Internal Controls and Operational Performance of Nonprofit Organizations.

• In Event: Internal Controls and Firm Performance

Abstract

Prior literature documents a negative association between internal control deficiencies (ICDs) and subsequent contributions for nonprofit organizations (Petrovits, Shakespeare, and Shih 2011). However, there is a lack of understanding as to how ICDs impact donor behavior. In the for-profit environment, prior literature documents evidence of a spillover effect whereby ICDs negatively impact operational performance (Feng, Li, McVay, and Skaife 2014; Cheng, Goh, and Kim 2017). We examine this spillover effect in the nonprofit environment and model operational performance as a potential mediating variable between ICDs and subsequent contributions. Results demonstrate a robust negative association between ICDs and the charitable expense ratio (a key operational performance metric for nonprofits). We find that this association at least partly mediates the negative relationship between ICDs and subsequent contributions. Our results are relevant to donors and managers, demonstrating the pervasive impact of internal controls on a nonprofit’s ability to effectively execute its charitable mission.

Authors

• Nathan R Berglund, Mississippi State University

• Mikhail Sterin, Oklahoma State University