need for such resources.

Forbes’ (2016) study on the impact of nonprofit executive compensation giving

and examples of NPOs explained that there were economic, historical, and political

theories regarding the reason why nonprofit organizations exist today. Economic theories

included market and governmental failure. According to Forbes’ (2016), the market

failure premise proposed that not enough people desire a service or program for

profitable corporations to provide such services, whereas, the governmental failure

premise was that the government would not provide a service because of increased cost

or limited public interest. Ultimately, the government was less likely to act if only a

small presence of constituents demanded a response from the government as compared to

a larger group of individuals; however, a smaller group of individuals could create a

nonprofit organization to provide commonly desired services as opposed to attempting to

persuade a greater part of citizens to support such efforts (Forbes, 2016). Taken together,

these reasons demonstrate the need for various types of nonprofit organizations which

have been created to provide services and resources to communities.

Problem Statement

In the United States, approximately 7% of annual revenue from nonprofits was

lost due to lack of ethical financial operations from executive leaders each year (ACFE,

2014). According to the Association of Certified Fraud Examiners (ACFE), this figure

represents $85 billion in estimated annual losses in available operating funds (ACFE,

2014). From 2006 to 2013, there was an increase of NPO executive leaders indicted for

inappropriate use of funds, corruption, and fraud (Kusnetz, 2013). Ultimately, the failure

of a NPO’s ED to establish transparent financial operations in nonprofit service

organizations may increase the potential for ineffectiveness and unethical behaviors in

human service organizations. Currently, there is no universal agreement on the definition

of effective nonprofit leadership or how best to measure such leadership. For example,

Ali, Babar, and Bangash (2011) and Mehmood and Arif (2011) investigated nonprofit

effectiveness from the perspective of leadership style. Their findings indicated that there

is a positive correlation between ED leadership styles and organization commitment (Ali

et al., 2011; Mehmood & Arif, 2011). On the other hand, researchers, such as Baapogmah

(2014), investigated effective leadership by studying ED accountability and transparency

practices. Others, such as Nezhina and Brudney (2012), Yukl (2010), and Alexander

(2009), researched nonprofit leadership effectiveness by investigating the organizations'

adherence to the guidelines of the SOX Act that was designed to ensure that the audit

process of nonprofits provided an objective review of the organization’s financial actions.

None of the literature reviewed for this study considered both leadership style and the

adherence to the SOX Act to determine if an ED with a transformational, transactional, or

laissez-faire leadership style was more likely to embrace the use of a tool that would

enhance the transparency and accountability of the organization to the funders and

individuals served. The current study contributed to the literature by providing data on

the feasibility of using the experiences of different leadership style with efforts to adhere

to financial accountability requirements as a measurement of nonprofit leadership

effectiveness.

Purpose of the Study

The purpose of this qualitative, phenomenological study was to understand the

lived experiences of EDs who self-report the use of one of Burn’s (1978) and Bass’

(1985) three leadership styles and who do or do not apply the recommendations of the

SOX Act to manage the ethical financial operations of their human services nonprofit

organizations. The intent was to determine if the three leadership styles could be used as

an indicator of the potential transparency in financial operations as measured by the

extent to which the SOX Act is applied.

Research Questions

To explore and understand the lived experiences of EDs and their adherence to

the SOX Act, this phenomenological study included two central research questions:

RQ1: What are ED experiences relative to adhering to SOX requirements related

to nonprofit organization ethical behavior in financial reporting and management?

RQ 2: How does the level of use of the SOX Act recommendations differ and

why, according to transformational, transactional, or laissez-faire leadership

styles?

Theoretical Framework

The theoretical framework used in this study was Avolio and Bass's (2004) full

range leadership model. Transformational leaders, according to Burns (1978), were the

leaders who believed in engaging in higher levels of needs for both the individual and the

organization rather than recognizing self-serving interests. Transformational leadership

theories influenced individuals to follow a leader because that leader had a vision that

individuals believe in or a goal that individuals can connect with to help the organization

reach its goals (Burns, 1978). Avolio and Bass (2004) extended the theory of leadership

by observing that transactional and transformational leadership were both present

behaviors and were utilized in shifting the focus of leadership in organizations to

reengineering individuals, groups, and organizations. Transactional leaders set goals and

promised followers rewards for their performance, whereas transformational leaders

motivated followers to work diligently towards their goals and move beyond self-interest

(Avolio & Bass, 2004). Laissez-faire leadership, on the other hand, is a passive

leadership style in which leaders avoided interaction with their followers by keeping long

social distance (Krasikova, Green, & Lebreton, 2013). In addition, laissez-faire

leadership is the avoidance of intervention, which was the leader's lack of commitment,

and this style of leadership has a negative impact on followers' organizational

performance and productivity (Yahya & Ebrahim, 2016). Users of laissez-faire style did

not focus on leader/follower involvement but, instead, gave individuals freedom to act as

they chose (Yahya & Ebrahim, 2016). In contrast, transformational theorists focused on

relationship implementation between leaders and followers whereas transactional theory

emphasized the role of executives, organization, and performance (Burns, 1978). These

contentions of the three leadership styles offer a convincing argument for the difference

of opinions for the findings of this study. It is conceivable that the leadership style

needed to operate effectively and ethically heavily relies on the strength of a NPO’s

executive director to implement their leadership style to effectively provide ethical

financial operations within their organization.

Ethical behaviors influenced researchers to investigate which leadership style

was more effective and sustainable in maintaining quality of performance. For my

study, it was important to determine the correlation between leadership style and the

SOX Act, which supported the research questions and premise that a transformational

leader style, viewed by most experts as the most effective in motivating and performing

with the highest standards (Adoma, 2016), would result in an individual more inclined

to embrace practices that could improve ethical financial operations.

Nature of Study

A qualitative method using a phenomenological approach was most appropriate

for this study because the study focused on an in-depth exploration into the essence of

nonprofit EDs’ perceptions in response to their lived experiences (see Padilla-Diaz,

2015). This approach assisted in understanding the experiences of EDs who are charged

with ensuring transparent and ethical financial operations by adhering to the

recommendations of the SOX Act. At the same time, this study used self-reported

descriptors to understand how the differences in each style contributed to the differences

in the extent each is used. To test this hypothesis, I used the national taxonomy of exempt

entities (NTEE) to classify the tax-exempted organizations, identified the population of

NPOs with human services specific codes, selected a sample, and investigated the

experiences with the SOX Act based on the leadership style of the ED.

Screener questions were used to select an equal number of self-described

transformational, transactional, and laissez-faire leaders based on their responses to

Burns’ (1978) and Bass’ (1985) criteria for each style who were aware of the SOX Act.

The nonprofit organizations were identified using GuideStar’s (2017) database to target

NPOs with an NTEE code of P20. Specifically, organizations were selected if they are

human service organizations whose mission is to provide a broad range of social services

for individuals, families, and the community (National Center for Charitable Statistics,

2017). Once identified, I conducted twelve 30- to 60-minute face-to-face interviews with

EDs selected randomly from 34 human services NPOs with the NTEE code P20. The P20

code, which consists of charities, includes nonprofits with the mission to serve

individuals or families (National Center for Charitable Statistics, 2017). By using a

phenomenological construct, these interviews focused on understanding a phenomenon

from the lived experiences of the participants (see Englander, 2012).

Two instruments were used in this study: an interview guide and the SOX

Compliance Checklist. Discussed further in Chapter 3, the interview guide assisted in

obtaining the lived experiences and inhibitors and facilitators related to the SOX

implementation effort of each of the EDs with self-reported transformational,

transactional, and laissez-faire leadership styles. The SOX Checklist identified the

number of protocols within the organization to improve ethical financial operations.

I used the modified van Kaam method by Moustakas (1994) to develop themes

from the lived experiences participants shared during the interviews. The approach

involved four extensive steps, discussed in Chapter 3, with the aim of showing the

complete process of how the findings were established. I also employed MAXQDA

Software to assist in the systematic organization of the codes to determine the thematic

relationships of the formed themes

Definitions of Terms

The terms used in this study are procurement related and reflect common usage in

the nonprofit sector.

Laissez-faire leadership: Leadership that does not exemplify leadership

characteristics; leadership that allows subordinates to have the freedom to act as they

choose (Avolio & Bass, 2004). This leadership style avoids decision making and lacks

motivation and individual influence (Avolio & Bass, 2004).

NTEE codes: The National Taxonomy of Exempt Entities is a system used by the

IRS and National Center for Charitable Statistics (NCCS) to classify NPOs by mission

focus (GuideStar, 2017).

Transactional leadership: Motivates followers by appealing to their self-interest

(Avolio & Bass, 2004). A transactional leader motivates followers to perform as expected

to own the rewards. Transactional leaders also define expectations, promote

performances, and achieve their goals (Avolio & Bass, 2004).

Transformational leadership: Leadership that focuses on values such as liberty,

equality, and justice (Burns, 1978). A transformational leader exceeds the basic

recognition of need and moves the organization, as well as an individual, to achieve goals

(Burns, 1978).

Transparency: Transparency is the practice of openly, truthfully, and fully sharing

information about operations with clients, members, potential donors, neighbors, and

many others (Neely, 2011).

Assumptions

One assumption in this study was that transformational leadership highlights the

interconnectedness among leaders and followers which allows individuals to achieve

desired goals. In this study, I assumed that individuals would be able to select their

leadership styles from one of the formal definitions presented. Another assumption was

that the participants would answer the questions candidly. The final assumption was that

none of the participants would be classified as mentally or emotionally disabled.

Scope and Delimitations

The study included NPOs in the state of Alabama with an NTEE Code of P20.

NPO EDs that did not identify with one of the three leadership styles were excluded.

NPO EDs that held the position of ED for at least 3years were included. NPO EDs also

had to indicate an awareness of the SOX Act requirements to be eligible to participate.

Limitations

This study involved examining EDs’ leadership styles and the adherence to the

SOX Act requirements. In this study, the first possible limitation was the credibility of

the research and the assurance that the study represented the intent of the data drawn

from the participants. I addressed this possible shortfall via a pretest that tested the

accuracy of the data instrument. Transcription review was also used to establish

credibility. Scholars have agreed that transcription review is an important approach to

promoting the credibility of research data, which also supports reliability (Cope, 2014;

Creswell, 2013; Kolb, 2012; Maxwell, 2013). Another possible limitation was

transferability of the research findings because the sample consisted of 10 human service

nonprofit EDs from Alabama. The delineated sample criterion did not support

generalizing the results beyond the opinions of the participants or other boundaries.

Specifically, the study did not include a focus on other human service agencies other than

NPOs with NTEE code P20. Other researchers can address this limitation through further

research that targets each NTEE code in other states. The major limitation of the study

was the possibility of a small response rate and the unexpected homogeneity of the

leadership styles, which could limit the potential findings of the 12 samples used for the

specific premise in the research. Some potential threats to validity in this study included

people, places, and time. Leadership styles may not be mutually exclusive, which would

allow opportunity for participants to alter their leadership styles to suit different

circumstances. Limiting the population to specific NTEE codes (i.e., NTEE code P20)

also limits generalization in findings beyond these NPO classifications. To address bias

and limitations, I placed the sample into groups according to their leadership styles.

Placing the sample in groups allowed every possible combination to have an equal

chance of being selected and to represent the population more clearly. According to

Rubin and Rubin (2012), researchers who have used the phenomenological approach

must consider the selected participants as a limitation.

Significance of Study

The enactment of the SOX Act was an effort by congress to institute new controls

to prevent fraud and abuse and to enhance both the integrity of finance reporting and the

quality of governance (Gupta, Weirich, & Turner, 2013). Going forward, my study may

potentially offer several contributions to the knowledge base of nonprofit leadership. A

study researching the relationship between executive leadership styles and ethical

operations as determined by the ED’s adherence to the SOX Act may influence

researchers, practitioners, and NPO boards. The social significance of this study lies in

the growing importance of the results possibly assisting NPOs in making effective

decisions on financial transactions and audit procedures.

Potential for Social Change

As the effort to influence and sustain ethical financial operations intensifies for

nonprofit organizations, establishing financial sustainability should be viewed by NPOs

as a dynamically continuous process (Sontag-Padilla, Staplefoote, & Morganti (2012).

Executive leaders of NPOs should view accountability and transparency as beneficial

elements of the organization and demonstrate that they follow the ethical provisions and

best practices of the SOX Act. In addition to the collaborated effect of organizational

accountability and transparency, this study may offer the nonprofit sector, primarily

human service organizations, the opportunity to implement strategies and promote

positive social change, resulting in improvement of quality leadership in EDs that may

ultimately result in more efficient and effective ethical financial operation in NPOs.

Summary

Chapter 1 contained the research problem, the purpose, and the nature of the

quantitative research study. This research study determined the leadership style of EDs

and the correlation to the adherence to the SOX Act in a population of 34 social service

nonprofit leaders in Alabama. Chapter 2 is a review of literature related to emerging

perspectives and is a synthesis of research analyzed from peer-reviewed journals and

from authors known as noted experts.

The literature review provides a current and historical timeline of information

about the role of nonprofit organizations. A discussion of leadership theories

(transformational, transactional, and laissez-faire), policy and governance, and SOX

provisions as it pertains to SOX Act are also included. The research variables and

methods were used to determine and evaluate if there is a relationship between leadership

styles and adherence to the SOX Act in NPOs. Chapter 3 outlines the research design and

approach for the study.

Chapter 2: Literature Review

Introduction

In the United States, approximately 7% of nonprofits' annual revenue was lost to

lack of ethical financial operations among EDs (ACFE, 2014). According to the ACFE

(2014), this figure represented $85 billion in estimated annual losses in available

operating funds. The ED’s leadership style can negatively affect donor and client

confidence, organizational performance, and the NPO’s ability to accomplish its mission

(Yahaya & Ebrahim, 2016). The purpose of this qualitative phenomenological study was

to investigate the reasons an ED who self-reported the use of one of Burn’s (1978) and

Bass’s (1985) three transformational leadership styles did or did not apply the

recommendations of the SOX Act to manage the ethical financial operations of his or her

human services’ nonprofit organization.

According to the 2014 Global Fraud study by ACFE, 5% of all nonprofit

revenues, on average, were lost each year to fraud, with 22% of the cases involving the

loss of more than $1 million. High profile scandals have tarnished the reputation of some

NPOs, decreasing the public’s trust and support (Bryce, 2015). The ethical behavior and

leadership of EDs can prohibit such scandal as the EDs urge other executives to adopt

provisions that will promote ethical operations.

Ethical behavior and operations are a complex composite of actions that reap the

same benefits of organizational success but are effective only if performed appropriately,

within the right situation, and to the degree needed by the individual, group, or

organization (Goode, 2016). Following the ethical scandals from 2001 to 2011, it is

important to understand how to interpret the behavior of executive leaders which may

also provide clarity on how ethical leadership improves ethics in NPOs, modern

organizations, and organizational culture (Weber & Wasieleski, 2013). This revelation of

ethical behavior will allow EDs to display and utilize characteristics such as

accountability and transparency to influence perceptions of others and implement a shift

in the leadership of NPOs.

One gap that remains in this area of research is the determination of which one of

Burn’s (1978) leadership styles (transformational, transactional, and laissez-faire) would

EDs be more inclined to use to manage their financial operations in human service

organizations. The ways in which leadership effectiveness and ethical operations have

historically been measured and evaluated may be the cause of the lack of research in this

area. Like definitions of leadership, concepts of leader effectiveness have differed from

one writer to another. In general, the criteria selected to evaluate ethical operations

largely reflected a researcher’s explicit or implicit concept of leadership (Yukl, Mahsus,

Hassan, & Prussa, 2013).

The following sections included the literature search strategy, theoretical

framework, and a literature review related to key concepts.

