Director Monitoring of Expense Misreporting in Nonprofit Organizations: The Effects of Expense Disclosure Transparency, Donor Evaluation Focus and Organization Performance

40 Pages Posted: 7 Jan 2013 Last revised: 16 Apr 2015

Date Written: April 15, 2015

Abstract

When the financial performance of nonprofit organizations is poor — more specifically, the ratio of reported program expense to total expense is low, managers of these organizations are found to misreport expenses in order to boost the ratio. This study examines whether three factors — the transparency of expense disclosures, donor evaluation focus and nonfinancial performance — influence how directors monitor management expense misreporting under these circumstances. An experiment with 189 nonprofit directors finds that the enhanced transparency of expense disclosures increases director monitoring by reducing the tendency to accept management expense misreporting. Further, an organization’s nonfinancial performance and the perceived fairness of donor evaluation focus interact to influence director monitoring practices. Specifically, when directors know an organization’s nonfinancial performance is poor and understand that this performance will negatively influence the willingness of donors to contribute, the experimental results show that directors monitor less if they think that donors are adopting a more balanced approach to organizational evaluation that focuses on both financial and nonfinancial performance, i.e., there is a reverse fair process effect as this donor approach is perceived as being fairer than if donors focus solely on financial performance. However, monitoring is equally strong regardless of donor evaluation focus when directors know that an organization’s nonfinancial performance is good and a donation is forthcoming.

Keywords: nonprofit organizations, director monitoring role, transparency, donor evaluation focus

JEL Classification: C9, G3, L3, M4

Suggested Citation

Chen, Qiu, Director Monitoring of Expense Misreporting in Nonprofit Organizations: The Effects of Expense Disclosure Transparency, Donor Evaluation Focus and Organization Performance (April 15, 2015). Available at SSRN: https://ssrn.com/abstract=2197114 or http://dx.doi.org/10.2139/ssrn.2197114

Qiu Chen (Contact Author)

University of Ottawa ( email )

Ottawa, Ontario K1N 6N5
Canada

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