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The Causes and Consequences of Internal Control Problems in Nonprofit Organizations

45 Pages Posted: 2 Apr 2010  

Christine Petrovits

College of William and Mary - Mason School of Business

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business

Aimee Shih

National University of Singapore (NUS)

Date Written: March 31, 2010

Abstract

This study examines the causes and consequences of internal control deficiencies in the nonprofit sector using a sample of 27,495 public charities from 1999 to 2007. We first document that the likelihood of reporting an internal control problem increases for nonprofit organizations which are in poor financial health, growing, more complex, and/or smaller. We then present evidence that the disclosure of weak internal controls over financial reporting is negatively associated with subsequent donor support received after controlling for the current level of donor support and other factors influencing donations. We likewise report a negative association between internal control problems and subsequent government grants. Our results suggest that donors and government agencies, important sources of capital for nonprofit organizations, react either directly or indirectly to internal control information.

Keywords: internal control, nonprofit organizations, donors, government grants

JEL Classification: I18, I28, L31, M41

Suggested Citation

Petrovits, Christine and Shakespeare, Catherine and Shih, Aimee, The Causes and Consequences of Internal Control Problems in Nonprofit Organizations (March 31, 2010). Available at SSRN: https://ssrn.com/abstract=1582765 or http://dx.doi.org/10.2139/ssrn.1582765

Christine Petrovits (Contact Author)

College of William and Mary - Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

Catherine Shakespeare

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Aimee Shih

National University of Singapore (NUS) ( email )

Bukit Timah Road 469 G
Singapore, 117591
Singapore

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