The Role of Nonprofit Governance and Donor Pressure in Auditor Judgment and Decision Making : An Experimental Investigation

Auditors serve an important monitoring role in the nonprofit sector, yet little is known about how nonprofit auditor decision making may differ from the for-profit sector. Nonprofits face unique inherent risks in terms of donor pressure to increase program spending, and clients may seek to persuade auditors that favorable changes in program expenses are due solely to legitimate operational reasons. Since some nonprofit boards monitor expense classifications, governance characteristics may impact auditors' decision making. Research in the for-profit sector indicates auditors view good governance as a means of reducing risk and planned audit work. We argue that due to the absence of SOX type mandates and the resulting diversity in nonprofit governance quality, auditors may not perceive strong nonprofit governance as an effective monitoring mechanism when inherent risks are high. In an experiment, when governance was weak, auditors assessed the appropriateness of an observed increase in the program expense ratio similarly, and documented more increased risk factors, under both low and high donor pressure conditions. In contrast to findings in for-profit research, when governance was strong auditors relied on good governance to increase their appropriateness assessments in the low (but not high) donor pressure condition. Auditors documented both increased and decreased risk factors only when governance was strong and risk was low, and a path analysis confirms auditors' appropriateness assessments are driven by the type of evidence searched. These results have implications for audit research and practice by providing insight into how unique information is evaluated in the nonprofit environment