Accounting Errors in Nonprofit Organizations

Abstract

This study examines the accounting errors committed by public charities. Public charities report errors at a rate that is 60 percent higher than that of publicly-traded corporations, and almost twice as high as that of similar-sized corporations. The errors are commonly errors of omission (i.e., failing to recognize items that should be recognized). The error rate is not significantly associated with organization size, type, or portion of the budget devoted to administrative activities, but does have a strong positive association with internal control deficiencies and a strong negative association with Big 4 and second tier auditors. The error corrections often have low visibility in the financial reports issued by public charities; although they are reported in the footnotes of the audited financial statements, they often are not mentioned in auditor reports and in IRS Form 990s. The study improves understanding of the accounting challenges faced by nonprofits, and may improve nonprofit financial reporting by helping nonprofit managers and auditors understand the common circumstances and types of errors, and thus what activities to monitor more closely. The study also contributes to the academic literature by comparing the errors of nonprofits to those of corporations, by examining the outcomes of audits involving small auditors and small clients, and by advancing understanding of discrepancies between audited and unaudited financial reports.

Keywords: nonprofit, public charity, financial reporting, accounting errors, restatements, auditing

JEL Classification: M40