Governance and financial impression management in the non-profit sector: Evidence from UK charities

• In Event: Nonprofit Governance and Performance

Abstract

This paper seeks to investigate the features and role of governance mechanisms on the level of financial accountability in the context of UK charities. This is motivated by recent public concerns and research interest on the role of trustees in the charitable sector and questions as to the ability of trustee boards in effectively contributing to organizational strategy, performance, transparency and accountability. In parallel, recent studies suggest that charitable organizations may be managing their accounting, disclosure and reporting practices to display a better picture of accountability to an external audience, leading us to focus attention on the role of governance in discharging financial accountability. Drawing from the concept of impression management, we coin the term ‘financial impression management’ as an attempt by a charity to project an impression of financial probity and competence with a view to sway stakeholders and resource providers such as donors, funding agencies, and social investors. Consequently, and informed by the stakeholder and resource dependence perspectives, we assess whether UK trustees are able to mitigate financial impression management practices by examining the influence of governance characteristics and mechanisms on financial impression management, measured in this case by the proxy of discretionary accruals. Based on a hand collected sample of top 250 charities, our results firstly reveal that trustee board diversity, specifically with respect to gender, business orientation, experience and educational background, is extensive whilst a majority of organizations have audit committee and internal audit functions. Secondly, gender, ethnicity, and educational background have a positive association on financial accountability by restricting financial impression management, whilst the financial expertise of the audit committee is associated to lower financial impression management. The results assert the role of specific stakeholder-driven (trustee diversity) and resource dependence-led (expertise of audit committee) characteristics of trustee boards in ensuring that charities reliably fulfill their financial accountability to various stakeholders. The findings contribute to the scant knowledge on the composition of UK trustee boards and their role in the charity accountability process and have significant implications for various stakeholders such as (i) donors and funders in terms of how they assess the governance ‘risk’ of their funding/grant decisions and (ii) for charity policymakers in terms of the development of relevant guidance for the sector.

Authors

• TAM HUY NGUYEN, University of Southampton

• Teerooven Soobaroyen, University of Southampton