Reactions of Nonprofit Monitors to Financial Reporting Problems

Journal of Financial Reporting, 2018

Posted: 26 Jul 2014 Last revised: 20 Oct 2018

Date Written: June 15, 2018

Abstract

This study investigates how those in charge of monitoring nonprofits – donors and boards of directors – react to disclosure of financial reporting problems (accounting errors and internal control deficiencies). I find that donations tend to 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 (CFOs), representing a possible response of boards to financial reporting problems, increases following disclosure of errors. CFO turnover is not robustly related to control deficiencies. 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. Interviews with nonprofit board members suggest that the value of error-free financial reporting derives less from the decision-usefulness of the information and more from demonstrating that the organization is competent and trustworthy.

Keywords: nonprofit, public charity, accounting error, restatement, significant deficiency, material weakness

JEL Classification: M40

Suggested Citation

Burks, Jeffrey J., Reactions of Nonprofit Monitors to Financial Reporting Problems (June 15, 2018). Journal of Financial Reporting, 2018. Available at SSRN: https://ssrn.com/abstract=2471138 or http://dx.doi.org/10.2139/ssrn.2471138

Jeffrey J. Burks (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

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