Misleading financial reporting in nonprofit organizations

Research shows that, among other financial measures, nonprofits intentionally manipulate efficiency ratios, earnings, and revenues to appease funders, influence executive pay, avoid paying taxes or getting audits, and protect exempt status. They do this by manipulating cost allocations and accruals and by altering real business decisions. Although governance - such as audits - may stop managers from manipulating financial information, research shows there is no “one size fits all” approach to circumvent all types of misreporting. We call for research on several topics: whether financial measures other than those previously studied are manipulated; circumstances that encourage or discourage misreporting; whether nonprofit executives, employees, or board directors have incentives to manipulate for reasons other than executive compensation; and red flags that can be used to identify potential misreporters. We welcome more experimental, survey, and case studies, in addition to archival studies, to further our understanding of misreporting in the nonprofit sector.