Fraud in the Nonprofit Sector

• In Event: 3.01 Nonprofit Research Concurrent Session: Governance/Audit

Abstract

Research on fraud has primarily focused on the consequences of financial reporting misconduct in publicly traded, for-profit firms. We build upon this literature and examine the response of donors and nonprofit organizations following disclosure of a fraud. Using a comprehensive dataset of over 240,000 nonprofit tax returns from 2009 to 2014, we document a significant decrease in donations in the year following a disclosed fraud, with an average decrease in donations of 5 percent. This decrease is concentrated in organizations with weak governance and with fraud perpetrated by a member of the board of directors. We also document an increase in donations to geographic peers of nonprofits disclosing fraud, consistent with donors reallocating charitable donations to other nonprofit organizations in the same community. Last, we document a differential managerial response to the disclosed fraud. Among nonprofit managers, we observe an increase in charitable program expenses following a fraud event perpetrated by a board member and an increase in fundraising expenses following a fraud event perpetrated by a party external to the nonprofit.

Authors

• Michelle Hutchens, University of Illinois

• Amy Genson Sheneman, The Ohio State University