Literature Search Strategy

When used individually, the words leadership, nonprofit, and effectiveness

generated a plethora of hits from the search engine; therefore, I narrowed down the key

word search to leadership theories, ethical behavior/leadership, ethical operations,

accountability, financial transparency, leadership styles, and Sarbanes Oxley Act of

2002. The resources used for searching the literature were the EBSCO and ProQuest

electronic databases. The search yielded more than 700 matches in the 5-year date range

using the keywords leadership and nonprofit, more than 250 using the keywords

leadership behavior, more than 13,000 using leadership styles, more than 511 using

effective leadership, more than 1,200 using ethical leadership, and more than 150 using

the keywords leadership theories.

Theoretical Framework

The theoretical framework for this study is Avolio and Bass’s (2004) full range

leadership model. The purpose of using this construct was to discover and analyze the

effect of a transformational leadership style, in contrast to transactional and laissez-faire

styles, of nonprofit EDs and the strength and likelihood of embracing the use of a tool

that could enhance the transparency and accountability in human service nonprofit

organizations.

Leadership Theories

A theory is a tested proposition that explains and predicts a phenomenon

(McMillan & Schumacher, 2010). Leadership theory has focused on researching what

makes successful leaders excel. There are many leadership theories developed since the

1940s. Kellerman (2012) counted about 40 overall leadership theories and presented a

timeline on the development of four major theories: the trait approach (up to late 1940s),

style approach (late 1940s to late 1960s), contingency approach (late 1960s to early

1980s), and the new leadership approach (since early 1980s). The leadership styles that I

focused on are part of the new leadership theory. The main theories under this umbrella

are transformational, transactional, and laissez-faire leadership styles which fall under the

full range model of leadership.

Transformational theory. Transformational leadership was shown to be inherent

to EDs who primarily focused on the present conditions of an organization and made

decisions based on short-term goals rather than the future (Voorn, Walter, & Stoker,

2013). The transformational theory emphasized the ability of the individual to engage in

leadership activities and create a positive connection that resulted in a win-win situation

for both leader and follower (Burns, 1978). Burns (1978) and Bass (1985) initially

defined transformational leadership. Specifically, Burns (1978) stated, “Thus,

transformational theory is normally viewed as a shared process, involving the actions of

leaders at different levels and in different subunits of an organization, not just those of the

chief executive” (p. 20). In sum, the goal of a transformational leader was to maximize

the potential of his or her followers and implement positive social change.

Transactional theory. The transactional theory focused on the connection or

exchange that transacted between leaders and followers and the incentives used to

motivate effort, as well as the knowledge of what it took to be a successful leader. Bass

and Avolio (1995) stated, "Transactional leadership emphasizes the transaction or

exchange that takes place among leaders, colleagues, and followers" (p. 3). Bass (1985)

viewed transformational and transactional theories as distinctly different processes;

however, a leader could use both theories but with different scenarios.

Laissez-faire theory. Laissez-faire leadership theory was the opposite of

transformational leadership. Bass (1985) believed that this theory was not customer-client

focused and had more of a negative impact on the nonprofit environment and the well-

being and effectiveness of an organization. In addition, Bass (1985) believed that this

theory had more of a negative impact on the nonprofit environment and the well-being

and effectiveness of an organization.

Theoretical Propositions/Hypothesis and Applications of Theories

Leadership studies have developed to the point that more researchers explore

whether the act of studying leadership has an impact on leadership styles and leaders’

commitment to operating with quality value standards of accountability and transparency

in their organizations (Ismail & Mahamad, 2011). A leader may employ different

leadership styles, such as authentic, ethical, transactional, transformational, and laissez-

faire (Reed, Vidaver-Cohen, & Colwell, 2011). Specifically, leaders influence

organizational culture, norms, and performance through employment of leadership styles

(Jyh-Shen & Tung-Zong, 2009). In this study, transactional, transformational, and

laissez-faire leadership theories provided the theoretical foundation. Each style supported

ethical behavior to some degree and could lead an NPO to transparency.

Research (Lowe, Kroek, & Silva, 1996) has shown that transactional leadership

style generates a high level of productivity and organizational performance by building

relationships between leaders and subordinates based on performance and rewards. A key

element of a transactional leader is contingent reward as in when the leader and the

subordinate agree on a predetermined level of performance in exchange for a reward

(Skakon, Nielson, Borg, & Guzman, 2010). Bass and Avolio (1995) proposed

transactional leadership consisted of three dimensions, namely contingent rewards and

management-by-exception (active/passive). These researchers contended that

management-by-exception was the opposite of contingent reward in that leaders

communicated negative feedback and criticized performance by highlighting the

deficiencies rather than focusing on the improvements. Transactional leadership has been

found to be more effective than laissez-faire leadership because transactional leaders

were more focused on the operational-based relationship with their employees (Skakon et

al., 2010). Werder and Holtzhausen (2009) added that a leader who operated under the

enforcement of policies and standards provided less opportunity for relationship building.

On the other hand, a transactional leader dwelled on the specific task-related exchange of

activities and rewards and did not focus on long term goals (Tyssen, Wald, &

Heidenreich, 2014). In this vein, Reed et al. (2011) contended that transactional

leadership could potentially cause damage to an organization’s morale and performance

level, which could lead to dysfunctional behavior. They also noted that some of the

strengths of transactional leaders were they require less extensive training, which created

low cost. In addition, these individuals were found to be specific and to the point, which

left little room for misinterpretation or ambiguity. Finally, these leaders were reliable

motivators due to the tangible reward (Reed et al., 2011). According to Tyssen et. al.

(2014), some of the weaknesses of transactional leaders, on the other hand, were rigid

expectations, lack of accountability, and the fact that motivations were driven by

employee performance.

Transformational leadership acknowledged subordinate’s needs, provided vision,

and motivated individuals to exceed expectations (Rafferty & Griffin, 2004). A

transformational leader exemplified self-motivation, provided hope, and motivated

individuals to go beyond their self-interest (Bahrami, Hasanpour, Rajaeepour,

Aghahosseni, & Hodhodineghad, 2012; Muhl, 2014). Unlike transactional leadership,

Rafferty and Griffin (2004) also noted that transformational leaders transcended their

own interests for the benefit of the organization via commitment and building morale.

Ismail, Mohamad, Mohamed, Rafiuddin, and Zhen (2012) added that transformational

and transactional leaders were equally important in organizational performance. In an

examination of leadership and organizational commitment, transformational leadership

increased in relevancy and was becoming the style of choice (Top, Akdere, & Tarcan,

2015). On the other hand, transactional leaders motivated followers via compromise and

control (Brown & Trevino, 2006) Although transformational leaders relied on vision to

inspire individuals, one of the weaknesses of this leadership style was the lack of detail

orientation, which required the support of organized and detail oriented individuals to

assist with the possible small oversights that could derail long-term goals (Brown &

Trevino, 2006) Another limitation of transformational leaders was their strong emotions

and passion that could block them from the reality and truth of their organizations

(Brown & Trevino, 2006). These characteristics could restrict transformational leaders

from their ability to perform logically when faced with organizational challenges.

Research has shown that some leaders used transformational and transactional leadership

styles, and both styles can be effective; however, researchers found that transformational

leadership was used more often and was the most effective in NPOs (Breevaart et al.,

2014; Zhu, Sosik, Riggio, & Yang, 2012).

Laissez-faire leadership was defined as being hands off and avoiding decision-

making and subordinate responsibility (Chaudhry & Javed, 2012). Cemaloglu, Sezgin,

and Kilinc (2012) described laissez-faire leaders as poor communicators who provided

minimum strategic direction for an organization and gave their subordinates limitless

freedom. Laissez-faire leaders did not engage in public displays of destructive behavior,

and were, therefore, silent in leading an organization's decline (Aasland, Skogstad,

Notelaers, Nielson, & Einarsen, 2010). Aasland et al. (2010) also revealed that over 21%

of respondents used this form of leadership. Their study also revealed that laissez-faire

leadership had few benefits and many shortcomings. One example indicated that laissez-

faire leadership was most effectively used in organizations that had skilled and self-

motivated individuals. Another benefit of this style was the opportunity that was given to

team members to display their knowledge and skill in particular subjects (Aasland et al.,

2010). Aashland et al. also revealed that some of the shortcomings of laissez-faire

leadership style were lack of cohesiveness due to the leader's un-involvement, and goals

and deadlines were rarely met.

Previous applications of the theoretical framework. Leadership styles and the

influence that it can have on organizational and financial stability have been popular

topics of research (Slater, 2015). The full range of leadership (e.g. laissez-faire,

transactional, and transformational leadership) has been applied in ways similar to my

current study. For instance, in prior research regarding the theory of leader effectiveness

and leadership style, Aboyassin and Abood (2013) found an inverse relationship existed

between laissez-faire leadership style and organization performance, whereas a positive

relationship existed between transactional leadership and organization performance.

Effective leaders ensured that their subordinates were given extra effort to provide a

pleasant workplace (Aboyassin & Abood, 2013) Redick, Reyna, Scaffer, and Toomey

(2014) used the laissez-faire, transformational, and transaction leadership styles and

employees' perceptions in predicting their extra effort, satisfaction, and effectiveness of

the leaders. The research indicated that transformational leadership had the most

influence on employee’s perception of leadership effectiveness and extra effort to provide

job satisfaction. The participants of this study preferred working with transformational

leaders overall. Add summary and synthesis.

EDs’ leadership may stimulate organizational success and commitment.

(Northhouse, 2015). The full range leadership paradigm has been used in prior studies to

determine EDs’ key to success in NPOs, their commitment, and survivability in the

nonprofit and for-profit sectors. For example, Mohammed, Othman, and D’Silva (2012)

used leadership theory to determine the link between the transformational, transactional,

and laissez-faire leadership styles and organizational commitment. In this study,

transformational leadership behaviors were found to be linked to organizational

commitment through their key dimensions, such as providing direction and

encouragement via inspirational motivation (Mohammed et al., 2012). Kottke and

Pelletier (2013) noted that the presence of ethical leadership was more encouraging in an

environment where employees felt loyal to the organization. Their research confirmed

that ethical leaders provided positivity to organizational commitment. This finding was

also supported by Bull (2016); research findings on ethical leadership indicated that it

was positively related to organization commitment. Bull (2016) noted, “Ethical leaders

create an environment where subordinates understand the importance of ethical conduct

and reward those who adhere to it” (p. 28). Taken together, the previous studies

demonstrate that various research studies have been conducted on ED leadership styles,

and these styles have been shown to influence organizational performance and

subordinate motivation; however, there have not been any research studies on the

influence that the SOX Act may have on leadership styles when dealing with financial

ethical operations.

Rationale of Theory

Conclusions about the three chosen theories are significant to leadership

development and effectiveness in NPOs. Chaudhry and Javed (2012) theorized that

laissez-faire leadership style was destructive for NPOs and led to less than optimal

performance. Favorable transactional leadership theory is a prerequisite to

transformational leadership theory. Transactional leadership theory focused on employee

driven tasks and rewarding employees contingent on their performance (Kinicki &

Kreitner, 2009). When compared to transformational leadership theory, transactional

leadership theory was distinct but not mutually exclusive.

The differences in the three theories discussed in this literature review will

demonstrate the need to understand the importance of effective leadership styles as it

relates to ethical financial operations. The selected theories related to the present study in

seeking to identify an effective leadership style via the perceptions of EDs’ experiences.

In developing the theory of transformational leadership, Burns (1978) suggested that

transformational leadership was not only effective but also ethical leadership.

Transformational leaders appealed to higher ideals, such as accountability and

transparency, and both ED and organizations were raised to higher levels of motivation

and morality (Burns, 1978). Although transformational leadership motivated followers

and increased their performance at a higher level than transactional leadership, effective

leaders used these approaches collaboratively (Burns, 1978). Even if ethical financial

operations are correlated with both transformational and transactional leadership, it is still

debatable as to which one style is perceived as more ethical than the other. Alternatively,

perhaps collaborative efforts of the two styles caused a leader to be perceived as being

the most ethical. This study focused on determining if one leadership style is more or less

ethical than another. Research Question 1 focused on the ED’s perception and helped to

expand on which leadership styles were more inclined to use the SOX Act as a tool to

enhance transparency and promote ethical financial operations in NPOs. Research

Question 2 was built upon the existing theory by depicting which leadership style was

used the most and how experiences with the SOX Act differed among EDs with

transformational, transactional, and laissez-faire leadership styles.

Literature Review Related to Key Concepts

Financial Accountability and Transparency

A significant theme in the literature was the relationship between accountability

and transparency. Accountability is an obligation to accept responsibility or to account

for actions (Naidoo, 2011). Leadership studies developed to the point that more

researchers are exploring its effectiveness in relation to leadership styles and leader

commitment to operating with quality value standards of accountability in their

organizations. Accountability is an important goal for both management and

performance in the nonprofit sector due to the recent increase in scandals and the

misappropriation of funds in numerous NPOs (Yallapragada, Roe, & Toma, 2010).

Developing accountability within NPOs may produce a tool of reinforcement that

generates positive behavior among management, board members, and stakeholders.

An organization cannot be accountable without transparency. Transparency is the

process of leaders truthfully providing an environment of openness in an organization

(Naidoo, 2011). This process can function as a deterrent of corruption and may also

improve governance and promote accountability. Accountability, transparency, and

ethical compliance were the focus for the SOX Act's push to restore public confidence

and demand higher accountability from executive leaders of NPOs (Behn, DeVries, &

Lin, 2010). The combined effect of nonprofit transparency and financial accountability

may assist in strengthening numerous NPOs across the United States as well as

worldwide. Implementing such practices may help reduce NPOs’ financial risk, improve

public image, and build constructive public policies in society.

A review of the existing body of academic literature regarding the relationships

between leadership style and ethical financial operations, accountability, and

transparency was part of the foundation for this study. Beal and Griffin (2012) and

Baapogmah (2014) identified research gaps in the literature regarding the correlation

between leadership style and ethical financial behavior, providing an opportunity for

future research. The thematic literature review included an examination of accountability

practices; specifically, Beal and Griffin (2012) provided a comparison of financial

reporting between nonprofit human service health care entities that implemented the SOX

Act. Beal and Griffin's approach was a qualitative, case study approach in which they

used face-to-face interviews and email correspondence with accountants that worked for

a nonprofit health care organization. The researchers also conducted an in-depth

interview with the Vice President of Finance and Accounting Service. They used the

seven provisions of the SOX Act pertaining to NPOs and developed interview questions

to determine the positive and negative aspects of voluntarily adopting SOX provisions.

The purpose of their research was to gain insight on SOX regulations in relation to

nonprofit health care entities and to determine the negative or positive impact of the SOX

Act. Beal and Griffin’s approach provided a logical way to test their premise that the

SOX Act can have a negative or positive influence on organizational performance.

Baapogmah (2014) conducted a study on the challenges of financial

accountability and operational controls in NPOs. The qualitative phenomenological study

explored the experiences of coping with challenges of accountability in 22 participants

who managed six NPOs in Delaware. The data was collected using open-ended interview

questions, and Baapogmah used the MAXQDA application to organize the data. In this

study, Baapogmah also analyzed the implementation of the SOX Act and its provisions

related to internal controls over financial reporting to NPOs. The findings in this study

indicated that managers of smaller NPOs struggle to implement effective internal control,

despite their high awareness of controls and accountability. There has been little research

on ED leadership style and its correlation with ethical operations and financial

transparency within human service NPOs. This literature review contributes to the

existing literature and partially bridges the identified research gaps.

Accountability is an important goal for both management and performance in the

nonprofit sector. Studies on leadership have become popular in that researchers are

conducting research on the effectiveness of leadership in relation to accountability,

commitment to operating standards, and transformational leadership style. Brown (2015)

described accountability as a requirement for organizational leaders to take responsibility

for their decisions and behaviors.

