The Effects of Governance on the Accuracy of Charitable Expenses Reported by Nonprofit Organizations
Contemporary Accounting Research, 2011

In this paper, Associate Professors Michelle and Robert Yetman examine the extent to which governance mechanisms affect the decision usefulness of nonprofit financial information as reported on the Internal Revenue Service Form 990 (hereafter IRS 990).

Nonprofit organizations are bestowed with a variety of tax benefits such as income, property, and sales tax exemptions. In addition, donors to many types of nonprofits can reduce their taxable income by the amounts of their donations. In exchange for these substantial benefits, nonprofit organizations are accountable to the public, who are, in effect, financing these tax benefits. As part of this accountability, nonprofits are required to make their financial information available to the public via the IRS 990.

The primary purpose of this paper is to advance this literature by examining the extent to which existing nonprofit governance mechanisms mitigate the tendency for nonprofits to overstate their charitable ratios. Although a substantial body of accounting literature examines the relationship between governance and reporting quality in the for-profit setting, there is little evidence on the effects of governance on nonprofit reporting despite nonprofits’ significant role in the economy.