Maintaining Public Trust: The Influence of Transparency and Accountability on Donor Response to Fraud

45 Pages Posted: 22 Aug 2017 Last revised: 20 Mar 2018

See all articles by Erica Harris

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: March 15, 2018

Abstract

All organizations, including charities, are vulnerable to the risk of losses due to fraud. Using a sample of 562 nonprofit organizations that report an asset diversion between 2008 and 2011, we examine whether fraud disclosures are relevant to donors’ giving decisions. We find, all else equal, the disclosure of an asset diversion is associated with a significant decrease in contributions. Our evidence suggests that the negative donor response is attenuated for organizations with stronger corporate governance. In addition, we find that providing pertinent information about the diversion mitigates the negative response. Donors appear to respond to content of the fraud disclosures, including the fraud amount, the ability of the organization to recover its losses, and the identity of the perpetrator. Overall, our results are consistent with a high level of donor sophistication in understanding the qualitative information on the IRS Form 990 and highlight the value of transparency when problems occur.

Keywords: nonprofit, fraud, corporate governance, transparency, asset diversion, asset misappropriation, public trust, disclosure, IRS Form 990, donations

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

Suggested Citation

Harris, Erica and Petrovits, Christine and Yetman, Michelle, Maintaining Public Trust: The Influence of Transparency and Accountability on Donor Response to Fraud (March 15, 2018). Available at SSRN: https://ssrn.com/abstract=3021543 or http://dx.doi.org/10.2139/ssrn.3021543

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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