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The Truth about Honesty in the Nonprofit Sector


  • McDonald, Bruce D. III

    (NC State University)

  • Goodman, Christopher B

    (Northern Illinois University)


The nonprofit sector aims to provide services with a public benefit, but how honest is it? Since the nonprofit sector relies on fundraising efforts to support its administration and program costs, and since poor financial performance can scare potential contributors away, nonprofit organizations have an incentive to appear fiscally healthy regardless of their true condition. We examine the factors associated with the honesty of organizations in the nonprofit sector using Benford’s Law, which tests for abnormalities in data that result from intentional falsification. Using the 990 tax filings for 51,010 nonprofits in the United States from 2012 and 2013, we find evidence of problems in the accuracy of their financial reporting. Those organizations with more external users of their financial information tend to conform more closely with Benford’s Law, suggesting more external monitoring of non-profit organizations may decrease the likelihood of misreported financial information.

Suggested Citation

  • McDonald, Bruce D. III & Goodman, Christopher B, 2020. "The Truth about Honesty in the Nonprofit Sector," SocArXiv 48g5c, Center for Open Science.
  • Handle: RePEc:osf:socarx:48g5c
    DOI: 10.31219/

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    1. Nye John & Moul Charles, 2007. "The Political Economy of Numbers: On the Application of Benford's Law to International Macroeconomic Statistics," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-14, July.
    2. Michalski, Tomasz & Stoltz, Gilles, 2010. "Do countries falsify economic date strategically? Some evidence that they do," HEC Research Papers Series 930, HEC Paris.
    3. Michelle H. Yetman & Robert J. Yetman, 2012. "The Effects of Governance on the Accuracy of Charitable Expenses Reported by Nonprofit Organizations," Contemporary Accounting Research, John Wiley & Sons, vol. 29(3), pages 738-767, September.
    4. Tomasz Michalski & Gilles Stoltz, 2013. "Do Countries Falsify Economic Data Strategically? Some Evidence That They Might," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 591-616, May.
    5. Ranjani Krishnan & Michelle H. Yetman, 2011. "Institutional Drivers of Reporting Decisions in Nonprofit Hospitals," Journal of Accounting Research, Wiley Blackwell, vol. 49(4), pages 1001-1039, September.
    6. Meeyoung Lamothe & Scott Lamothe, 2015. "Exploring the Determinants of Local Service Termination," Social Science Quarterly, Southwestern Social Science Association, vol. 96(5), pages 1453-1474, November.
    7. George Judge & Laura Schechter, 2009. "Detecting Problems in Survey Data Using Benford’s Law," Journal of Human Resources, University of Wisconsin Press, vol. 44(1).
    8. Patricia M. Dechow & Weili Ge & Chad R. Larson & Richard G. Sloan, 2011. "Predicting Material Accounting Misstatements," Contemporary Accounting Research, John Wiley & Sons, vol. 28(1), pages 17-82, March.
    9. Calabrese, Thad D., 2011. "Public mandates, market monitoring, and nonprofit financial disclosures," Journal of Accounting and Public Policy, Elsevier, vol. 30(1), pages 71-88, January.
    10. Dang, Canh Thien & Owens, Trudy, 2020. "Does transparency come at the cost of charitable services? Evidence from investigating British charities," Journal of Economic Behavior & Organization, Elsevier, vol. 172(C), pages 314-343.
    11. Hofmann, Mary Ann & McSwain, Dwayne, 2013. "Financial disclosure management in the nonprofit sector: A framework for past and future research," Journal of Accounting Literature, Elsevier, vol. 32(1), pages 61-87.
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