The Role of Board Financial Monitoring Strength and Donor Pressure in Nonprofit Auditors’ Assessment of Changes in Program Expense Allocations

Auditing: A Journal of Practice & Theory

Posted: 19 Jan 2015 Last revised: 15 Jun 2023

See all articles by John Lauck

John Lauck

Louisiana Tech University - School of Accounting & Information Systems

Sudip Bhattacharjee

Virginia Tech - Department of Accounting and Information Systems

Date Written: June 14, 2023

Abstract

Nonprofits face inherent risks from both donor pressure to increase program spending and a high
propensity for reporting errors. Simultaneously, in contrast to for-profit settings, limitations of nonprofit governance can raise auditors’ concerns about a board’s effectiveness as a control mechanism. We experimentally examine how a nonprofit board’s stronger and weaker monitoring strength influences auditors’ assessments of a client’s program expense allocations under conditions of higher and lower donor pressure to increase program spending. Auditors assess management’s expense allocations as more appropriate, and document fewer risk factors, only when board financial monitoring is strong and donor pressure is lower. Further, auditors rely on strong boards to reduce errors, but not intentional misstatements related to management’s allocation of functional expenses. These findings suggest that, in contrast to how auditors use for-profit governance, auditors may question the ability of even strong nonprofit boards to mitigate instances of intentional functional expense allocation misreporting.

Keywords: nonprofit audit; nonprofit inherent risks; donor pressure; nonprofit governance

Suggested Citation

Lauck, John and Bhattacharjee, Sudip, The Role of Board Financial Monitoring Strength and Donor Pressure in Nonprofit Auditors’ Assessment of Changes in Program Expense Allocations (June 14, 2023). Auditing: A Journal of Practice & Theory, Available at SSRN: https://ssrn.com/abstract=2548226

John Lauck (Contact Author)

Louisiana Tech University - School of Accounting & Information Systems ( email )

P. O. Box 10318
Ruston, LA 71272
United States

Sudip Bhattacharjee

Virginia Tech - Department of Accounting and Information Systems ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

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