The Causes and Consequences of Internal Control Problems in Nonprofit Organizations

Abstract

This study examines the causes and consequences of internal control deficiencies in the nonprofit sector using a sample of 27,495 public charities from 1999 to 2007. We first document that the likelihood of reporting an internal control problem increases for nonprofit organizations that are in poor financial health, growing, more complex, and/or smaller. We then present evidence that the disclosure of weak internal controls over financial reporting is negatively associated with subsequent donor support received after controlling for the current level of donor support and other factors influencing donations. We likewise report a negative association between internal control problems and subsequent government grants. Our results suggest that donors and government agencies, important sources of capital for nonprofit organizations, react either directly or indirectly to internal control information.

Does CSR Matter for Nonprofit Organizations? Testing the Link Between CSR Performance and Trustworthiness in the Nonprofit Versus For-Profit Domain

“…Typically, the nonprofit domain is more loosely regulated than the for-profit domain. For instance, most of the provisions of the Sarbanes-Oxley Act in the U.S. apply only to for-profit organizations, and there are no equivalent legal regulations for the nonprofit domain (Petrovits et al 2011). In addition, nonprofit organizations usually do not face the same strict public disclosure requirements as for-profit organizations (e.g., Boucher and Hudspeth 2008).…”

Internal Control System Deficiency and Capital Project Mis-management in the Nigerian Public Sector

“…This study is based on the perspectives adopted by some earlier researchers (Imbeau, 2006;Oyewobi et al 2011;Ajenjo, 2011;Petrovits, Shakespeare & Shih, 2011). It focuses on the strategic interaction of the actors involved in the internal control process of government on capital project management, which is a major area of spending public funds for development.…”

Fraud survival in nonprofit organizations: Empirical evidence

“…Harris, Petrovits, and Yetman () use factor analysis in their study of the quality of nonprofit governance, and find a positive association between good governance factors and the level of donations and grants received. Petrovits et al () find that disclosure of weak internal controls in a nonprofit organization is associated with a decline in subsequent donor support. The negative consequences of an erosion of trust can extend beyond the individual organization, as scandals can result in a decline in overall charitable giving, driving out bad organizations as well as good ones (Bottan & Perez‐Truglia, ; Prakash & Gugerty, ).…”

“…Although these studies provide insight into the incidence of fraud in the nonprofit sector, there is an absence of empirical evidence on the consequences of these frauds after their discovery. Concerns about the adverse effects of fraud, scandal, or other negative publicity on nonprofit organizations are well documented (Auger, ; Burt, ; Greenlee et al, ; Jeavons, ; Sisco, ), and some empirical evidence shows that donor support declines with negative news about a nonprofit organization (Petrovits, Shakespeare, & Shih, ). A nonprofit organization's reputation is so important that staining it with a scandal can ultimately lead to the organization's demise (Hager & Searing, ).…”