Voluntary Disclosure in Nonprofit Organizations: an Exploratory Study

Abstract

This study examines why some nonprofit organizations are willing to voluntarily provide their audited financial statements for review and others are not. While we are not stakeholders in these enterprises, we believe this study provides some descriptive evidence and insights on the nature of voluntary financial disclosure in the nonprofit sector. The ability of outside individuals (whether current stakeholders or not) to review firm-specific relevant and reliable information concerning the finances and operations of an exempt organization is important for the efficient flow of capital and potential donation decisions. In this study, we examine this voluntary disclosure issue by requesting audited financial statements (currently these are not required disclosures) from the 300 largest nonprofits in the U.S., as of 2001. Since this decision is voluntary and many of our sample firms choose not to disclose this information, we investigate whether there are factors associated with this choice.

We find that a nonprofit is more likely to allow us access to its audited financial statements if it has more debt, has a larger contribution ratio, is a larger organization, has a NTEE classification of Higher Education, and has a higher compensation expense ratio. By contrast, it appears that a nonprofit with lobbying expenses is less likely to disseminate its audited financial statements. Many interested parties, including the Senate, donors, other stakeholders and researchers, are concerned about transparency in the nonprofit sector. This study can add to their debate by demonstrating which factors are associated with transparency in the nonprofit sector.

Keywords: Nonprofit, Transparency

JEL Classification: M4, L3