Accounting Errors in Nonprofit Organizations - Jeffrey J. Burks

SYNOPSIS: This study examines the accounting errors committed by public charities as revealed by searching for disclosures of their corrections in auditor reports, financial statements, and footnotes. A sample of 5,511 audited financial statements, predomi-nantly from the years 2006 to 2010, was obtained from GuideStar, a data provider for nonprofits. Public charities report errors at a rate that is 60 percent higher than that of publicly traded corporations, and almost twice as high as that of similar-sized corporations. The errors are commonly errors of omission (i e.. failing to recognize items). The error rate has a strong positive association with internal control deficiencies and a strong negative association with Big 4 and second-tier auditors. Regressions are unable to detect a significant association between the error rate and organization size, type. or portion of the budget devoted to administrative activities. The error corrections often have low visibility in the financial reports issued by public charities; although they are reported in the footnotes of the audited financial statements, they often are not mentioned in auditor reports and in IRS Form 990s. The study improves our understanding of the accounting challenges faced by nonprofits, and may enhance nonprofit financial reporting by helping nonprofit managers and auditors understand the common circumstances and types of errors, and thus what activities to monitor more closely. The study also contributes to the academic literature by comparing the errors of nonprofits to those of corporations, by examining the outcomes of audits conducted by large as well as small auditors, and by advancing our understanding of discrepancies between audited and unaudited financial reports.

Keywords: nonprofit; public charity: financial reporting; accounting errors; restatements, auditing.

Data Availability: Data are available from sources identified in the paper.

1. Barks is an Associate Professor at the University of Notre Dame.

I am grateful for the helpful comments provided by two reviewers. Arnold M. Wright (editor). Andrew Acito, Kris Alice. Brad Badenscher, Colleen Boland, Matt DeAngelis, Jim Fuehmieyer, Jeremy Griffin, Hannah Kim, Stephanie Ltmcque, Andy Leone (AAA Anual Meeting discussant). Ram Ramanan. Dave Riechiute, Brian Riffel. Joe Schroeder, Jim Seida. Steve Siemborski. Jennifer Stevens. and Dan Wangcrin. and workshop participants at Michigan State University. the University of Connecticut. and the University of Notre Dame. I thank Kristin Bachteler, Sean Bennett. Ruby Lee. Maria Moon. and Andrew Roscrihurg for excellent research assistance. Finally. I thank the Notre Dame Masters of Nonprofit Administration program for connecting me with practitioners at foundations and public charities, and the Mendoza

College of Business and the Deloitte Foundation for financial support.

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