Nonprofit Governance and Financial Reporting Quality in a Changing University Setting

• In Event: Nonprofit and International Research

Abstract

In the current climate in higher education, it is important to have both valuable decision makers and accurate and reliable information on which to base decisions. Nonprofit governance is a mechanism for this critical decision making, and this study analyzes governance’s effects on financial reporting quality (FRQ) in the university setting when there has been a change in university president. When financial reporting quality is high, better information is available on which to make decisions. Therefore, boards of directors, top management, and others involved in the governance of the university should set high standards for reporting. This is more important still when there is a change in leadership positions. I hypothesize that there are certain nonprofit governance factors which affect FRQ. Specifically, I propose a curvilinear relationship between board size and financial reporting quality, wherein boards that are either too small or too large have lower FRQ. Secondly, I posit that board independence is positively related to FRQ.
In this study, I use Tax Form 990s to identify changes in university presidents between 2010 and 2013 for universities filing both a Tax Form 990 and Single Audit report. An event study approach allows for one year pre-change and two years post-change analysis. The 990s are used to obtain governance measures of board size and board independence. I use Single Audit reports available from the Federal Audit Clearinghouse to measure financial reporting quality in four ways: financial statement audit opinion, internal control over financial reporting findings, Single Audit opinion, and internal control over program compliance findings.
Identifying specific governance factors that relate to improved financial reporting is beneficial to the higher education industry to improve the quality of decisions being made. With much currently at stake, particularly in small private institutions, this information is very valuable as colleges face difficult decisions.

Author

• Martha Louise Stilwell, University of Evansville