Why Bad Things Happen to Good Organizations: The Link between Governance and Asset Diversions in Public Charities

42 Pages Posted: 10 May 2015 Last revised: 29 May 2015

Erica Harris

Rutgers, The State University of New Jersey - Rutgers University, Camden

Christine Petrovits

College of William and Mary - Mason School of Business

Michelle Yetman

University of California, Davis - Graduate School of Management

Date Written: May 28, 2015

Abstract

In the United States, the IRS now requires charities to publicly disclose any theft or unauthorized use of assets that the charity identifies during the year. We use this new disclosure to investigate whether strong governance reduces the likelihood of a charitable asset diversion. Specifically, for a sample of 1,528 charities from 2008 to 2012, we examine eleven measures of governance that capture four broad governance constructs: board monitoring, independence of key individuals, tone at the top, and capital provider oversight. We find consistent evidence that good governance across all four constructs is negatively associated with the probability of an asset diversion. Of the eleven governance measures, our results indicate that monitoring by debt holders and government grantors, audits, and keeping managerial duties in-house are most strongly associated with lower incidence of fraud. Our results also indicate that the likelihood of a fraud is negatively associated with a board review of the Form 990, the existence of a conflict of interest policy, and the presence of restricted donations. In addition, we document that the likelihood of an asset diversion is negatively associated with program efficiency and positively associated with growth and organizational complexity.

Keywords: nonprofit, fraud, corporate governance, asset diversion, asset misappropriation, IRS Form 990

JEL Classification: G18, G38, L30, L31, L38, M40, M41, M42, M48

Suggested Citation

Harris, Erica and Petrovits, Christine and Yetman, Michelle, Why Bad Things Happen to Good Organizations: The Link between Governance and Asset Diversions in Public Charities (May 28, 2015). Available at SSRN: https://ssrn.com/abstract=2604372 or http://dx.doi.org/10.2139/ssrn.2604372

Erica Harris

Rutgers, The State University of New Jersey - Rutgers University, Camden ( email )

Camden, NJ 08102
United States

Christine Petrovits

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

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

Michelle Yetman (Contact Author)

University of California, Davis - Graduate School of Management ( email )

128 AOB IV
One Shields Avenue
Davis, CA 95616
United States
530-754-7808 (Phone)
530-752-2924 (Fax)

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