Kaserer, Mettler, and Obernberger (2011) posited that lack of accountability and

transparency were the root causes for fraudulent activities, such as the situation with

Enron. “The deepest concern about nonprofit accountability is due to a section of

Sarbanes-Oxley Act of 2002, which was created in the highly publicized wake of Enron,

Tyco International and WorldCom downfall” (Brigham & Ehrdardt, 2014). The SOX Act

required a board to monitor and take more responsibility for financial transactions and

auditing procedures. The actions of these leaders resulted in their agencies’ unsuccessful

enforcement of SOX; however, data showed that 40% of nonprofit employees who

observed misconduct failed to report it, largely because they believed that reporting

would not correct the actions, and they feared retaliation from peers or subordinates

(Rhode & Packel, 2009). For example, the New Hampshire Charitable Foundation took

the need for best practices into their organization to assist them in reaching a higher level

of productivity (Rhode & Packel, 2009). The charitable foundation reviewed the SOX

provisions, formalized the policies that were already in place and compiled them with key

provisions of SOX. This section of SOX enforced higher accounting and reporting

standards; however, only two sections of this act specifically applied to nonprofits.

Although some nonprofit leaders were uncertain about how to engage and promote

nonprofit accountability within their organizations, there were potential contributors to

nonprofit accountability, including commitment to operating standards, code of ethics,

and transformational leadership.

Nezhina and Brudney (2012) conducted a study exploring the cost and benefits of

implementing the SOX Act in NPOs. The researchers found evidence that improved

financial controls generated decreased risk of fraud. A similar study conducted by Neely

(2011) investigated the influence of the Nonprofit Integrity Act of 2004 and found that

requiring NPOs to implement governance structures, such as the SOX Act, to improve

accountability increased expenses and diverted funding without improving financial

accountability. Without policy and governance, such as those supported by operating

standards or a code of ethics, there was a lack of validity when measuring accountability

within an organization. Willford and Small (2013) stated that without an effective leader,

there was no practical way to ensure the adherence to the guidelines. Research on the

relationship among operating standards, transformational leadership, and accountability

in nonprofit organizations revealed organizations that have these established standards

demonstrate effective and ethical decision-making and accountability.

Rationale for Selection of the Concepts

The key concepts discussed in the study included the SOX Act, leadership styles,

ethical behavior, accountability, and transparency. Each of the above studies related to

my proposed study in that they correlated leadership styles with the effectiveness of

organizational performance and in the ways the researchers approached the problem;

however, there has not been much research on if SOX can measure ethical operations and

the relationship between ethical operations and leadership style.

Studies Related to the Key Concepts and/or Phenomena

Leadership style. Leadership style was shown to be one of the most predominant

elements that influence organizational stability and sustainability (Slater, 2015).

Nonprofit achievement refers to the ability of the leader to influence and inspire others to

do what is right (Wongyanon, Wijaya, Mardiyono, & Soeaidy, 2015). The specific

leadership styles that the present study examined were transformational, transactional,

and laissez-faire. Leadership styles determine values, culture, and change tolerance and

affect efficiency, effectiveness, and organizational performance (Huang, Hsu, & Chiau,

2011). According to Wongyanon et al. (2015), transformational, transactional, and

laissez-faire leadership styles have a significant and positive influence on the success of

NPOs. The reviewed literature highlighted definitions of distinct leadership styles, and

the majority of the reviewed studies supported that leaders often operate at the extreme of

transformational leadership.

The examination of leadership styles started with philosophers, such as Bass,

Avolio, and Burns, who established a relationship between leadership styles and the

moral duties leaders have toward their followers (Bass, 1985; Burns, 1978; Bass &

Avolio, 1995). Descriptors of leadership refined and narrowed the described behavior in

which leaders implemented a leadership style. For example, leaders could be accountable,

authentic, ethical, and responsible in employing a transformational, transactional

leadership style (Reed et al., 2011). The premise for this study was that transformational

leadership style is the most effective leadership style for EDs in NPOs.

Prior recorded conduct of EDs provided ample evidence that transformational

leaders could have a positive influential effect on financial operations in NPOs. Scholars,

such as Eady-Mays (2016) and Bell (2016), examined the relationship between leadership

styles and ethics. Eady-Mays (2016) reported that transformational leaders had

significant effects on the outcomes of an organization. Bell (2016) noted that this

significant effect influenced educated decision-making, and restored public confidence

and trust in NPOs.

Leadership styles affect the manner in which an NPO operates and how it

motivates employees and assists consumers, as well as the influential impact it has on

operating costs and financial performance (Thomas & Bendoly, 2009). Jones’ (2013)

quantitative study examined leadership styles and financial performance within Rural

Electric Cooperatives. The findings indicated that a significant, positive relationship

existed between leadership style and financial performance. In fact, Hassell’s (2013)

study on the perceived leadership style dissimilarity and leader turnover at a nonprofit

healthcare organization demonstrated the influence of transformational leadership on

reducing subordinate staff turnover. Although most studies indicated the benefits of a

transformational leader and the influence this leadership style had on ethical behavior in

NPOs, Thiel, Bagdasarov, Harider, Johnson, and Mumford (2012) stated, “The ethics

rules of the organization as well as of society guide the behaviors of a leader of integrity.

Ethical behavior may be pertinent to NPOs’ operations, but is not a sufficient protection

from unethical behavior (Thiel et al., 2012). The Thiel et al. (2012) study on leaders’

ethical decision-making in organizations contended that prior recorded behavior of

political and executive leaders provided sufficient evidence that visionary,

transformational leaders acted in destructive, irresponsible, unethical manners on

occasion.

Sarbanes-Oxley Act as an Indicator of Ethical Financial Behavior

The SOX Act was the initial action taken by the United States federal government

to reform the public accounting profession since the Securities and Exchange Act of 1934

(Moeller, 2004; Public Company Accounting Oversight Board (PCAOB), 2006;

Securities and Exchange Commission (SEC), 2005; 2006). There were approximately 60

provisions of the SOX Act; however, GuideStar, in collaboration with BoardSource

(2018) and Independent Sector (2018), developed a report on the effects of the SOX Act

on nonprofits. There were seven major provisions in the SOX Act with relevance to

nonprofit organizations and to the current study. With respect to the ethical leadership

and management of NPOs, these provisions could help NPO leaders ensure that audit

committees had financial competency, conduct an objective review of the organization,

and allow leaders to make sound decisions. If the NPOs were implementing such actions,

they were most likely adhering to the provisions of the Sox Act. A summary of the seven

provisions follows.

Independent and competent audit committee. This provision discussed the

requirement that each member of the company’s committee be a member of the board of

directors and be independent. Independence was defined as not having any relationship

with the NPO and not receiving any compensation. In addition, NPOs had to have a

member who qualified as a financial expert serving on the audit committee. This

provision was important for NPOs because it ensured that the audit committee had the

financial competency to understand, evaluate, and make sound financial decisions.

Responsibilities of auditors. This provision required that all critical accounting

policies and practices were reported to the audit committee and discussed with

management. In addition, the act required that the lead and reviewing partner of the

auditing committee rotate every five years.

Certified financial statements. This provision required that all financial

statements (i.e., form 990) were accurately submitted and represented the financial

condition and operations of the organization. This provision was important to NPOs

because it showed the organizations’ understanding of certifying document integrity.

Insider transactions and conflicts of interest. In the provision, the Act

prohibited loans to any directors or executives of NPOs. The provision also required that

NPOs have a conflict of interest policy with disclosure.

Disclosure. This provision required NPOs to provide financial information (i.e.,

form 990) and material changes timely, accurately, and completely.

Whistle-blower protection. This provision protected employees who risked

their jobs by reporting illegal activities within the organization. The act recommended

that NPOs establish a confidential and anonymous way to encourage employees to report

any suspicious or inappropriate activities within the organization’s financial management

without the fear of retaliation.

Document destruction. This provision made it a crime to alter, cover up, falsify,

or destroy any document to prevent its use in an official proceeding (e.g., federal

investigation). NPOs were required to develop a written document retention and periodic

destruction policy. With the SOX Act in place, the SEC’s regulatory and statutory powers

had the ability to pursue criminal and punitive actions against EDs and other executives

who deliberately submitted inaccurate financial reports (Financial Accounting Standards

Board (FASB), 2004; Hall & Liedtka, 2007; SEC, 2006). Section 404 essentially outlined

the demand for organizational leaders to document and test internal controls that were

developed to implement financial information and reports (SEC, 2006). Prior to the

passing of the SOX Act, shareholders and stakeholders were only able to pursue criminal

prosecutions and punitive actions through private litigation (Hall & Liedtka, 2007);

however, with section 404, the SEC could bring punitive actions against them as well,

due to the requirement that leaders be accountable and transparent.

The focus of the current study was on the influence of the Sarbanes-Oxley Act

and its relevance to ethical operations. According to the SOX Act, organizations must

implement and maintain greater procedural controls over financial reporting. Sections

302 and 404 force responsibility on EDs to review and attest to reported information and

maintain internal controls over the content of financial statements (PCAOB, 2006; SEC,

2006). If enforced, these sections would make EDs financially accountable.

Sarbanes-Oxley Act and NPOs

To implement governance reform, congress enacted SOX, which derived from the

names of Senator Sarbanes and Representative Oxley. To measure effective leadership in

NPOs, I defined the degree of compliance with the 2002 SOX Act. The degree of

compliance refers to the adoption and implementation of SOX provisions as they pertain

to NPOs. The essence of this act was the foundation of accountability and transparency

by governing boards in overseeing financial transactions and auditing procedures. The

overall effectiveness of SOX was the concept of independence. SOX suggested that an

NPO should have a performance evaluation conducted by an independent outside

auditing firm. The act also called for the development of an independent board with

board members who would not cause a conflict of interest.

The SOX Act’s major intent for the board was its liberty to ensure the execution

and effectiveness of an ED’s actions and goals. The connection between the use of the

SOX Act and the leadership of the NPO had been attempted before. For example,

Nezhima and Brundney (2012) conducted a quantitative research study on NPOs and the

impact of the SOX Act. The researchers collected data through face-to-face surveys with

the EDs and the Chief Financial Officers (CFOs) of six NPOs in a southern city – two

small, two medium, and two large. The participants in the study provided insights about

the adoption of and the option to opt out of SOX guidelines by their NPO (Nezhima &

Brundney, 2012). The findings were mixed, with some indication that the adoption of

SOX in NPOs did not have a tremendous impact on the organization. Typically, nonprofit

leaders behaved conservatively and maintained the status quo, as well as followed

existing accountability standards regardless of the SOX Act (Nezhina & Brudney, 2012).

However, other participant responses from the survey revealed that the implementation of

SOX Act influenced their organizations, whereas others did not find that SOX

recommended anything that they were not already doing.

Studies Related to the Research Questions

Ethical behavior. Definitions of ethical behavior can provide some context about

the challenges facing EDs as it relates to ethical behavior. Currently, there is a need for

the improvement of ethical behavior and leadership in the nonprofit sector. The

commitment to ethical behavior within NPOs is under intense investigation by persistent

media coverage. In fact, based on recent public lapses in EDs’ decision-making, once

well-respected NPOs find themselves in precarious situations (Mayer, Kuenzi, &

Greenbaum, 2011). Nonprofit EDs must become more accountable and dedicated in

adhering to the ethical standards that encompass the attributes of integrity, honesty, and

financial responsibility (Ferrell & Ferrell, 2011).

Goode (2016) conducted a study on employee perception, focusing on improving

the understanding of how the perceived behaviors of EDs in NPOs influence the behavior

of employees. Goode (2016) identified ethical behavior as a critical element of the

leaders’ work experience. Goode contended that if EDs conducted themselves

counterintuitively to what the ethical policies and standards exemplify, the atmosphere

for employees and stakeholders could destroy the integrity of the organization. In another

research study conducted by Godfrey (2013), he stated that ethical behaviors in NPOs

were influenced by the ED’s leadership style. Godfrey's research was based on the

transformational leadership theory and revealed that this theory was beneficial to the

organization’s ability to perform with integrity and high ethical standards. Godfrey

contended that the ED’s ethical behavior was imperative in formulating the individual’s

own ethical decisions. The result of this study proposed that leaders could alter their

ethical behavior based on costs and rewards related to the ethical dilemma, and, once the

ethical and moral values were broken, the decisions were made on the next behavior

(Robins & Judge, 2008).

The ED’s ethical behavior did not only influence the behavior of employees, but

also nonprofit volunteers. Umezurike’s (2011) study on the behavior of NPO leaders and

the retention of volunteers argued that NPO leaders who demonstrated ethical behaviors

created a clear foundation for volunteers to work diligently towards diminishing society's

economic instability. EDs who discussed the importance of ethical behavior with their

volunteers created rapport and expectation of fairness. Although laws and regulations

governed ethical behavior, the accountability of EDs to engage in moral practices was

often dependent upon the ethical examples and standards that influenced their individual

opinions.

In the above three studies, there were two studies that revealed the perceptions of

the ED’s ethical behavior in an NPO. Goode’s (2016) study depicted the employee's

perception of ethical behavior of the leadership within an NPO, whereas Umezurike’s

(2011) study showed how nonprofit volunteers perceived EDs who attracted, motivated,

and retained volunteers. Godfrey (2013) was the only study that examined the influence

that ethical behavior had on effective leadership in NPOs. Similar to my study, this study

also reflected on the influence leadership style had on determining the ED’s ethical

behavior. This study also used the same theoretical framework of transformational

leadership as its premise for effective leadership and ethical behavior. The application of

the Godfrey (2013) study was to explore how leadership style influenced ethical behavior

such that accountability and transparency in NPOs could be improved. Bhandari (2010)

stated, “Ethical conduct, whether it is for-profit or nonprofit, is highly expected of all

organizations” (p. 35). In sum, ethical leadership was perceived as being both a moral

individual as well as a moral manager.

In some situations, unethical leadership occurred when leaders did not have their

followers’ best interests at heart. The entire process of being a leader was to be aware of

the needs of one's organization or country and to put the mission of the organization and

the benefits to constituents first. Leaders who did not have concern for their followers

were not only unethical, but also ineffective. Implementing policies and procedures

effectively could also mean being ethical, and being highly ethical could simultaneously

mean being more effective (Bhandari, 2010).

The unethical and illegal acts associated with for-profit organizations, such as

ENRON, and individuals, such as Bernie Madoff and Martha Stewart, are common in

for-profit organizations; however, according to Bhandari (2010), NPOs are not immune

to such unethical acts. “In fact, nonprofits could be considered more susceptible to

unethical behavior than for-profit, due to the absence of the agent-principal dichotomy of

agency theory framework in nonprofit organizations” (p. 36). In other words, principles

of NPOs are not as concrete as for-profits because nonprofits do not have shareholders,

which increases the likelihood of unethical behavior among their leaders.

The authenticity of ethical leadership became a problem in nonprofit human

service organizations in Alabama. It was important that ethical policies, such as the SOX

Act’s implementations and applications, defined what was morally right and what was

morally wrong in the decision-making process (Ferrell & Ferrell, 2011). The ethical

challenge of leadership was that there were nonprofit leaders in Alabama who were found

guilty of charges ranging from securities fraud, wire fraud, conspiracy, and filing false

tax returns. These ethical challenges had been a growing trend in human service

organizations. There was an increase in NPO leaders who were indicted for inappropriate

use of funds, corruption, and fraud. Although there were major cases of unethical conduct

in Alabama, such as the Health South Corruption Case, the biggest scandal in nonprofit

history surfaced in 2010 inside the New Jersey Red Cross. The chief executive of the

Hudson County Chapter and his bookkeeper stole over $1 million in Red Cross funds and

squandered it on gambling and each other. This type of leadership affected the recipients

of the services provided as the mismanagement and misappropriation of funds reduced

the nonprofit organization’s ability to complete its mission.

There were many factors that contributed to this problem, including leaders

appointed without any formal leadership training, the lack of understanding between

leadership versus management, and the inconsistency in policy and governance. Bhandari

(2010) concluded that the primary reason for unethical leadership in nonprofits was the

lack of a principal paradigm, a passive board of trustees, indifferent benefactors, and a

weak regulatory environment. The remedy for such behaviors included monitoring and

mitigating such practices by nonprofits, identifying and empowering surrogate principals,

and establishing a new regulatory agency similar to the SEC (Bhandari, 2010). However,

data showed that the NPOs that integrated SOX requirements and best practices into their

organizations reached higher levels of productivity and factors that increased ethical

financial operations.

