Financial Disclosure Management by Nonprofit Organizations1Ranjani Krishnan, Michelle H.Yetman, Robert J.Yetman*Eli Broad College of Business, Michigan State University, East Lansing, MI 48824.Tippie College of Business, The University of Iowa, Iowa City, IA paper examines how nonprofit organizations respond to incentives to manage theirpublicly available financial information.
Prior research identifies two operating ratios donorscommonly use to evaluate the efficiency and effectiveness of nonprofits (i.e., the programservice ratio, defined as the fraction of total expenses committed to advancing the charitablemission of the organization, and the fundraising ratio, defined as the ratio of fundraisingexpenses to donations revenue).
Nonprofit managers have an incentive to over-report theexpenses classified as program services and under-report the expenses classified asadministrative and fundraising in order to improve these ratios.
We examine whether nonprofitsrespond to these incentives, and we find evidence consistent with opportunistic cost shifting toimprove the program service and fundraising ratios.
Additional analysis finds that smallernonprofits that are more reliant on donations revenue manipulate their operating ratios to agreater extent.JEL classification: M4; L3Key words:
Nonprofit organizations, earnings management, disclosure, > *Corresponding author.Tel.: (319) 335-0841; fax (319) ; email: firstname.lastname@example.org We thank Ashiq Ali, Ramji Balakrishnan, Leslie Eldenburg, Lil Mills, ShivaSivaramakrishnan, and workshop participants at the University of Arizona and Texas A&MUniversity for their helpful paper examines how nonprofit organizations respond to incentives to manage theirpublicly available financial information through accounting expense organizations do not have an observable stock price, there are nonetheless significantcontractual incentives for financial disclosure management.
In particular, implicit contracts withdonors provide nonprofits with an incentive to appear efficient in raising their donations and inallocating their resources to charitable, rather than administrative, outputs.Typically, two ratios are used to measure a nonprofit organizations donative and financial statements aggregate all expenses into one of three categories(i.e., program services, fundraising, and administrative), and the ratios are based on theseexpense categories.
The first ratio, known as the program service ratio, is program serviceexpenses divided by total expenses.
Because program service expenses are those directly relatedto the nonprofits primary charitable output (as opposed to either administrative or fundraisingexpenses), this ratio measures a nonprofits operating effectiveness.
The second ratio, known asthe fundraising ratio, is fundraising expenses divided by donations revenues and captures anonprofits fundraising efficiency.
Numerous industry watchdog groups suggest that donors usethese two ratios to determine which charities are worthy of receiving donations, and a growingbody of empirical research finds evidence consistent with donors responding to informationcontained in these ratios (Weisbrod and Dominguez 1986; Posnett and Sandler 1989; Callen1994; Tinkelman 1999; Okten and Weisbrod 2000; Yetman and Yetman 2002; Baber, Daniel andRoberts 2002).To the extent that nonprofit managers believe that donors respond to these ratios, there is anincentive to allocate expenses out of the fundraising and administrative categories and into the2program services category in order to improve reported operating ratios
Although these kinds ofaccounting expense allocations have long been suspected, they have never been empiricallydocumented (Khalat and Hueslein 1992).
For example, an article in Forbes states, Moreoverfrom a public relations standpoint, charities have every incentive to maximize the charitablecommitment figure and minimize reported fundraising expenses.Dubious accounting isnt rare.(Barret, 1999).
Our paper provides empirical evidence consistent with nonprofits usingaccounting expense allocations to overstate their program service expenses and understate theirfundraising expenses, thereby making themselves more attractive to potential donors.
Furtheranalysis estimates the magnitude of these accounting expense allocations, and examines theeffects of political costs and reliance on donations as a revenue source on a nonprofitspropensity to make expense allocations.This research is of potential interest for several reasons.
First, nonprofits provide a naturalsetting (free of price-related incentives) in which to examine the effects of contractual incentiveson financial reporting choices.
Second, the effects of disclosure management on the quality anddecision usefulness of publicly available financial information generally has not been addressedin the nonprofit setting.
Nonprofit organizations, which constitute over 10 percent of nationalgross domestic product, are an important part of the United States economy (Independent Sector2001).
Annual donations received by nonprofits total over $200 billion (American Associationof Fundraising Council Trust for Philanthropy, 2002).
To the extent that donors make resourceallocation decisions based on reported financial information and are unable to disentangledisclosure management, economic resources are potentially misallocated.
Third, a small butgrowing body of research uses these ratios for empirical analysis without considering theimplications of managerial manipulation (Baber, Roberts, Visvanathan 2001; Yetman 2001;3Baber, Daniel, and Roberts 2002;).
By documenting the extent and method of nonprofitdisclosure management, we provide valuable information for future research.We conduct our analysis using two databases. 7 215
The NebraskaTaxation of1RQSURWOrganizations(for Sales and Use,Income, and Withholding Taxes)Revised December, 2009INFORMATION7-215-1992 Rev.12-2009Supersedes 7-215-1992 Rev.1-2006This information guide provides an overview of how Nebraska sales and use, income, and withholding tax laws apply to nonprot organizations.It is not designed to answer all questions which might arise, but is intended to enable a person to become familiar with how the tax programs affect nonprot organizations.G U I D not necessarily entitle the organization to an exemption from 1EUDVNDVDOVDQGXVWDA 501(c) designation refers to the section an exemption from federal and state income tax.Although from I SALES AND USE TAXNonprot Organizations That Are Not
Exempt From Payment of Sales and Use and use exempt from sales and Organizations That Are Exempt From Payment of Sales and Use created
for religious purposes (see Reg.1-091).to to
(see Reg. 85-1101 to 85-1111 (see Reg.1-092).) date: 10-1-2008.Updates are in Red by the exempt of the hospitals or which receives federal organization providing day care, early childhood NOTE: Foster care homes cannot or to place children for permanent adoption. Organizations. the for use by the organization.
tax-free purchases by qualied exempt 13 and give the completed form to the seller.Purchases for resale. tax-free for resale purposes.Example: completed form to the Example: A civic organization holds a rummage sale.
The on the items sold at the the Department of Revenue.ExceptionsSchools.
date: 10-1-2008.Operative date: organizations.,.
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