An Analysis of the Association of Nonprofit Hospitals’ Off-Balance Sheet Disclosure Management with Contributions

• In Event: Hospital Performance and Nonprofit Accountability

Abstract

This paper examines the associations of nonprofit (NP) hospitals’ off-balance sheet disclosure management with contributions. Several researchers find that donors’ decisions are based on an NP entity’s program ratio (Baber et al. 2001; Okten and Weisbrod 2000; Posnett and Sandler 1989; Weisbrod and Dominguez 1986) suggesting that managers have incentives to manipulate financial statement ratios to increase donations through off-balance sheet transactions. We are the first to differentiate between consolidate and unconsolidated entities within the NP hospital sector. Our research provides insight into the consequences of off-balance sheet related entity transactions and attempts to determine the economic significance of these transactions.
We find that hospitals, which do not consolidate but receive support or have affiliates, receive more donations than expected compared to hospitals that provide consolidated group returns. This suggests that incentive exists to present unconsolidated financial statements when receiving support from affiliates. Hospital managers utilize disclosure discretion in the NP industry and attract excess donations. Resources in the economy are potentially misallocated, financial decision makers are misled, and unconsolidated hospitals receive an unfair advantage over consolidated hospitals’ financial statements.
Our findings are useful to policy makers, researchers, watchdog agencies, and the Internal Revenue service (IRS) when considering fundraising expense allocations, in investigations of misreporting, and in the definition of the reporting entity. Our results inform regulators about economically significant resource misallocations and promote new regulation to close the gap between FP and NP consolidation regulation. We call on the FASB to reconsider consolidation guidance for NP organizations.

Authors

• Benedikt Markus Quosigk, Kennesaw State University

• Dana A Forgione, University of Texas-San Antonio