43 Pages Posted: 26 Jul 2014 Last revised: 1 Jun 2016
Date Written: May 1, 2016
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.
Keywords: nonprofit, public charity, accounting error, restatement, significant deficiency, material weakness
JEL Classification: M40
Suggested Citation: Suggested Citation