Determining a clear definition of leadership, its various styles, and the

characteristics of ethical and effective leadership is the key to finding the factors that may

resolve the problem. This lack of knowledge of what constitutes effective and ethical

leadership may contribute to the gap in research of what influenced NPO leaders to

engage in ethical or unethical practices. O’Connell and Bligh (2009) used newspaper

articles to present a quantitative analysis across three periods by exposing scandals and

its emergence as a common theme in the nonprofit sector. Their way of analyzing such

activities highlighted the media’s role in changing the perception of unethical leadership

actions as well as changing the reputation of an organization. O’Connell and Bligh stated,

“Leaders are influential in setting the tone at the top of an organization and act as both

symbolic and real representatives of the organization to the outside world” (p. 214).

Setting an ethical tone at the top could generate a positive environment as well as make

scandal less likely. O’Connell and Bligh contended that leaders had the option to create a

positive or a negative ethical organizational climate, which increased the need for leaders

to establish social legitimacy at the defamation of an organization’s reputation.

Rhode and Packel (2009) discussed the prevalence in unethical behavior in

nonprofit organizations and the resolution to the dilemma. Rhode and Packel examined

the factors that influenced effective leadership and moral conduct and discussed various

ethical issues that arose in NPOs as well as ways to implement ethical behavior within

organizations. Overall, addressing the concerns of ethical misconduct in NPOs required a

greater comprehension of the influences that accommodate ethical judgment and the most

effective reaction to resolve such issues. Rhodes and Packel (2009) focused on the

increased body of research related to organizational culture in NPOs specifically. To

understand the cause of unethical behavior and what influenced effective leadership, one

would have to review the primary forces that misled ethical judgment in NPOs, analyze

the issue, and then suggest ways that NPOs could prevent unethical behavior and promote

effective leadership and institutionalize moral values in all realms of organizational

culture.

Ethical issues arise in every organization, whether for-profits, nonprofits, or

governments; however, these issues share a common relationship between individual

character and organizational influences. Some of the challenges faced by NPOs include

criminal and civil violations, such as fraud, misrepresentation, and misappropriation of

funds. The most popular issues have been misallocation of resources, inadequate

accountability, and lack of transparency. Rhode and Packel (2009) identified the

following four crucial factors that influenced ethical conduct: (a) moral awareness,

recognition that a situation raised ethical issues; (b) moral decision making, determining

what course of action was ethically sound; (c) moral intent, identifying which values

should take priority in the decision; and (d) moral action, following through on ethical

decisions.

Rhode and Packel (2009) also discussed the six divisions in which ethical issues

occur in NPOs: compensation, conflicts of interest, publications and solicitation, financial

integrity, investment policies, and accountability and strategic management. Individual

salaries should not be discussed among employees, especially in NPOs with sustainability

issues. Such practices could cause donors and volunteers to stop donating their funds and

time. For example, a New York Public Library donor ceased her contribution of funds

when the NPO gave its president and ED a raise of several hundred thousand dollars to

increase his salary to $800,000 per year (Rhode & Packel, 2009). Salaries were not the

only widespread issue; executive officers and board members felt that they deserved

additional benefits within the organization, such as misappropriating funds to support

lavish lifestyles. A highly publicized example involved the former ED of the United Way

of America, William Aramony, who served six years in prison for misuse of the charity’s

funds (Rhode & Packel, 2009). Unethical tactics like this demanded greater transparency

of NPO ED salaries and prompted the implementation of IRS form 990, which was an

annual reporting form that federal tax-exempt organizations had to file. This form

provided information on the filing organization's finances, mission, and programs.

Nonprofit organizations are often threatened with conflicts of interest. A conflict

of interest could happen when board members, volunteers, or donors served on the same

board of two organizations in the same realm or a competitor or when a board member

was also a beneficiary of the organization, or when a family member of an executive held

an important staff position (Rhode & Packel, 2009). Although such transactions do not

seem as harsh as others, this quid pro quo collaboration could ruin an organization’s

reputation and character. To prevent such acts from occurring in NPOs, Rhode and

Packel, (2009) recommended nonprofits implement a detailed conflict of interest policy

that included the disclosure of executives, employees, and board members’ financial

interests in companies affiliated with the organization.

Nonprofit organizations also approached ethical dilemmas with transparency,

especially when it pertained to publications and solicitation concerns, such as

administrative cost, fundraising funds allocations, and appropriation of funds. A highly

publicized solicitation scandal was that of the Red Cross during the 9/11 terrorist attacks.

Donors contributed more than $564 million to the American Red Cross for the 9/11

tragedy in hopes of assisting victims and family; however, the Red Cross used more than

half of the $564 million for operations and reserves for the NPO (Rhode & Packel, 2009).

More transparency would make organizations accountable, and stakeholders would be

able to monitor the organization’s performance.

One of the most recent issues with publication and solicitation was misreported

fundraising costs. Hargrove and Naeem (2012) reported, “Thousands of nonprofit

organizations in the United States misreport how they solicit billions of dollars in

donations, making it impossible for Americans to know how their gifts are used” (p. 1).

According to Hargrove and Naeem, 41% of all 37,987 charities and NPOs collected at

least $1 million; however, about 15,389 NPOs indicated on annual tax returns that

fundraising expenses, such as advertising, telephone solicitations, and face-to-face pleas

for contributions. were zero.

Hargrove and Naeem (2012) found that 22,598 NPOs did not report fundraising

expenses that totaled $14.3 billion, which was $.07 for every dollar they raised.

Transparency was important when it pertained to solicitation, grant proposals, and donor

agreements because it affected the NPO’s integrity, character, and rankings. NPO

fundraising tactics had to be transparent, conducted with integrity, and not misguided or

produce unexpected violations of resources.

Nonprofits’ financial integrity was also at stake if their leaders failed to consider

the reputation and ethical stance of their donors (Rhode & Packel, 2009). For example, if

they accepted donor funds from organizations like the Playboy Foundation, there could

be a significant conflict in the ethical values of the NPO and those of the donor. In most

cases, financial integrity issues could lead to investment policy problems. This problem

occurred when the NPO’s portfolio was not consistent with their values. In order for a

nonprofit to maintain its investment value, it had to divest from organizations whose

values did not mirror the NPO’s mission.

The final area in which ethical issues arose in NPOs was accountability and

strategic management. This issue occurred when a donor gave a nonprofit organization a

large amount of funds and the executive and board did not implement objectives and

specific measures of the allocation of the funds and lacked strategic focus (Rhode &

Packel, 2009).

There are no simple answers to these ethical issues; however, there are effective

ways of addressing them. Rhode and Packel (2009) highlighted, “One of the most critical

steps nonprofits can take to promote ethical conduct is to ensure that they have adequate

ethical codes and effective compliance programs” (p. 34). These ethical issues may also

be addressed by implementing a foundation of policy and governance, which may

provide strength for NPOs.

Policy and governance. In order for NPOs to survive, they must have principles

of policy governance as well as an understanding of the policy being governed (Yang,

2011). This concept is called knowledge governance which Yang (2011) defined as

understanding the structures and mechanisms that can influence the process of

knowledge, creation, sharing, integration, and retention. Policy and governance are

important to nonprofit boards because it lays the foundation for the board of directors.

The ED and the board members must have open communication, which requires each

program director to inform the team of directors about any conflict that may arise. This

kind of communication allows the organization to come together as a team and resolve

the challenging conflict (Yang, 2011). It was required that the bylaws of NPOs were

reviewed every 5 years, and the board voted in the amendments. The governance of an

NPO has proven to be strength of the organization. Yang (2011) explained, "Governance

of NPOs is determining the structure in which an organization should select to create

sustainability and knowledge transferred among employees, managers, and leaders" (p.

155). My study explored the use of a tool (SOX Act) that may assist nonprofits with

governance and the implementation of policy, by giving them the knowledge and training

they need that may potentially enhance effective leadership and decision-making within

their NPO.

Summary and Conclusion

The over-arching theme in nonprofit organizations was how leadership affected

an organization’s performance. This theme emphasized why ethical financial operations

was such a critical element

Methods and instruments for measuring ethical operations

have been developed, such as the Leadership Behavior Description Questionnaire

(LBDB, Stogdill & Coons, 1957), Multifactor Leadership Questionnaire (MLQ, Avolio

& Bass, 2004), and Least Preferred Coworker (LPC, Fielder, 1967). Rowold and

Rohmann (2009a; 2009b) explained how researchers, such as Avolio, Bass, and Jung

(1999), Burns (1978), and Lowe and Kroeck (1996), have also studied leadership style.

The proposed study used a research design, method, and data analysis technique that was

supported by Creswell (1998, 1999, 2003), Brown (2005), Avolio et al. (1999), and

Babbie (2004). This study begins to bridge the gap between the leadership style and the

use of SOX Act and the effect that leadership styles have on executive leaders and ethical

financial operations.

This bridging process begins with examining the nonprofit ED’s leadership

capabilities, such as leadership style, effectiveness, accountability and transparency, and

its relationship to nonprofit sustainability. Chapter 3 is a description of the research

design and approach, justification for using the design and approach, the setting and

sample used, along with the instruments and materials, data collection and analysis, and

measures taken for protection of participants’ rights.

Chapter 3: Research Method

Introduction

The purpose of this qualitative phenomenological study was to investigate the

reasons EDs who self-report the use of one of Burn’s (1978) and Bass’s (1999) three

leadership styles do or do not apply the recommendations of the Sox Act to manage the

ethical financial operations of their human services’ nonprofit organizations. As

described previously, this study sought to understand the behaviors and styles of leaders

and the influence that the SOX Act has on ethical financial operations. This research

design highlighted the actions, behaviors, and processes that influence ethical operations.

Understanding the behaviors and experiences of nonprofit leaders could provide insight

into their leadership (Cooper & Roper, 2009; Rafik, 2009). I conducted this research

through semistructured interviews with EDs at human service NPOs. Although human

service NPOs are nationally established, participants for this study were located in

Alabama.

The remainder of this chapter includes information about the research design and

rationale, role of the researcher, methodology, issues of trustworthiness, and concludes

with a summary and transition to Chapter 4.

Research Design and Rationale

The following research questions guided the study:

RQ1: What are ED experiences relative to adhering to SOX requirements related

to nonprofit organization ethical behavior in financial reporting and management?

RQ 2: How does the level of use of the SOX Act recommendations differ and

why according to transformational, transactional, or laissez-faire leadership

styles?

The central phenomenon of this study were the perceptions and lived experiences

of human service EDs in their pursuit of implementing the SOX recommendations of the

Sox Act to manage the ethical financial operations of their human services’ NPOs.

According to Moustakas (1994), five primary qualitative approaches supported the

qualitative tradition of the research. Each tradition could present an exploratory

dimension to scientific inquiry but selecting one approach over another remains

dependent on the purpose of the research.

The research study used a qualitative methodology. I chose a qualitative approach

after exploring the benefits and drawbacks of conducting the study with a quantitative or

mixed-methods approach. The quantitative research was not suitable because the

quantitative techniques in an open-ended inquiry construct would not capture the

exploratory data necessary to investigate nonprofit ED’s leadership styles and

experiences (see Ingham-Broomfield, 2015). According to Ingham-Broomfield (2015)

and Pietkiewicz and Smith (2014), a quantitative design was only beneficial to a study

that focused more on general findings, in contrast to a study that sought a deeper

exploration into the meaning of a given phenomenon.

A mixed-methods design was also rejected for this study. Venkatesh, Brown, and

Bala (2013) noted that mixed-methods research techniques were a practical way of

exploring when there was a need to use quantitative and qualitative designs within the

parameters of a study. However, the pertinent need to investigate the leadership styles

and the lived experiences of nonprofit EDs in the context of a specific phenomenon

eliminated the need to conduct the study using mixed methods. A qualitative method

would better help me to understand the phenomenon and gain new perspectives on

aspects already known, or to gain more in-depth knowledge that would be difficult to

explain in a quantitative method (see Creswell, 2007). The qualitative approach also

allowed the use of multiple sources of data, such as interviews, observations, and

documents (Venkatesh et al., 2013). The fundamentally interpretive characteristic of the

qualitative approach also allowed me to reflect on my role, the role of the reader, and the

role of the EDs in shaping the study (Creswell, 2007). In-depth interviews formed the

basis of my data collection strategy.

The qualitative design was a phenomenological approach. Alternative designs that

I rejected included grounded theory, narrative, ethnographic, and case study. None of

these designs effectively met my research goals.

The grounded theory approach is useful when one was inductively exploring a

given phenomenon to form a theoretical model to explain a phenomenon (Creswell,

2013; Gambetti, Graffigna, & Biraghi, 2012). The grounded theory approach was

inappropriate for this current study because my focus was not to understand the

phenomenon, but to understand the subjective realities of people and their interpretations.

My focus eliminated the need for an inductive mode of exploration. The narrative design

is useful in capturing stories of research participants for the purpose of data collection

(Holly & Colyar, 2012) but was not appropriate for the current study because the focus of

this research was to explore and understand ED’s experiences in the context of a specific

phenomenon.

Ethnographic design involved extensive data collection and is useful in exploring

the experiences of a cultural group or an organizational setting with similar values

(Creswell, 2013; Samnani, & Singh, 2013). Here, the ethnographic design was not

appropriate because nonprofit EDs have diverse socioeconomic backgrounds, and the

cultural dynamic was not my focus (Bressler, Bressler, & Bressler, 2013). The case study

design was useful for exploring a phenomenon within the realm of a single or a smaller

number of cases (Creswell, 2013). The case study could be favorable to this study

because of its ability to explore a phenomenon through interviews, observation, and

document review (Creswell, 2013; Patton, 2002). However, the case study design was not

appropriate based on my research need for multiple participants who would provide a

more in-depth and qualitative understanding of the phenomenon. The rationale for

selecting the phenomenological design for this study was because the focus of the

research purpose surrounded the essence of the lived experiences of nonprofit EDs.

Role of the Researcher

In this qualitative phenomenological research approach, I functioned as a

participant observer for collecting data via semistructured interviews. In my role as

participant observer, I ensured the establishment of rapport and trust with each of my

participants. My professionalism was maintained consistently throughout the interview

process (see Englander, 2012; Patton, 2002). The interview was a data gathering process,

and I ensured that my conduct was an integral part of the research outcome (see Collins

& Cooper, 2014). Purposeful sampling was employed to ensure that only participants

who had at least 3 years of experience as an ED were included. Once the larger group of

participants was gathered, I placed the list of NPOs in alphabetical order. I moved

through this list until I have received acceptance from the participants. I made initial

contact with participants via telephone, email, and face-to-face encounters as necessary

and appropriate.

I conducted the interviews, transcribed, coded, analyzed, and interpreted the

experiential interview data. To mitigate bias, I remained objective in my analysis of the

research findings. I used the bracketing technique to assist with putting predisposition to

bias throughout the data gathering and data analysis process (Chan, Fung, & Chien,

2013). These safeguards are integral because Englander (2012) emphasized that it is

important for a researcher to be consistently systematic in the development and execution

of scientific research.

I work for Greenville (Alabama) Water Works & Sewer Board. My employment

was not a factor that may influence a participant's responses. To safeguard against the

potential of influence, participants were made aware of my employment with an

understanding that I would be conducting the study as a Walden University student. I did

not have any relationship with any of the NPO EDs chosen for the study. I was fully

aware of the pertinence of accountability and transparency mechanisms as it related to the

effectiveness in an ED’s leadership style and ethical operations and believed it was vital

that NPO EDs adopt a framework of accountability. Each of the participants in the study

was presented with an informed consent form prior to participation.

