The Economic Consequences of Financial Audit Regulation in the Charitable Sector

58 Pages Posted: 12 Nov 2018 Last revised: 28 Apr 2020

Date Written: April 27, 2020

Abstract

I investigate how financial audit regulation in the charitable sector affects donor behavior. I propose that audit mandates alleviate the moral-hazard concerns of small and dispersed donors dealing at arm’s length. My empirical strategy relies on variation in size-based exemption thresholds across states and differences in size driven by the nature of charities’ activities. Consistent with audit mandates reducing donors’ reliance on charity reputation, I find that donations are less concentrated on the largest, most well-known charities. I show this reallocation of resources allows the charitable sector to serve more diverse geographic areas and social needs. In terms of the effect on willingness to give, I document that audit mandates are associated with a higher proportion of taxpayers who donate. However, I only observe a sizable impact on total contributions in dollars for charities that conduct activities that are particularly opaque to outside donors. Collectively, these results suggest audit regulation reduces information frictions and thereby affects resource allocation in the market for charitable giving. Nevertheless, I cannot conclude that this reallocation of donations justifies the costs imposed on charities.

Keywords: Financial-reporting regulation, auditing, resource allocation, nonprofit organizations

JEL Classification: M42, M48, M49, L31, L38

Suggested Citation

Duguay, Raphael, The Economic Consequences of Financial Audit Regulation in the Charitable Sector (April 27, 2020). Available at SSRN: https://ssrn.com/abstract=3273498 or http://dx.doi.org/10.2139/ssrn.3273498

Raphael Duguay (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
New Haven, CT 06511
United States

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