Assurance of Nonprofit Financial Reporting: An Analysis of State Audit and Review Requirements

• In Event: 3.01 Nonprofit Research Concurrent Session: Governance/Audit

Abstract

Prior research suggests that federally mandated single-audit requirements enhances nonprofit organizations’ financial reporting quality. Building on this research, we examine whether state mandated assurance regulations, which vary in presence and application, are associated with higher financial reporting quality for nonprofits that meet their state assurance thresholds but are not subject to the single-audit requirements. We find evidence consistent with our hypothesis that state required financial statement assurance incrementally improves financial reporting quality. Distinctively, we document that review attestation services contribute to nonprofit organizations’ financial reporting quality. Unique to our study, we also provide an explanation as to why nonprofit organizations adhere to their state assurance requirements by documenting that state tax burdens, which would be imposed if nonprofits’ forfeit their tax-free status, affect the likelihood of compliance. Our research provides evidence that assurance requirements at the state level enhance nonprofits’ financial reporting and, more importantly, provides an explanation for why nonprofits comply with assurance requirements.

Authors

• Michelle Higgins Yetman, University of California at Davis

• Paul Anthony Wong, University of California-Davis

• Hollis Ashbaugh Skaife, University of California-Davis