Methodology

Participation Selection and Sampling Strategy

Participants in this study were EDs from human service organizations in the state

of Alabama. I determined the targeted population size by querying GuideStar, an online

database of financial information and IRS 990 forms for over 1.8 million United States

NPOs (GuideStar, 2017). GuideStar's database allowed me to search for NPOs by

financial status, geographic location, and NTEE codes. The sampling technique for this

study was purposeful sampling followed by random sampling. Purposeful sampling was

more suitable for this study because it fulfilled the need for me to explore the day-to-day

experiences that were central to the research questions and allowed me to obtain valuable

information from individuals (see Anney, 2014; Creswell, 2013; Patton, 2002; Robinson,

2014). Once individuals were identified through purposeful sampling, I used random

sampling to give each NPO that met the purposeful selection criteria an equal chance to

participate and eliminate any potential bias in the selection process (see Robinson, 2014).

The first criterion was selecting NPO ED participants with at least 3 years of NPO

work experience working in the state of Alabama. The 3-year minimum criterion was

important to get the maximum number of participants possible to increase my chances of

meeting saturation. The ED of the NPO also had to indicate a leadership style of interest

and an awareness of the SOX Act. The selection criteria also included that the NPO must

have an NTEE code of P20, with a minimum of 3 years of experience. To ensure that

each ED met the criterion, I developed prescreening interview questions (Appendix A) to

determine which individuals qualified for the study.

The goal was to secure 12 NPO executive leaders for the study. I used GuideStar

(2017) database to obtain the contact information of the NPO and ED. I made phone calls

and sent out emails to potential participants. The email contained an introductory letter

(Appendix B) that explained the purpose of the study and the participation criteria. I also

sent an email to potential participants with an invitation to participate (Appendix C). An

informed consent form was also sent to the ED via email; the form ensured that the

recipient acknowledged that returning the consent form indicated that he/she agreed to

participate in the study. I checked responses daily and conducted follow-up calls and

emails to those who had not returned the informed consent forms. This process continued

until I secured 12 consent forms. At the receipt of each consent form, I called each

participant and used my screener questions to determine if the individual met the

criterion. The screener collected information on awareness of SOX Act and years of

experience as an ED. In addition, a description of each transformational leadership style

was read to the individual, and potential participant was asked to select the one that most

closely identified his or her leadership style. If individual met all inclusion requirements,

I set up a date and time to conduct interviews.

Saturation is important in determining most of the qualitative sample size. Failure

to reach data saturation may affect the quality of the research and prohibit content

validity (Kerr, Nixon, & Wild, 2010). When conducting a qualitative study, one must

address the question of how many interviews are enough to reach data saturation (Guest,

Bunce, & Johnson, 2006). The relationship between saturation and sample size is that the

sample size is a prerequisite for saturation. One must choose a sample size in order for

the researcher to have a greater opportunity to reach data saturation; however, it is not

about the number chosen, but about the depth of the data collected (Burmeister & Aitken,

2012). A large sample size will not ensure data saturation, neither will a small sample

size; rather, it is what constitutes the sample size (Burmeister & Aitken, 2012). Creswell

(2012) determined sample size by the valuable data extracted from the sample. In the

proposed study, I collected data via interview. My rationale for selecting this method was

because interviews are one method by which one's study can reach saturation (Bernard,

2012). My goal was to collect enough data from the interviews to replicate the study.

Multiple researchers reported that identifying the most appropriate sample size to

achieve saturation in a qualitative phenomenology study is a debatable criterion

associated with the flexibility that is pertinent to qualitative research methods and is

important for quality research data (Marshall, Cardon, Poddar, & Fontenot, 2013;

O'Reilly & Parker, 2012; Robinson, 2014). Although researchers have contended there

are no rules to determine the sample size of a qualitative research study, the sample size

must have sufficient data to support an evidence-based outcome (Marshall et al., 2013;

O'Reilly & Parker, 2012; Pietkiewicz & Smith, 2014). Given the growing level of the

NPO sector in the state of Alabama, my goal was to fill a gap in the literature by

interviewing 12 EDs of large human services NPOs. In this process, I reached saturation

at 12 interviews.

Instrumentation

Basis for instrument development. Two instruments were used to collect data

for this study. The first instrument was a researcher developed interview guide (Appendix

D) consisting of open-ended interview questions used during individual face-to-face

interviews. The basis for development of the questions for the personal interviews

stemmed from the research questions as well as the literature review in Chapter 2 of this

study. To determine internal and external validity and reliability, I tested the interview

protocol on individuals who were not participants in the study but met the criteria of

NTEE code P20, were aware of the SOX Act, had at least 3 years of experience as well as

identified with at least one of the leadership styles. This test determined if the questions

asked generated responses that helped in answering the research questions. Probing was

used, as needed, to gain clarity on responses and allow detailed dialogue of areas needed

to answer research questions, without leading the interview. This instrument allowed the

researcher to go in-depth into a topic that aimed to elicit rich and detailed information

from the interviewee. Hosking (2011) stated that interviews are used as a personal guide

in which people discuss their own views of their lived experiences or some aspect about

them which was imperative for this study. The instrument that was used to answer

Research Questions 1 and 2 was self-designed. The second instrument, the SOX checklist

(Appendix E), was adapted by the researcher and based on the seven provisions listed in

the SOX Act and used to determine the number of recommended provisions used in the

NPO and administered during the same interview. The study included a semistructured

format with pre-established questions generated from the SOX checklist. Permission to

use the Sox Compliance Checklist was received.

In a qualitative phenomenological study, researchers must record concepts that

are more perceptions than facts regarding the phenomena (Moustakas, 1994). These

concepts were difficult to translate into useful data for factual measurement; however, as

Savage-Austin and Honeycutt (2011) stated in their study, by directly observing the

participants and via the information collected through the interview, perceptions became

clearer and more concise. Given that this is a phenomenological study, the participant's

experience and knowledge regarding the study's topic made the opened-ended interview

questions an appropriate strategy (see Plakhotnik, 2012). The interview questions

provided the necessary foundation for the interview to operate smoothly and analyze the

themes and patterns by thematic coding. The source that supported my research questions

was the work of Nezhima and Brundney (2012). Their study focused on the NPO’s

impact on the SOX Act, and the participants provided insight on their experiences of

adopting the SOX guidelines. In, addition, Beal and Griffin’s (2012) and Baapogmah’s

(2014) studies also assisted in the development of my research questions. Beal and

Griffin (2012) used the seven provisions of the SOX Act to develop their interview

questions, which were used to determine the positive and negative aspects of adopting the

SOX provisions. On the other hand, Baapogmah (2014) discussed the correlation

between leadership styles and ethical financial behavior and used interview questions to

explore the phenomenon pertaining to the barriers and facilitators in implementing the

SOX Act. With having similarities with other researcher’s questions, I felt confident that

my research and interview questions was appropriate for the data needs.

Content validity. The questions that were developed by researchers when

seeking data on leadership style, the SOX act, and ethical financial behavior were similar

in nature. Hassell (2013) asked about the dissimilarity with regard to leadership style

between higher-level leaders and subordinate leaders in NPOs, whereas Waritay (2015)

and Godfrey (2013) asked specifically about organizational leader’s leadership style and

how it related to integrity, honesty, and trustworthiness.

Given that these interview questions were my first development in this study,

ensuring that the data were as reliable and valid as possible was important. The study of

ethics is a sensitive subject, and I expected cautious answers from participants who

wanted to refrain from any negative ethical perceptions of them. In addition, I anticipated

that some of the questions would not generate enough detail as desired. I ensured that I

was transparent during the interviews so that I avoided leading the participants to any

conclusions that could potentially compromise the validity of the study (Pluye, 2013). To

establish content validity, I conducted a pretest using the matrix in Table 1. I conducted

this test with at least three nonprofit EDs who were not part of the study. I scheduled a

conference call with each ED, and I followed the process of the interview guide. I

presented each interview question to the participants, ensuring that it generated the proper

response needed to support each research question. After each of the pretests, I gathered

my notes and made the appropriate adjustments to the interview guide. The results from

this pretest determined whether changes were necessary in the interview questions and

was used to refine the instrument as needed. In addition, to ensure that I captured the data

accurately for reliability and validity purposes, a recorder was used. A pen and paper

approach were also used to capture additional high-level notes to ensure the accuracy of

the audio recording.

Establishing Sufficiency of Data Collection Instrument

I established sufficiency of the data collection instrument by using the matrix

table below. The matrix was used to map each participant’s interview question to the

appropriate research question. This process eliminated unwarranted questions that did not

generate answers to the research questions (see Table 1 for illustration). I asked four

interview questions and two probing questions that answered Research Question 1.

Research Question 2 focused on the SOX checklist.

Table 1

Research Questions

Procedures for Recruitment, Participation, and Data Collection

The technique for data collection for this qualitative phenomenological study

began after I export the data from GuideStar (2017) into an Excel spreadsheet. Each

What are ED experiences

relative to adhering to SOX

requirements related to

nonprofit organization

ethical behavior in financial

reporting and management?

How does the level of use of the

SOX Act recommendations differ

and why, according to

transformational, transactional, or

laissez-faire leadership styles?

Interview

Questions

for ED

What does the SOX Act mean to

your organization?

PQ1: Can you explain how your

organization implemented the

ACT?

PQ2: Explain any written

guidelines implemented in your

NPO in regards to financial

operations.

Describe your NPO’s guidelines

for financial transparency prior

to implementing the SOX Act.

PQ3: Tell me about your

decision to implement or to not

implement the guidelines of the

SOX Act.

Describe your experience with

implementing the SOX Act, and

how it may influence NPOs that

have not implemented the SOX

Act?

Questions were asked according to

the SOX compliance checklist.

name was assigned a participant number using randomly generated numbers. I sent an e-

mail announcing the study approximately two weeks prior to sending the invitation to

participate. I sent each ED a letter of invitation to participate and an informed consent

form via email. The letter briefly described the research, as well as information on use

and confidentiality of the personal identifying information and the data collected during

the study. Once the informed consent forms were received from the EDs, I annotated the

data into an Excel spreadsheet by assigned code. I sorted the final list by the

organization’s name and assigned an alphanumeric code starting with the organization’s

first name. For example, if the first organization’s name was Family Guidance Center, the

code assigned was family-001. All the participants were selected and recruited based on

meeting the criteria and passing the screening. The first calls were made to EDs who

expressed interest and who returned the informed consent forms. I completed the

screening application for each person over the phone and recorded details in the Excel

spreadsheet. I made a follow-up call 10 days after mailing the invitation to individuals

who had not responded to encourage participation and verify receipt of the letter. All

screening applications were kept in a password-protected folder on my laptop where only

I had access. In each of the groups’ spreadsheets, I indicated yes if the applicant passed

the screening or no if the applicant did not pass.

Once I reviewed the ED’s consent form and screening results for variation, I

placed a second phone call, notifying the participant that the individual qualified and

would be recruited for the study. Also, at this time, I scheduled an interview with the

participant. The telephone number and e-mail address of the researcher, committee chair,

and Walden contact, as required by Walden’s IRB process, was included on the consent

form.

Data Collection

The data collection method was semistructured, open-ended interview. I collected

data in the field at the sites where the ED’s experienced the issue or problem under study.

The interviews were conducted via telephone in a remote secured office setting. I

collected data from 12 EDs. I used the interview guide to ensure that each participant was

asked the same questions in the same order, which promoted congruency when

implementing data analysis (Jacob & Furgerson, 2012).

Data was collected on a weekly basis with 30- to 60-minute recorded interviews

with each ED. A requirement to be recorded was a condition of participation and was

included in the informed consent form. With the participants’ permission, the interviews

were audio recorded using a voice recording phone application. I followed up with

participants for clarity of their comments.

To detect overemphasized and underemphasized points, vague descriptions, bias,

and other common errors in the collected data, I uploaded all notes and recordings into

MAXQDA, as well as to my thumb drive, at the conclusion of each interview. In

addition, the EDs were asked if they had any questions at the end of the interview, and

then I informed them that once the interview recordings were transcribed, I would contact

them and allow them 30-45 minutes to review the transcription for accuracy. If any

changes were needed, they would be completed at that time. Once changes were

completed, debriefing occurred.

Data Analysis Plan

A qualitative data analysis is an interpretive plan that requires an ability to bring

clarity to word patterns, pictures, and documents in a way that descriptively highlights

the phenomenon of the study (Pietkiewicz & Smith, 2014). Data collection was

conducted via semistructured interviews after I received IRB approval. The interview

questions correlated with the central research questions and the sub research questions,

with interview questions one through five focusing on determining ED’s leadership style

and questions six through 10 focusing on the ED’s experience with using the SOX Act to

improve ethical financial operations. I set up an informal meeting with the EDs of the

selected NPOs to obtain background information on the types of services and programs

they provide.

After the participant interviews were completed, I began the transcription process.

The next step involved preparing the transcribed data for coding, using axial coding, and

Braun and Clarke's (2006) Thematic Analysis. I used the software MAXQDA for coding

the interview data and developing themes that correlated with the theory-based research

questions (Finfgeld-Connett, 2014; Ishak & Baker, 2012). The process involved making

sense of the themes and patterns across data sets that are important to the description of

the phenomenon and clarifying the meaning of the research outcome (Finfgeld-Connett,

2014; Patton, 2002).

According to Moustakas (1994), a phenomenological data analysis allows the

researcher to cluster the statements into themes, which prevents overlapping and

repetitive statements. The approach that I took to analyze the data was the modified Van

Kaam method by Moustakas (1994).

Data analysis followed four steps: preliminary

grouping, reduction and elimination, clustering, and thematic identification.

Preliminary grouping. As a first step in my analysis, I performed horizontal

procedures that required me to list and perform preliminary grouping of the lived

experiences of nonprofit EDs. I grouped the participants’ responses according to their

demographic profiles. The groups were in accord with the lived experiences of 12 NPO

EDs who had at least 3 years of experience.

Reduction and elimination. My second step was taking the preview of

experiences that emerged from the listing and preliminary grouping of experiences and

testing each experience by two requirements: Relevancy and sufficiency for

understanding it, and if the experiences could be abstracted and labeled. If an experience

did not meet the above two requirements, it was eliminated along with those that may be

overlapping, repetitive, or use vague language.

Clustering. This step involved synthesizing information for clustering and

developing themes from the participants’ responses to the interview question. According

to Moustakas (1994), the core themes of a study were generated from clustered

participant groups. I sorted out pertinent information for clustering and developing

themes of the group participants identified by step two. This process allowed me to

clearly see the themes by reviewing the description of the lived experiences of the NPO

EDs.

Thematic identification. This step involved finalizing the identification of the

grouped participants and themes and providing supporting evidence for the

phenomenological experiences via the responses in the interview transcripts. This process

involved following Moussakas’ review questions: “Are they expressed explicitly in the

complete transcription? Are they compatible if not explicitly expressed? If they are not

explicit or compatible, they are not relevant to the participant’s experience and should be

deleted” (p. 121). The results section included a description of each participant’s textural

and structural description of the meanings and essence of the experience, representing the

group.

Issues of Trustworthiness

This section includes validity and reliability of qualitative data and ethical

procedures. I indicated ways in which validity and reliability took place as supported by

noted researchers. Qualitative researchers judge the credibility of their work by its

transparency, consistency, and communication ability. Below, I described how I

addressed the issues of trustworthiness of this research study.

Internal and External Validity

The focus of trustworthiness in a qualitative study is to justify the quality of the

findings. Researchers who have used qualitative study to explore phenomena maintain

societal rapport by implementing methods that denote credibility, transferability,

dependability, and confirmability (Sousa, 2014; Yilmaz, 2013). In this qualitative

phenomenological study, I addressed credibility, transferability, dependability, and

confirmability throughout the research design and implementation process.

Credibility means that the study represents the intention of the data drawn from

the participants’ original data (Lincoln & Guba, 1985). I used two techniques to ensure

credibility. First, I used triangulation, a powerful strategy for enhancing the quality of the

research, especially credibility (Knafl & Breitmaye, 1989). The types of triangulation

methods are interviews and audiotape recording. The triangulation that was used in this

study was the analysis of leadership constructs of practices collected through interviews

which was compared to the overall perception of collective data from interviews. A

pretest was performed to test the credibility of the data instrument with revisions made

according to the results of the pretest. Credibility does not depend as much on the size of

a sample, but more on the richness of the information collected (Patton, 2002).

