Expense Misreporting in Nonprofit Organizations

45 Pages Posted: 15 Sep 2004

See all articles by Ranjani Krishnan

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems

Michelle Yetman

University of California, Davis - Graduate School of Management

Robert J. Yetman

University of California, Davis - Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 8, 2005

Abstract

We examine whether nonprofit organizations understate fundraising expenses in their publicly available financial statements. A large body of anecdotal evidence notes that an inexplicable number of nonprofits report zero fundraising expenses. We provide empirical evidence that the zero fundraising expense phenomenon is at least partly due to inappropriate reporting. We then examine to what extent these misreported expenses are the result of managerial incentives. Prior research finds an association between reported expenses and managerial compensation as well as the level of donations received. Using these findings we construct two incentive variables and find a positive association between misreporting behavior and managerial incentives. Our results also suggest that the use of an outside accountant reduces the probability that a nonprofit will misreport expenses, consistent with the use of an outside paid accountant increasing the reliability and usefulness of nonprofit financial reports. Finally, we find that SOP 98-2 reduced the probability that a nonprofit will misreport fundraising expenses.

Keywords: Nonprofit organizations cost shifting, agency problems

JEL Classification: M4, L3

Suggested Citation

Krishnan, Ranjani and Yetman, Michelle and Yetman, Robert, Expense Misreporting in Nonprofit Organizations (September 8, 2005). Available at SSRN: https://ssrn.com/abstract=590963 or http://dx.doi.org/10.2139/ssrn.590963

Ranjani Krishnan

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-353-4687 (Phone)
517-432-1101 (Fax)

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)

Robert Yetman

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

One Shields Avenue
Davis, CA 95616
United States

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