Management Accounting Section Midyear Meeting

Understanding and Mitigating Misreporting in Nonprofits: The Joint Effects of Pay Level and Penalty Type

• In Event: Nonprofits, Social Responsibility and Opportunism

Abstract

Using an incentivized experiment, we examine how nonprofit pay levels affect nonprofit managers’ misreporting behavior and the effectiveness of different types of penalty in mitigating such behavior. We find that in the absence of penalties for misreporting, managers who select into lower- versus higher-paying nonprofits misreport at similar levels, but they have different motivations and justifications for misreporting. Lower-paying nonprofits attract mission-focused managers who misreport to advance their nonprofit’s mission and justify doing so by their personal sacrifice of wealth, whereas higher-paying nonprofits also attract self-focused managers who justify misreporting by focusing on their personal outcomes. Moreover, we find that imposing a possible penalty on the nonprofit (manager) is more effective in mitigating misreporting in lower (higher)-paying nonprofits. Our study contributes to theory on the behavioral drivers of nonprofit misreporting and informs practice of ways to effectively mitigate misreporting by managers who select into nonprofits with different levels of pay.

Authors

• Eric W Chan, University of Texas at Austin

• Xinyu Zhang, Cornell University