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Does transparency come at the cost of charitable services? Evidence from investigating British charities

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  • Canh Thien Dang
  • Trudy Owens

Abstract

Recent high-profile scandals related to misuse of funding and donations have raised the demand for scrutiny over financial transparency and operational activities of non-profit organizations in developed countries. Our analysis challenges the common practice in the sector of using programme ratios and overhead costs as indicators for non-profit accountability. Using Benford's Law to measure irregularities in financial data for a large sample of public charities we estimate that 25% of the sample potentially misreport their financial information. We show theoretically and empirically that charities with a higher programme ratio (their level of spending on charitable activities), will be less likely to misreport their financial information only when their overhead costs (spending on governing activities) are also sufficiently high. Tighter monitoring becomes ineffective in increasing the sectoral transparency and accountability unless accompanied by a sufficiently high charitable spending.

Suggested Citation

  • Canh Thien Dang & Trudy Owens, 2019. "Does transparency come at the cost of charitable services? Evidence from investigating British charities," Discussion Papers 2019-02, University of Nottingham, CREDIT.
  • Handle: RePEc:not:notcre:19/02
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    Cited by:

    1. McDonald, Bruce D. III & Goodman, Christopher B, 2020. "The Truth about Honesty in the Nonprofit Sector," SocArXiv 48g5c, Center for Open Science.
    2. Margaret Samahita & Leonhard K. Lades, 2021. "The Unintended Side Effects of Regulating Charities: Donors Penalise Administrative Burden Almost as Much as Overheads," Working Papers 202106, School of Economics, University College Dublin.

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    More about this item

    Keywords

    non-profits; misinformation; public provision of financial reports; Benford’s Law; heteroskedasticity-based instruments.;
    All these keywords.

    JEL classification:

    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H83 - Public Economics - - Miscellaneous Issues - - - Public Administration
    • H49 - Public Economics - - Publicly Provided Goods - - - Other

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