Reactions of Nonprofit Monitors to Financial Reporting Problems
Jeffrey J. Burks
University of Notre Dame
October 1, 2015
In the nonprofit sector, there are questions about the usefulness of financial reporting and the vigilance of the governance monitors who may use it. This study investigates how two types of monitors (donors and boards of directors) react to disclosure of financial reporting problems (accounting errors and internal control deficiencies). I find evidence of actions by both types of monitors following the discovery of financial reporting problems. Donations fall following disclosure of severe errors and control deficiencies. Furthermore, donations fall following errors only when they are disclosed in the report that is most widely accessible by donors. Turnover of chief financial officers, representing a possible response of boards to financial reporting problems, increases following disclosure of errors, particularly severe errors. It also increases following disclosure of significant deficiencies in internal control. Overall, the results are consistent with donors and boards being willing to take action in response to concerns about financial reporting quality, thus indicating that they consider financial reporting important and that they act on signals of low quality.
Number of Pages in PDF File: 49
Keywords: nonprofit, public charity, accounting error, restatement, significant deficiency, material weakness
JEL Classification: M40
Date posted: July 26, 2014 ; Last revised: October 2, 2015
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