The Effect of Governance on Nonprofit Reporting When Misreporting Is Difficult to Detect

• In Event: Nonprofit and Municipal Governance

Abstract

Abstract: Studying a sample of large U.S. nonprofits with relatively strong governance, we note that approximately one-fifth of these nonprofits do not report changes in program ratios although economic theory, existing cost structures, and changes in business operations suggest program ratios should vary. Prior research finds that nonprofits manage financial information to avoid reporting changes in program ratios possibly to influence donation and compensation decisions and to avoid regulatory intervention. This study, investigates whether boards of directors, audit committees, auditors, restricted donors, lenders, and state regulators detect and mitigate this reporting behavior. After conducting several sensitivity tests, we find that donors who restrict gifts are the only monitors that circumvent organizations from reporting zero program ratio changes, suggesting that these donors are the most effective monitor of nonprofit financial information. These donors appear to be more motivated and/or sophisticated to ensure the quality of financial reporting. Additional tests show that these donors are more effective when they have more control. Nonprofits under strong state regulation or long-term debt contracts, however, are more likely to report zero change in program ratios. These organizations may do so to circumvent regulatory costs.

Authors

• Andrea Alston Roberts, University of Virginia

• Qianhua Ling, Marquette University