The Accounting Errors of Public Charities: Characteristics, Predictors, and Consequences

• In Event: New Measure, New Data, and New Question

Abstract

This study comprehensively examines the accounting errors committed by public charities. Public charities report errors at a rate that is 60 percent higher than the rate of restatements among corporations. Most of the errors appear to involve basic mistakes rather than technical errors or intentional manipulations, and are commonly errors of omission. The errors often have low visibility in the financial reports issued by public charities, in apparent violation of auditing standards and IRS reporting rules. Internal control deficiencies greatly increase the probability of errors, while Big 4 and second tier auditors are associated with a significantly lower probability of errors. Finally, donations fall on average in the year following errors that have severe characteristics, and this effect is concentrated in the errors that are visible in IRS 990s. This study thus extends prior work on the accounting challenges faced by nonprofits and the causes and consequences.

Author

• Jeffrey J Burks, University of Notre Dame