Audit Value and Charitable Organizations

Abstract

I examine whether donors favor charities that use high quality auditors and whether the propensity to donate varies directly with audit quality. I find that audit quality affects donor decisions in the market for contributions. From a signaling perspective, charities benefit simply from engaging a higher quality auditor. From an information perspective, donors are more sensitive to changes in reported accounting information verified by a high quality auditor.

I also add to the economic literature that examines the demand for giving by investigating the impact of a charity’s reputation on the price elasticity of donations. As expected, I find that donors are more sensitive to the price of contributing for more reputable charities. After conditioning on reputation, however, I find donors are still willing to give more to charities aligned with a quality auditor, but the information effect of audit quality choice dissipates with the size of the charity. Thus, a charity’s reputation and the choice of auditor are substitute mechanisms for signaling the credibility of financial information to donors.

Keywords: Audit Quality, Nonprofits, Auditor Choice, Charities

JEL Classification: M49, L30