Transferability is an external validity and occurs when the findings of one study is

transferred and applied to other situations (Merriam, 1998). Transferability was addressed

via the criteria used to identify EDs with the phenomenological experience under study.

The detailed descriptions that was developed through the analysis of the interview data

(Cope, 2014; Sousa, 2014) also promoted transferability.

Dependability addresses the issue of reliability. I maintained dependability by

maintaining an audit trail with documented procedures used to develop and conduct the

research (Anney, 2014). I kept the hard copy and electronic documents in a secured file

for a minimum of five years as required by federal regulations and Walden University's

IRB (Protection of Human Subjects, 2009). Having an auditable trail to establish

dependability will allow other researchers to follow how the decisions were implemented.

Lincoln and Guba (1985) suggested that an audit of the research could enhance both the

dependability and confirmability of the study. Another strategy for establishing

dependability is code-recode technique. This technique requires that researchers code a

segment of data, then implement a waiting period and return and recode the same data

and compare the results. Once researchers complete this technique, dependability can be

enhanced through triangulation. This method ensured that the weakness of one method of

data collection are complemented by the use of other optional data collection methods

(Lincoln & Guba, 1985).

Confirmability is the qualitative counterpart of objectivity. This strategy is

important because it allowed auditors to follow the decision trail and derive at

comparable results given the same data and research context (Wahyuni, 2012). Wahyuni

(2012) and Anney (2014) highlighted the importance of an audit trail in supporting

confirmability of the research. I also relied on my interactivity with my dissertation

committee. The interaction with my committee allowed a thorough review of the research

design and acted as an additional measurement in addressing conformability (Wahyuni,

2012). Reflexivity was useful to highlight the major influence that the researcher had on

the data. In addition, to ensure that the study does not lack sufficient analytical

knowledge, I promoted inter-coder reliability by using Van Kaam method for a thematic

analysis, which is applicable to my phenomenological research.

Ethical Procedures

This section addresses ethical procedures and concerns related to the treatment of

participants, data collection and storage, recruitment materials, and confidentiality.

Ethical practices were my focus while conducting the study. Before data collection, I

gained permission to work with participants from Walden University’s Institutional

Review Board (IRB).

After I received approval from Walden University’s IRB, I began the research

data collection. During the data collection process, I remained cognizant of the need to

secure Walden University IRB approval to ensure that the methods proposed adhere with

the standards in Title 45 C.F.R. Pt 46 (Protection of Human Subjects, 2009). My

adherence to the methods throughout the research helped in mitigating participant risk

(Aluwihare-Samaranayake, 2012). I ensured that informed consent was secured before

the data collection process began. The data collection began with an email announcing

the survey. The letter briefly described the research and contained information on use and

confidentiality of the data, the telephone number and e-mail address of the researcher, the

committee chair, and the Walden contact, as required by Walden’s IRB process.

I informed participants of the opportunity to opt out of informed consent and

withdraw from the study at any time, as stated in the written informed consent form. I did

not anticipate any harm to participants during the data collection process; however, if a

participant displayed a harsh response or displayed any negative action during the

process, I would end the interview immediately and advise the participant to seek the

appropriate professional assistance. I protected participants' identities with the recordings,

transcriptions, and documentations of the research findings by maintaining

confidentiality. In support of confidentiality, the recordings were destroyed once

participants validated accuracy. In addition, transcripts and data analysis were secured in

a locked file for a minimum of five years; at that time, documents will be destroyed.

There was not any conflict of interest between the participants and myself, and

participants did not receive any incentives for their participation.

Summary

The purpose of this qualitative phenomenological research study was to

investigate the attributes of 12 executive leaders to determine whether they were

transformational, transactional, or laissez-faire leaders, and if their leadership style was

more inclined to use the SOX Act as a tool to ensure transparency in ethical financial

behaviors and operations in nonprofit service organizations. The study included

semistructured interviews with active EDs with a minimum of 3 years of experience.

Data collection commenced upon approval of the Walden University IRB. The

initial step in data collection was a search in the GuideStar (2017) database for NPOs

who met the selection criteria and maintained an office in the state of Alabama. Data

collection proceeded without adversity and with active participation.

Chapter 3 included an introduction, research design rationale, role of researcher,

methodology, issues of trustworthiness, and summary. In chapter 4, I present my findings

and conclude with implications for social change and recommendations for future

research.

Chapter 4: Results

Introduction

The purpose of this study was to understand the lived experiences of EDs who

self-report the use of one of Burn’s (1978) and Bass’s (1985) three leadership styles and

who do or do not apply the recommendations of the SOX Act to manage the ethical

financial operations in their human service’s NPOs. I also sought to determine if the three

leadership styles could be used as an indicator of the potential transparency in financial

operations as measured by the extent to which the SOX Act is applied.

There were two central research questions in this study:

1. What are ED experiences relative to adhering to SOX requirements related to

nonprofit organization ethical behavior in financial reporting and

management?

2. How does the level of use of the SOX Act recommendations differ and why

according to transformational, transactional, or laissez-faire leadership styles?

This chapter presents the findings from participant interviews as they relate to the

research questions. This chapter is organized into seven sections: setting, demographics,

data collection, data analysis, evidence of trustworthiness, results, and summary.

Setting

The results of this study were not influenced by personal or organizational

conditions between my interpretations and the participants’ experiences. Information

known at time of data collection was that participants were active EDs in human service

NPOs in the state of Alabama for a minimum of 3 years. Each participant, a total of 12,

responded to the consent email with “I consent.” Each participant was also informed via

consent form that there were minimal risks involved with the interview and that the

participant could opt out or have questions clarified at any time during the interview. A

total of 12 interviews were conducted for this study. Each interview was conducted via

telephone.

Demographics

This study evaluated the lived experiences of 12 EDs regarding leadership

effectiveness and the influence of the SOX Act. Table 2 displays the demographic

information for participants which included gender, years of experience, race, and size of

NPO. Two African-American EDs were included in the study, both women. There were

10 European-Americans EDs, 7 which were women and 3 were men.

Table 2

Demographic Characteristics of Participants

Gender Quantity

Male 3

Female 9

Ethnicity

African American 2

Caucasian 10

Years of Experience

1-5 5

6-10 1

11-15 1

16-20 2

20-25 2

26-35 1

Size of NPO

Small 0

Medium 3

Large 9

Data Collection

At the receipt of each consent form, I called each participant and completed a

prescreen interview. This consisted of their awareness of SOX Act, years of experience

as an ED, and the full range model leadership style (transformational, transactional,

laissez-faire) that best described them. If individuals met all inclusion requirements, I set

up a date and time to conduct interviews. Interviews were conducted with the qualified

participants over a 4-week period from March 19 to April 13, 2018. Each participant was

interviewed once. My criterion for meeting saturation was to target EDs with NTEE Code

P20 (interviewing both men and women with different ethnicities), and EDs with diverse

annual income and years of experience. I remained knowledgeable of the richness of the

data during collection. Once I reached the point where I was not receiving any new data,

saturation was met, and I stopped sampling data and rounded off my analysis. The data

from the phone interviews were recorded using a digital voice recorder and a voice

recorder app on my cellular phone. The proposed size of the nonprofits included was

expanded to include agencies with a minimum of $100,000 annual income, down from

$500,000 to improve response rates. Four open-ended interview questions were posed to

12 ED participants. The phone interviews lasted 12-30 minutes.

Data Analysis

Inductively moving coded units to a more detailed model of categories and

themes included the following process:

Data Preparation: This step involved preparing the transcribed data for coding, using

axial coding, which was the basis of this study’s thematic analysis. This step included

breaking down the responses into core themes and revealing codes and categories that

will develop a constant comparison between data.

Identifying and managing input: This step involved comparing handwritten notes and

software output (MAXQDA), consolidating, and coding data from each group, then

compiling the information to confirm the consistency and effectiveness of the data

interpretation. The confirmation process helped to accomplish validity and involved

triangulation, which consisted of matching the participants’ interview results to their

audio transcripts to ensure that I accurately captured what the participant’s intended to

communicate. To enhance reliability, I also gave the participants the opportunity to

review and verify their response to the interview questions via their transcript. The

participants reported no change to their interviews.

Organizing data: This step involved entering the transcripts into MAXQDA, a qualitative

and mixed methods data analysis software that is designed to assist researchers with

processing and organizing qualitative research data (Burns, 2016). MAXQDA helped me

to code the interview data and develop themes that correlated with the theory-based

research questions. I identified all themes and phrases that could be associated with the

theme. I inserted the phrase that was developed into the search field. Once MAXQDA

identified the phrase, I copied and pasted the entire sentence and placed it under the

theme. This process took place for each phrase that was developed.

Categorizing: In this step, using the analysis from MAXQDA and handwritten notes, I

created a table of codes that included categories and themes (listed below) that were

developed from the transcripts to assist with recording responses from the participants.

Constructing and organizing data: In this step, I used the information from the

spreadsheet and the analysis to further develop interpretations and descriptions of the data

by comparing my notes and software output. I remained aware of the importance of the

richness of the collected data. I ensured that the EDs lived experiences were compatible

and explicitly expressed in the complete transcription via the code and recode technique.

I enhanced dependability through triangulation.

My role as a researcher was to listen and understand the lived experiences with

EDs working in nonprofit human service organizations, while completing an in-depth

exploration into the essence of nonprofit ED’s perceptions regarding ensuring transparent

and ethical financial operations and by adhering to the recommendations of the SOX Act.

The interview protocol used in this study was pretested by interviewing several

participants that were not included in the study but met the criteria needed to participate

in the study. The pretest was used to test the credibility of the data instrument with

revisions made according to the results of the pretest. The population targeted for the

study was selected based on their job classification and number of years of experience.

Since the inclusions were met by the participants in the study, the data obtained were

within the scope of the research objective. Focusing solely on the data gathered from

interviews, my bias or influence on the research study was limited by strictly gathering

information from each of the interview transcripts.

The specific categories and themes generated the following information from the

data. Based on the structural and thematic coding, the following seven categories were

developed: (a) perception of financial operations/management, (b) adherence to SOX

Act, (c) use of prior guidelines, (d) motivation to use SOX Act, (e) perceptions of ethical

operations, (f) leadership styles, and (g) levels of use of SOX Act.

EDs’ Perceptions of Financial Operations/Management

The specific code that emerged from the data regarding the EDs perceptions of

financial operations/management within the organization was activities of being

transparent. The responses included (see Figure 1) independent/competent audit

committee, responsibilities of auditors, certified financial statements, prevention of

insider transactions and conflict of interest, internal control, whistle blower protection

policy, and document destruction policy. Based on the responses from the EDs, the

category was transparency and was further broken down into the concept of governance,

as each ED explained what might enhance the likelihood of using the SOX Act in

nonprofits that had not implemented the SOX Act and the benefits of utilizing the seven

provisions.

Figure 1. EDs’ perceptions of financial operations/management

EDs’ Understanding of Adherence to SOX Act Provisions

The specific codes that emerged from the data regarding the understanding of

EDs’ adherence to SOX Act provisions were activities of being accountable. The

responses obtained were independent audit committee, financial expert accountant, board

members, annual audits, disclosure of financial statements, and auditor rotation. Based on

these answers, the category of accountability was developed and further broken down

into the concept of governance and providing ethical financial operations to others. As

EDs Perceptions of

financial

operations/managment

practices

Having a

competent

audit

committee

Written

responsibilities

of auditors

Certified

financial

statements

Prevention of

insider

transactions and

conflict of

interest

Internal

controls

Use of whistle

blower &

document

descruction

policy

Transparency

shown in Figure 2 below, each of the 12 participants indicated that their perception of

efficacy of accountability practices was directly related to improving leadership and

ethical financial operations in human service organizations.

Figure 2. Adherence to SOX Act

Use of Prior Guidelines

The specific code that was generated from the data referencing the use of the SOX

Act was implementation of provisions. Each participant was asked the following probe:

“When did your organization implement the SOX Act?” The responses (see Figure 3)

ranged from 6 months after the SOX Act was created to the NPO already having similar

guidelines in place prior to the SOX Act. Based on these responses outlined in the figure

below, the category remained accountability and was further broken down into the

concept of management practices, as each participant indicated that adherence to

Adherence

to SOX Act

Independent

Audit

Comittee

Financial

Expert

Accountant

Board

Members

Annual

Audits

Disclosed

Financial

Statements

Auditor

Rotation

Accountability

Practices

financial accountability requirements and the interconnectivity with other management

practices are beneficial to their nonprofit leadership effectiveness.

Figure 3. Use of prior guidelines

EDs’ Perceptions on Motivation to Use the SOX Act

The specific code that emerged from the data regarding the perception on the

motivation to use the SOX Act in NPOs that had not yet implemented it was reasons to

implement the SOX Act. The responses included (see Figure 4): enhancement of prior

guidelines, education, training, knowledge of success, and continued funding. Based on

the responses from EDs, the category was motivation to adhere to the SOX Act. Each ED

gave valid reasons for all NPOs to adopt and implement all seven provisions of the SOX

Act. One ED stated that education and training might increase the likelihood for NPOs to

adopt the SOX provisions. Another ED stated just the mere fact that it could result into

continued funding for the nonprofit as well as providing compliance and transparency.

Use of

prior

guidelines

No written

financial

guidelines in

place

Added SOX

guidelines that

were not

implemented

Similar

Guidelines

in place

prior to SOX

Act

Enhanced

other

guidelines to

mirror SOX

Act

Continued the

Use of funding

source's

guidelines in

addition to

SOX

Continued use

of previous

guidelines after

implementation

of SOX

Figure 4. Motivation to use the SOX Act

EDs’ Perceptions of Ethical Operations

The specific code that emerged from the data regarding EDs’ perceptions of

ethical operations was the meaning of being ethical. The response included (see Figure

5): Christian values, honesty, integrity, being good stewards over funds, operating in a

way that is transparent to donors, trust, and donor confidence. Based on the response

from the participants, the category was key moral principles and was further broken down

into the concept of behavior characteristics and skills as each participant described what

he or she believed the position and duties were in regard to making ethical decisions

regarding the financial operations of the organization.

Motivation to

use SOX Act

Enhancement of

prior guidelines Education Training Knowledge Continued

funding Auditors

making it a

priority

Benefits of

SOX

Figure 5. EDs’ perceptions of ethical operations

Leadership Styles Characteristics

The specific codes that emerged from the data regarding EDs’ leadership were

leadership styles practices. The response obtained were stewardship, governance,

empowerment, exceeds expectation of needs, and focused on the process. Based on the

responses from the EDs, the category was leadership characteristics and was further

broken down into the concept of influence of leadership styles as each ED indicated his

or her leadership styles and the influence that it has on organizational and financial

stability. One ED stated the importance of exceeding the expectations of needs. Two

other EDs talked about the importance of stewardship of the funds, whereas another ED

focused more on the process rather than the personality or motivation to others. He stated,

“If the process works, everything else will be efficient.”

EDs perception

of ethical

operations

Christian

values

Honesty

and intergrity

Being good

stewards

over funds

Operating in a

way that is

transparent to

donors

Trust Donor

confidence

Stewardship

Figure 6

Leadership style characteristics

Levels of Use of the SOX Act

The specific code that was generated from the data regarding the level of use of

the SOX Act was implementation of the SOX Act because each response revealed which

provisions were adopted and why their organization adopted the seven provisions. The

responses included (see Figure 7): adopted all 7 provisions, enhanced/ added previous

guidelines, sustainability, donor/community confidence, fulfill the needs of the

community, and requirement from other funders. Based on the responses from the EDs,

the category was commitment and further broken down into the concept of passion and

trust and wanting to fulfill the needs of the community as well as keeping the confidence

of the donors.

