The Economic Consequences of Financial Audit Regulation in the Charitable Sector

• In Event: Not-For-Profit Audit

Abstract

I investigate how financial audit regulation in the charitable sector affects donor behavior. I propose that audit mandates alleviate moral-hazard concerns by (1) reinforcing donors’ belief that charities are monitored and (2) committing charities to obtain an audit ex post. My empirical strategy relies on variation in size-based exemption thresholds across states and differences in size driven by the nature of charities’ activities. Consistent with audit mandates reducing donors’ reliance on charity reputation, I find that donations are less concentrated on large, high-reputation charities. I show this reallocation of resources allows the charitable sector to serve more diverse geographic areas and social needs. In terms of the effect on willingness to give, I document that audit mandates are associated with a higher proportion of taxpayers who donate, especially among people with a high opportunity cost of time. However, I only observe a sizable impact on total contributions in dollars for charities that conduct activities that are particularly opaque to outside donors. Collectively, these results suggest audit regulation reduces information frictions and thereby affects resource allocation in the market for charitable giving.

Author

• Raphael Duguay, The University of Chicago