Identical Program Ratios: A Red Flag of Ratio Management
63 Pages Posted: 10 Mar 2017
Date Written: March 8, 2017
We provide evidence that when nonprofits experience large changes in total spending but report identical program ratios between periods this is the likely result of likely of managers manipulating cost allocations to control how ratios are reported. We find nonprofits are more likely to report identical program ratios when: resource providers – government grantors, and lenders rely on ratios; pay is determined, at least in part, by performance; and the potential for regulatory interference is high. We also provide evidence that monitoring and regulation can encourage ratio management. We identify techniques nonprofits use to allocate costs to report identical ratios and find that technique choice is dictated by the sophistication of the organization. We also find that to report identical ratios, nonprofits most frequently alter allocation rates for expense lines where managers have the most discretion over how much to report as a program expense. Finally, by focusing on ratio changes, we provide evidence that nonprofits manage ratio to achieve certain program ratio targets.
Keywords: nonprofit, reporting quality, ratio management, earnings management
JEL Classification: L30, M41
Suggested Citation: Suggested Citation