Leadership

Styles

Stewardship

Transformational Leader

Governance Empowerment Exceeds

expectation of

needs

Focused on

efficiency of

the process

Transactional

Leader

Leadership

Characteristics

Figure 7. Levels of use of the SOX Act

Treatment for Discrepant Cases

Researchers should first address the issue of missing data and non-response

errors. Peugh & Enders (2004) suggests two techniques of dealing with missing data, i.e.,

pairwise deletion and list-wise deletion. Research participants had the opportunity to opt

out of the research at any time (Patton, 2002); however, no participant requested to

withdraw from the study. Recognizing and analyzing discrepant data is key in validity

testing, as any data which cannot be explained through interpretation can present defects

in results of the study.

Evidence of Trustworthiness

To provide evidence of trustworthiness, as demonstrated in Table 3, interview

transcripts, a codebook, handwritten notes, audio recordings, and triangulation were used

to ensure accurate validation and captivity of the intended communication. Credibility

and transferability were achieved with direct quotes. Direct quotes assisted with

Levels of

Use of

SOX Act

Adopted

all seven

provisions

Enhanced/added

guidelines

Sustainability Donor and

community

confidence

Fulfill the

needs of

community

Requirement

from other

funders

Guidelines

implemented

& Why?

providing perceptions to each interview question. Transferability was also obtained by

purposeful sampling and providing thick description in the form of direct quotes so that

readers could make generalizations. Dependability was provided via the interview

transcripts, which provided evidence of the exact words from each participant. In

addition, the hard copy and electronic documents will be secured in a file for five years.

Confirmability was achieved by providing a copy of the transcript to each participant to

confirm accuracy of response, and to ensure confirmability. Intercoder reliability via

thematic analysis was also used to ensure confirmability.

Table 3

Criteria for Trustworthiness of Qualitative Research

Criteria Evidence

Credibility Direct quotes from participants,

interview transcripts, triangulation

Transferability Purposeful sampling, thick

description

Dependability Audit trail

Confirmability Interaction with dissertation

committee, inter-coder reliability

(thematic analysis), providing

participants with a copy of interview

transcript

Results

The research question in this study explored the lived experiences of EDs and

their adherence to the SOX Act. The following research questions guided this research

study:

1. What are ED experiences relative to adhering to SOX requirements related to

nonprofit organization ethical behavior in financial reporting and

management?

2. How does the level of use of the SOX Act recommendations differ and why

according to transformational, transactional, or laissez-faire leadership styles?

Answering the research questions could provide useful information to improve leadership

qualities in EDs and efficiency and effective ethical financial operations in NPOs.

I classified the themes into two categories according to their relationship to the

research questions. The first category related to Research Question 1, and the other

category related to Research Question 2. The first category of themes included:

I. Transparency/Accountability Practices

Each ED explained that using the SOX Act meant being transparent and

accountable, and abiding by such provisions as having a competent audit committee,

disclosed certified financial statements, conflict of interest and insider transaction

prevention, internal controls, and written whistle blower and document destruction

policies. Eleven of the 12 EDs stated that their organizations used the SOX Act. ED3

explained that the organization was more of a faith based nonprofit organization and did

not have any written guidelines for financial transparency. ED3 stated, “We use Christian

values in hopes to be ethical, open and honest, so there is no need for any guidelines”

(ED3, personal communication, April 4, 2018). When asked when the NPO implemented

the SOX Act, ED6 stated, “Probably 6 months to a year after SOX came out, but we have

been doing some of those things before” (ED6, personal communication, March 20,

2018). Each ED whose NPO used the SOX Act explained the accountability practices

used in their NPO. Each ED referred to using an independent audit committee, expert

financial accountant, board members, and rotating auditors. ED11 indicated that his NPO

rotated auditors every 5 years. He also stated “Our 990 form and tax forms are reviewed

and approved annually” (ED11, personal communication, April 4, 2018).

II. Use of Previous Guidelines

Each of the EDs stated that their NPOs had prior guidelines in place for financial

transparency; however, ED3 stated that her NPO did have “financial transparency” (i.e.

disclosure of financial statements, board approval for spending, annual audits, and an

accountant that keeps up with every dime that is spent), but does not have any written

financial guidelines in place. She further discussed that they were different from other

human service NPOs, because their funders were various churches, and they expected the

funds to be spent. There were various responses to whether the NPOs continued to use

prior guidelines after implementing the SOX Act. Whereas others stated that they

continued to use prior guidelines after the implementation of SOX, ED7 stated, “We

added the whistle blower policy, and it increased internal controls as far as financial

management” (ED7, personal communication, April 5, 2018). ED2, ED5, and ED8 stated

that their NPOs updated their guidelines along the way to mirror the SOX Act. ED10 and

ED11 discussed how SOX enhanced their previous guidelines.

The following category of themes represents participants’ responses in relation to

Research Question 2.

I. Benefits of the SOX Act

Each ED explained the importance of NPOs using the SOX Act. The majority of

the responses centered around education, board training, continued funding, enhancement

of previous guidelines, knowledge of the requirements, and auditors making it a priority.

ED1 focused on training and education, by stating that board training will allow NPOs to

know what requirements are appropriate and not appropriate. ED11 stated, “The

requirements are out there, so the auditors have to make it an absolute priority” (ED11,

personal communication, April 4, 2018). ED12 explained that if board members are

familiar and comfortable with and accustomed to dealing in a business setting, NPOs are

more likely to follow the SOX guidelines. ED10 stated, “Training and education might

get them to start using the SOX guidelines. Just the mere fact of the funding sources, if

you can’t produce your financial manual or 990, you can’t get continued funding and

could lose funding” (ED10, personal communication, April 5, 2018). ED7 also

referenced the benefits of using the SOX Act is to have continued use of funds and public

donations. He further stated, “Then they need to be good stewards by being transparent,

having checks and balances, and maintaining audits” (ED7, personal communication,

April 5, 2018). ED9 explained the importance of using the SOX Act as a tool to increase

funding and strengthen internal controls. ED4 stated, “Adopting the SOX Act will

enhance NPOs” (ED4, personal communication, March 29, 2018). ED2 explained that

the importance of using the SOX Act is having policies and procedures in place to be

accountable to donors and those who give. ED2 further stated the using SOX “keeps

down the increase of misappropriated funds and makes you have a stronger NPO” (ED2,

personal communication, April 3, 2018).

II. Levels of use of SOX Act by Leadership Styles

Among the 12 EDs that were interviewed, 11 EDs reported a preference for

transformational leadership, and 1 ED reported a preference for transactional leadership.

ED1 reported a preference for transformational leadership and stated that her NPO used

all seven provisions. She further discussed why by stating, “We have to show them how

well their money is being used and that we are good stewards of the funds” (ED1,

personal communication, April 11, 2018). ED2, who reported a preference for

transformational leadership, indicated that her NPO used all seven provisions. She also

added that they have a board of directors with a treasurer and a budget committee, along

with an annual external financial audit. Her reason for using SOX was the fulfillment to

the community. ED3 reported a preference for transformational leadership. Although she

does not adhere to the responsibilities of auditors, whistle blower protection/document

destruction policy, she based her choice of using most of the SOX provisions on donor

and community confidence, as well as a requirement from donors. ED4, who reported a

preference for transformational leadership, contributed her NPO decision to using the

SOX Act with enhancement to the organization. She stated, “Transparency is trust”

(ED4, personal communication, March 29, 2018). She further explained that the goal as

an NPO leader was to fulfill the need of the community. ED5, who reported a preference

for transformational leadership, indicated that her NPO used all seven provisions of the

SOX Act. She contributed their decision to sustainability and requirement of funders. She

stated, “When you are an NPO and you are dealing with people’s money, it is due

diligence to handle it properly” (ED5, personal communication, March 29, 2018). ED6,

who reported a preference for transformational leadership, explained generally wanting to

have good financial standards, which goes hand in hand with SOX, as the reason for

using the seven provisions of the SOX Act.

ED7, who reported a preference for transactional leadership, indicated that his

NPO follows all of the seven provisions of the SOX Act. His reasoning for following

these guidelines was donor’s confidence. He further explained another reason - trust. He

stated, “The greatest commodity is trust. If people don’t trust your NPO they will not

donate” (ED7, personal communication, April 5, 2018). ED8, who reported a preference

for transformational leadership, explained that using the seven provisions of the SOX Act

helps make governance a top priority in her NPO and credits its potential to uplifting the

quality of NPOs and increase across the board. ED9, who reported a preference for

transformational leadership, indicated that her NPO used all seven provisions of the SOX

Act. Her reasoning for using these provisions was the passion to do the right thing and

maintain integrity. She further explained that SOX is a good way to hold NPOs

accountable. ED10, who reported a preference for transformational leadership, adheres to

the seven provisions of the SOX Act and credits that not only is it a requirement from

funders, but also it ensures good internal controls are in place, such as reliable financial

reporting and adherence to policies and procedures. ED11, who reported a preference for

transformational leadership, indicated his NPO’s adherence to all the provisions of the

SOX Act by explaining that his NPO used these provisions long before the SOX Act was

implemented; however, adopting these provisions enhanced their guidelines and put them

into a semi-concise document. He stated, “It made it easier to hammer it home for the

people involved” (ED11, personal communication, April 4, 2018). ED12, who reported a

preference for transformational leadership, credited her reason for using the seven

provisions of the SOX Act to accountability and transparency.

Discrepant cases were addressed by using pairwise deletion technique. This

involved partial deletion of the missing entries in the participant responses. Although the

selected participants were given the option to opt out of the study at any time, none of

them requested to withdraw.

Summary

The purpose of this study was to contribute information about EDs’ perceptions

of ethical financial operations in nonprofit organizations. This study was intended to

demonstrate that EDs who reported a preference to transformational leadership were

more likely to adhere to the seven provisions of the SOX Act pertaining to NPOs. My

premise was that effective leadership in NPOs are most represented by transformational

leaders. I contended that leadership styles are interrelated to the influence of the SOX

Act. I specifically focused on the lived experiences of EDs who reported a preference

with transformational, transactional, and laissez-faire leadership styles and their

perceptions of the SOX requirements related to nonprofit organization’s ethical behavior

in financial reporting and management.

The data for this study was gathered using the four questions on the interview

guide. The first three questions provided information about the lived experiences of

transformational leaders relative to adhering to the SOX Act. The first interview question

asked EDs whether their NPOs used the SOX Act. Each of the 12 EDs related their

answer back to the theme of transparency/accountability practices. Each ED described the

SOX Act as a tool for ethical financial transparency. A probing question asked when the

NPO implemented the SOX Act, and the responses ranged from 6 months after SOX was

created to SOX providing enhancement to similar and previous guidelines. From the

interviews, I learned that EDs in human service NPOs are good stewards over the funds

that they receive from their donors/funders. They are also likely to use the seven

provisions of the SOX Act for internal controls, transparency, and accountability. The

EDs understood the importance of donor confidence, trust, integrity, and governance.

The accountability practices theme was also derived from EDs’ responses on

question one regarding the use of the SOX Act. The EDs responded by indicating their

financial obligation to adhering to the SOX Act (i.e., rotation of auditors, disclosed

financial statements, and independent audit committee). Accountability was also

indicated by some of the responses that SOX enhanced the guidelines that were already in

place prior to the SOX Act.

The continued use of previous guidelines theme was developed as I learned from

this research that each NPO had previous guidelines in place for financial transparency,

and continued to use them even after SOX was implemented. The responses provided to

the question of “Prior to implementing the SOX Act, did your organization have any

guidelines in place for financial transparency?” were: no written financial guidelines,

which generated from an ED of a faith-based NPO who received funds from various

Christian churches and relied on ethical and Christian values as a means for transparency

and accountability; enhanced previous guidelines to mirror SOX provisions; and

continued use of funding sources requirements in addition to the SOX Act.

The benefits of using SOX Act theme was derived from the EDs’ responses on

question three regarding what might enhance the likelihood of using the SOX Act in

NPOs that had not implemented the Act. The EDs responded with enhancement of prior

guidelines, having the education and training on the various requirements, and the

knowledge of why it is important for ethical financial transparency. Several EDs’

responses focused on continued funding and auditors making the provisions a priority for

NPOs.

The stewardship theme was developed as I learned from this research study that

each ED perceived ethical financial operations as operating in a way that is transparent to

donors. Leadership characteristics was developed as a theme through conversation with

EDs who reported a preference for transformational and transactional leadership.

Leadership characteristics such as governance, empowerment to individuals, exceeding

expectations of needs, and the focusing on the efficiency of the process led to the

difference in how many of the seven provisions were implemented by each leadership

style and why that NPO decided to implement those provisions in their NPOs. Literature

suggested there was a lack of empirical evidence on leadership styles and the influence it

has on the adherence to the SOX Act. The responses revealed that whether the ED’s

preference was transformational or transactional, each of them adhered to the ethical

behaviors of the SOX Act recommendations. Although the transactional leader focused

more on the efficiency of the bottom line, ensuring ethical financial transparency was still

paramount. However, to confirm my premise that transformational leaders are more

likely to adhere to the seven provisions of the SOX Act, this research study revealed that

11 out of 12 EDs identified with being a transformational leader and the other identified

as a transactional leader.

This chapter included the research setting, demographics, data collection methods,

data analysis, evidence of trustworthiness, and the results of the study. In chapter 5, I

reiterate the purpose and nature of the study as well as why it was conducted. In addition,

I discuss the interpretations of the findings, limitations of the study, recommendations,

and implications for further study.

Chapter 5: Discussion, Conclusions, and Recommendations

Introduction

This qualitative study was conducted to explore the lived experiences of EDs who

self-reported a preference to transformational, transactional, or laissez-faire leadership,

and whether the SOX Act had an influence on ethical financial operations. I explored

how EDs in NPOs leadership styles related to the NPOs’ adherence to the seven

provisions of the SOX Act. This exploration was achieved by examining their

understanding of transparency and accountability practices in the organizations for which

they work.

Data from the interviews showed that transformational leadership is widely used

in human service NPOs and NPOs were more inclined to use the SOX Act to manage

their financial operations. This finding was supported by additional research by scholars

such as Jones (2013) and Thomas and Bendoly (2009), whose studies examined

leadership styles and financial performance. The current results indicated that

transformational leaders can have a positive influential effect on financial operations in

NPOs. The EDs understood transparency and accountability practices to include showing

donors how well their money is used and that they were good stewards over funds and

maintaining strong internal controls. The EDs also described transparency and

accountability as exceeding the needs of the community. Likewise, EDs described their

understanding of transparency and accountability as doing the right thing and maintaining

integrity. Lastly, EDs felt that adhering to the SOX Act helped their organizations to have

continued funding and ensured that their accounting and auditing department understood

their role and responsibility.

Interpretation of the Findings

My starting point with this study was recognizing a need in NPOs to improve

ethical financial operations and a gap in the literature researching EDs leadership style

and the use of SOX Act and the effect that leadership styles have on executive leaders

and ethical financial operations. The exploration process began with examining the

nonprofit ED’s effectiveness, style of leadership, and capabilities accountability and

transparency, and its relationship to nonprofit sustainability. This study has added to

nonprofit literature by documenting EDs of human service NPOs lived experiences with

transparency and accountability practices and their interpretation of gaps that exist

between leadership styles and the use of the SOX Act.

The research question asked, among nonprofit EDs who reported preferences for

transformational leadership styles, what were the lived experiences of these leaders

relative to adhering to SOX requirements related to nonprofit organizational ethical

behavior in financial reporting and management? The phenomenological approach

selected to guide this research aided in gathering information on issues congress outlined

as standards to improve transparency and accountability to ensure the effectiveness of

ED’s actions and goals. Avolio and Bass’s (2004) full range leadership model helped to

discover and analyze the effect of a transformational leader, in contrast to transactional

and laissez-faire leaders.

The full range leadership paradigm has been used in prior studies to determine

EDs’ key to success in NPOs, along with their commitment and survivability. For

example, Redick et al. (2014) used the transformational, transactional, and laissez-faire

leadership and NPO employees’ perceptions in predicting their performance efforts, their

satisfaction, and effectiveness of the leaders. The findings indicated that transformational

leadership had the most influence on NPOs perception of leadership effectiveness and

organizational performance (Redick et al., 2014). Their research supported my premise

that transformational leadership had the most influence on leadership effectiveness and

EDs’ efforts to exceed expectations in their NPO’s. The participants of this current study

preferred leading with the transformational leadership style.

