The Impact of Noncompliance and Internal Control Deficiencies on Going Concern Audit Opinions and Viability of Nonprofit Charitable Organizations

Abstract

This study investigates whether material noncompliance (MNC) with laws and regulations and internal control deficiencies (ICDs) in a nonprofit charitable organization (NPO) affect the likelihood that the NPO receives a going concern audit opinion (GCO) and the viability of the NPO. I find that noncompliance and ICDs are positively associated with the likelihood that an NPO receives a GCO. The results also suggest that the entity-level ICDs increase auditors’ propensity to issue a GCO but ICDs that occur at the federal program level do not. The evidence from the survival analysis shows that only ICDs have significant influence on the viability of NPOs. The results of the survival analysis also show that GCO-receiving NPOs are more likely to discontinue operations than their financially distressed peers, indicating that either auditors are correct in issuing the GCOs or GCOs become self-fulfilling prophecies. Analyses of Type I/Type II misclassifications suggest that auditors make more Type I errors than Type II ones, and the accuracy of going concern decisions seems to vary by auditor type, sector, and time period. The overall findings of this study provide evidence of hidden costs of noncompliance and ICDs in NPOs, which can motivate regulators and the managers of NPOs to enhance NPOs’ governance to lower the probability of getting a GCO and improve the NPO’s sustainability.

Keywords: going concern audit opinion, nonprofit audit, noncompliance, internal control deficiencies, viability, financial distress

JEL Classification: M41, M42, M48