Fraud in the Nonprofit Sector

• In Event: Management Accounting & Nonprofit

Abstract

This study examines the effects of fraud in nonprofit organizations and in the communities they serve. Using a comprehensive dataset of over 240,000 nonprofit tax returns from 2009 to 2014, we find donors decrease charitable giving following a disclosed fraud with an average decrease in donations of 5 percent in the year following a fraud event. Given the important role nonprofit organizations play in the communities they serve, we evaluate the spillover effects of fraud to geographic peer nonprofit organizations. We find an increase in donations to geographic peers, consistent with donors reallocating charitable donations away from nonprofit organizations that disclose fraud and toward other nonprofit organizations in the same community. We also examine the nonprofit responses to fraud and find that, on average, nonprofit organizations increase their spending on charitable programs following the revelation of a fraud, suggesting that management focuses on restoring trust with stakeholders by providing additional charitable services to the community. Collectively, our evidence suggests that the consequences of fraud extend beyond the affected nonprofit organizations and may have positive spillover effects for the local community.

Authors

• Michelle Hutchens, University of Illinois

• Amy G. Sheneman, The Ohio State University