In another study conducted by Mohammed et al. (2013), the full range leadership

model was used to determine the link between the transformational, transactional, and

laissez-faire leadership styles to determine the link between those leadership styles and

organizational commitment. This study found that transformational leadership was linked

to organizational commitment through their key characteristic of providing direction and

encouragement via inspirational motivation.

It was important to determine the correlation between leadership style and the

SOX Act, which helped to support the research question and premise that a

transformational leader style was viewed by most experts as the most effective in

motivating and performing with the highest standards (Adoma, 2016). Other authors

who made this contention included Bahrami et al. (2012) and Muhl (2014) who

contended that transformational leaders go beyond their self-interest to reach

organizational performance goals. Hassell’s (2013) study supported the influence of

transformational leadership on reducing staff turnover. Breevaart et al. (2014) found

that transformational leadership is used more often and is the most effective in NPOs.

Top et al. (2015) simply stated that transformational leadership has become more

relevant and is becoming the most popular style of choice. Eady-Mays (2016) and Bell

(2016) examined the relationship between leadership styles and ethics. Eady-Mays

(2016) revealed that transformational leaders have a significant influence on the

outcomes of an organization. Bell (2016) contended that this significant influence could

enhance educated decision-making, restore public rapport and confidence in NPOs.

This study provides qualitative information from the perspective of the EDs

regarding the strength and likelihood of embracing the use of a tool that can improve

ethical financial operations. The specific standards focused on were leadership styles,

financial transparency, accountability, ethical operations, and use of SOX Act. Findings

of this study focused on reported perceptions, best practices, knowledge and attitudes

about ethical financial operations to determine if practices performed by EDs, in their

opinions, focused on transparency, and accountability, leadership styles, and levels of

use of the SOX Act.

The specific standards were supported by the literature review and included

researchers such as Beal and Griffin (2012) and Baapogmah (2014) who conducted

studies on the challenges of financial accountability and operational controls in NPOs.

Both studies focused on financial transparency and internal controls over financial

reporting. Kaserer et al. (2011) indicated that the lack of transparency and

accountability were the root cause of the decrease in ethical operations. Nezhina and

Brundney’s (2012) study found that NPOs who implement governance structure, such

as the SOX Act, improves accountability and transparency and can also demonstrate

effective, ethical decision-making.

Leadership Styles

To explore which leadership style was more inclined to use the SOX Act as a tool

to enhance transparency and promote ethical financial operations in NPOs, I chose the

full range leadership model. This construct was used to discover and analyze the effect of

transformational leadership style, in contrast to transactional and laissez-faire styles. I

began my prescreened interview questions by getting EDs to identify which leadership

style best described them. Out of the 12 interviews conducted, 11 EDs reported a

preference to transformational leadership and one reported a preference to transactional

leadership. There were no EDs who reported a preference to laissez-faire leadership.

Whether transformational or transactional, one of the main topics that the EDs

highlighted was the importance of stewardship, trust, accountability, and transparency.

Examples of their responses included “We have to show them how well their money is

being used and that we are good stewards of the funds” (ED1), “Leadership is about

accountability” (ED2), “I am known as a motivator, and I want you to be all that you can

be, but I also would like to see the organization move forward as well” (ED3),

“Transparency equals trust, and we have to be transparent for donors to give to us”

(ED4), “Our first priority is focusing on exceeding the needs of people that you are

working for” (ED5),and “I want to do the right thing and maintain integrity, and SOX is a

good way to hold NPOs accountable” (ED9). The ED’s response is supported by

O’Connell and Bligh’s (2009) study on surviving from an ethical scandal. They

contended that leaders set the tone at the top of an organization and is very influential

towards the reputation of an organization. O’Connell and Bligh continued by stating that

setting an ethical tone produces a positive environment and decreases the potential of

scandal. Williford and Small’s (2013) research on the relationship of operating standards,

accountability, and transformational leadership reveled that NPOs with these standards

implemented can provide effective ethical decision-making and financial operations. The

EDs’ responses and the support given by the literature indicates the importance of using

the SOX Act as a tool to measure leadership effectiveness, and the influence that it has on

ethical decision-making and financial operations within NPOs.

The recurring focus by EDs on effective leadership demonstrates that ethical

behavior in leaders are morally synthesized actions that produce the same benefits of

organizational success but must be performed properly within the degree needed by the

individual or organization to be effective (Williams & Seaman, 2016). In addition to the

focus, it is also important to note that the full range leadership model defined leadership

style as one of the predominant elements that influence organizational stability and

sustainability (Slater, 2015). According to Wongyanon et al.’s (2015) study that focused

on the influence of leadership style of chief executives to organizational performance in

NPOs, the results indicated transformational, transactional, and laissez-faire leadership

styles had a major influence on the success of NPOs with transformational being the

strongest. Transactional leadership was rated as moderate and laissez-faire leadership was

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declared the weakest (Wongyanon et al., 2015). The reviewed literature highlighted

definitions of three distinct leadership styles, and the majority of the reviewed studies

support that leaders often operate NPOs at the extreme of transformational leadership.

Transparency/Accountability

The EDs in this study understood the differences in the three leadership theories

discussed in the literature review and the importance of effective leadership styles as it

relates to ethical financial operations. Through this study, I found that transformational

leadership was linked to organizational commitment through key dimensions, such as

implementing accountability and transparency as well as inspirational motivation. The

EDs in this study understood accountability practices used in NPOs as a tool of

reinforcement that generates ethical behavior for management and board members. An

organization cannot be accountable without transparency. EDs were asked about their

transparency and accountability practices used in their NPOs. Transparency and

accountability were measured by the levels of use of the SOX Act within the NPO.

Research Question 2 built upon the existing theory by depicting which leadership style

was used the most and how their experiences with the SOX Act differed among EDs with

transformational, transactional, and laissez-faire leadership styles. All the EDs responses

indicated an importance in operating with policy and governance to sustain transparency

and accountability. Findings of the current study confirms knowledge that the SOX Act

can be useful in finding the correlation between leadership style and ethical financial

operations. In an exploratory study on determinants of transparency in NPOs, Behn et al.

(2010) found that ethical compliance along with accountability and transparency were the

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primary goals for the SOX Act to restore confidence and rapport and increase

accountability standards for executive directors in NPOS. ED7 stated that maintaining

accountability and transparency within NPOs gives donors confidence that the NPO is

using funds appropriately. He contended that if policies and procedures are not in place

then it leaves the leaders and the organization suspect. ED7 informed me that “The

greatest commodity is trust” and if people do not trust the NPO, then they will not donate.

ED7 continued to say that if the NPO would like to continue to receive funding, NPOs

must do what they can to show transparency and accountability. Taken together, the

importance of ethical operations and transparency in NPOs is clear.

Ethical Operations

While unethical behavior in executive leaders is magnified by not making sound

decisions, in regard to ethical financial operations in nonprofit organizations, it is

important to explore the ethical standards that encompass the attributes of integrity,

honesty, and financial responsibility. EDs were asked about their adherence to the SOX

Act and their purpose for using it. The EDs’ responses reflected the purpose of

maintaining trust and confidence from donors as well as the community. ED2 responded

that it is all about accountability to the public and the people served. ED5 responded that

people want to know where their funds are going, and if NPOs want to have donors and

community support then being ethical offers a level of comfort to people. Goode’s (2016)

study on employees’ perception of ethical behavior of the leadership within NPOs

provided findings that if EDs are conducting themselves counterintuitively to what the

ethical policies and standards exemplify, the atmosphere for employees and stakeholders

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could destroy the integrity of the organization. One of my pre-interview questions

required EDs to identify which one of the Full Range Model leadership style best

described them. Eleven out of 12 reported a preference for transformational leadership. In

a case study by Godfrey (2013) on effective leadership and the factors that influence

leaders’ ethical behaviors in decision-making, the researcher found that ethical behaviors

in NPOs are influenced by the ED’s leadership style. Godfrey’s study examined the

influence that ethical behavior has on effective leadership in NPOs. Similar to my study,

Godfrey’s study used the same theoretical framework of transformational leadership as

its premise for effective leadership and ethical behavior.

Levels of Use of SOX Act

Therefore, research into the levels of use of the SOX Act is important because

vital decisions regarding ethical financial operations are based on the levels of use of the

SOX Act to ensure financial accountability and transparency. The level of compliance

within this study refers to the NPOs adoption and implementation of the seven SOX

provisions. To determine the difference in how many of the recommendations have been

implemented by EDs who report a preference to transformational, transactional, and

laissez-faire leadership and why, EDs were asked which of the provisions their

organizations use. The responses indicated that 11 out of 12 EDs used all of the

provisions of the SOX Act. ED3 stated that her NPO is a faith-based organization, which

means that it is totally Christian based. Her response to adhering to the SOX Act was that

her NPO used Christian values in hopes to be ethical, open, and honest and did not see a

particular need for guidelines. For non-faith based NPOs, SOX’s major intent is its

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liberty to ensure the execution and effectiveness of ED’s action and goals relative to

financial operations. Based on the literature and current findings, there is a need to

address articulation of accountability and transparency practices at the EDs level to

ensure governance and the implementation of policy. For instance, Godfrey’s (2013)

study indicated that ethical behaviors in NPOs are influenced by ED’s leadership styles.

His study was based on the transformational leadership theory and revealed that

transformational leadership has an influence on an organization’s ability to perform with

integrity and high ethical standards.

In conclusion, findings of this study indicated that transformational leaders are

more inclined to use the SOX Act as a tool to ensure ethical financial transparency in

NPOs. Based on the findings of this study, EDs understand and perceived effective

leadership in NPOs to be an influence of the use of policies and procedures such as the

SOX Act. EDs perceived the importance of ethical financial operations in their awareness

of accountability and transparency practices. EDs understand the value of implementing

the seven provisions of the SOX Act because each ED ensured that audit committees

have financial competency, conduct an objective review of the organization, and allowed

leaders to make sound decisions. If EDs are implementing such actions, they are being

influenced by the provisions of the SOX Act.

Limitations

There were several limitations to this study. First, the study did not produce

generalizable data as is typical for phenomenological research. Second, not all

participants effectively answered the questions due to the operations of a faith-based

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NPO. There were a limited number of participants with faith-based operations to

represent a sample of why all seven of the SOX provisions are not implemented within

the organization.

The data was not generalizable because the sample used to obtain the data was

small with varied levels of experience. Participants were provided with a screener guide

to determine if they were eligible for participation. The participants had to have worked

as an ED for at least 3 years, have an NTEE code of P20, and reported a preference for

transformational, transactional, or laissez-faire leadership. Second, because of the varied

levels of experience and the differences in organizations, not all questions were answered

effectively during the interviews. As I was transcribing and coding the interview

transcripts, I noticed the individuals with longer work history were more knowledgeable

about the SOX Act and the influence it had on effective leadership, and had better

developed perceptions to articulate and gave more meaning to their responses. Lastly, I

chose participants from small, medium, and large NPOs with various funding sources and

greater diversity because it generated more participants with a diverse response to

interview questions. Limitations could have been overcome by not limiting the

population to a specific NTEE code.

Recommendations

Based on the aforementioned limitations, I would recommend using a sample of

participants with at least 10 years of experience as an ED to obtain a deeper level of

knowledge. Based on my experience with the participants of this study, those having over

10 years of executive leadership experience were able to compare and contrast their

105

guidelines used prior to the SOX Act with the enhanced guidelines implemented after the

SOX Act was adopted. This recommendation will allow participants with 10 years or

more experience to effectively verbalize their perception based on the vast experience

working in NPOs had provided them. Van Maanen (2017) contended that the importance

of a phenomenological exploration is focusing on how a specific phenomenon is lived out

in the consciousness. The experienced ED had clearly developed perceptions about

efficacy and was able to discuss other experiences that helped them to be more successful

with providing ethical financial operations with the NPO.

I would also recommend expanding the research to NPOs with other NTEE codes.

This would make the data more generalizable and provide more diverse level of

experience. I would suggest participants in a medium to a large NPO. This will generate

more NPOs that adhere to the SOX Act; whereas, smaller NPOs may decide to adopt

specific provisions of the SOX Act and may have specific operational and financial

guidelines to adhere to from their funding sources.

I would also recommend including NPOs that do not adhere to all seven

provisions of the SOX. This will allow researchers to see if there is a difference in the

influence of adhering to only specific provisions of the SOX, versus all seven provisions.

Implications of Social Change

The research findings contributed to social change by adding knowledge on

implementing strategies that will result in the enhancement of quality leadership in EDs

that may ultimately result in more efficient and effective ethical financial operations in

NPOs. Sontag-Padilla et al. (2012) stated establishing financial sustainability should be

106

viewed by NPOs as a dynamically continuous process. This study's focus on a small

number of EDs who had been working for a minimum of three years warrants attention in

interpreting the findings. However, with the consistency in results, implications can be

drawn on the understanding EDs have about how their individual contributions promote

the goal of ethical financial operations based on an examination of their understanding of

accountability and transparency practices and performance measurements.

Implied in the findings is the notion that EDs desire support and funding from

various funding sources to help sustain their missions and financial operations. Based on

the participants’ perspectives in this study, I conclude that integrating SOX requirements

and best practices into NPOs has the potential to improve efficacy in ethical financial

operations and help them to reach higher levels of productivity. By applying the

perspective of the EDs, researchers, practitioners, NPO boards, and others can use the

information to design tools and initiatives surrounding inefficiency in ethical decision

making, financial transactions, and audit procedures. For example, NPOs’ independent

auditing firms should make the SOX requirements an absolute priority. As long as the

auditors are ensuring that the NPOs are following these guidelines, operations should

flow smoothly. EDs could take note that more time should be spent on educating and

training their staff on accountability and transparency practices and how these practices

affect NPO sustainability and reputation.

Empirical findings were mixed with some indication that the adoption of SOX in

NPOs did not have a tremendous impact on the organization. The findings stated that,

typically, nonprofit leaders behaved conservatively and maintained the status quo as well

107

as followed existing accountability practices regardless of SOX Act (Nezhina &

Brundney, 2012). However, other participants’ responses revealed that the

implementation of SOX Act did have an effect on their organizations. Nonprofit

employees are not given monetary compensation for performance measurements as

private employees would be, but findings suggested that increased education and training

on the benefits of continued accountability and transparency practices will keep the staff

abreast of policy and governance. The survival of NPOs depends on the implementation

of policy and governance as well as the knowledge of the policy being performed (Yang,

2011). Yang (2011) stated, “Governance of NPOs is determining the structure in which

an organization should select to create sustainability and knowledge transferred among

employees, managers, and leaders” (p.155). Data indicate that many of the EDs that

participated in this study understood that best practices and the SOX Act are used in their

NPO because it allows them to show their funders/donors that they are good stewards

over the money that they are being given. It also helps to gain commitment and trust from

funding sources and the community.

Geer, Maher, and Cole (2008) asserted that effective leaders are more inclined to

adhere to guidelines. Research reveals that NPOs that implement transformational

leadership operating standards and accountability proves that ethical decision-making and

transparency can be demonstrated more effectively.

Conclusion

My research into 12 NPOs revealed great support for what the literature purports.

Successful NPOs do require sound ethical financial practices, active funding sources,

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sound decision making and the capacity to innovate to be financially sustainable.

Achieving ethical financial operations is challenging without best practices, policy, and

governance; however, the value that NPOs provide is unquestionable. The essence of this

study is for EDs, board members, volunteers, auditors, and other staff to have the

knowledge and training of their NPO’s vital influence and support it has on their

communities. Another key essence of this study is the potential to change the perception

of nonprofit governance. This proactive approach will go a long way in preserving the

reputation of nonprofits and increase accountability standards while still continuing to

service their community.

109

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