The Effects of Governance on the Accuracy of Charitable Expenses Reported by Nonprofit Organizations

Abstract: Various users rely on nonprofit financial information for investing, contracting, and regulating decisions. The ratio of reported charitable to total expenses is one of the most widely used metrics to measure nonprofit performance. Prior research shows that many nonprofit organizations inflate this ratio by overstating their charitable expenses, reducing the decision usefulness of the information. Using a large sample of data from 1998ndash;2006, as well as a sample of data from the newly redesigned 2008 IRS form 990, we find that existing governance mechanisms improve the accuracy of reported charitable expenses across a broad sample of nonprofit organizations