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The Costs and Benefits of Voluntary Disclosures by Nonprofit

Organizations

Saleha Khumawala, University of HoustonDan Neely, University of Wisconsin-Milwaukee

Teresa Gordon, University of Idaho

Paper Presentation at theAmerican Accounting Assn. Annual Meeting August 2010San Francisco, CA

Costs

Benefits

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In the Not-for-Profit Sector, financial reporting includes◦ Form 990 returns ◦ Audited financial statements are required in some

states (but not always available from the charity)◦ Annual reports

Voluntarily provided May include partial or complete financial statements May be available on-line only

Voluntary Disclosures

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At least some donors are “careful givers”◦ May want more information to compare charities of

interest (Gordon & Khumawala 1999) Helps evaluate managers’ performance and

organizations’ accomplishments May help donors identify charities with similar ideologies

toward service delivery

◦ POTENTIAL DOWNSIDE: tangible production costs increase overhead costs and thereby reduce program expenses and increase the “price” of giving Long line of research beginning with Weisbrod &

Dominguez 1986 shows donors (in aggregate) react negatively to increased overhead and higher price

The Role of Annual Reports

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Managers can use an annual report in various ways◦ A form of “advertising” to improve fundraising efforts◦ A signal of integrity or effective management◦ A way to explain poor performance (start-up

organization, etc.)

Brown and Caughlin (2009) suggest three management types which would have different motivations (we add “entrepreneur”)

Nonprofit Managers as Agents

Organization Size

Organization Age

Bureaucrat Ideologue

Warm glow Entrepreneur

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There really isn’t any other group to serve as principals since boards are self-perpetuating and state/federal oversight is often minimal

Donors delegate decision making to management ◦ They may not be in a position to observe how

donations are used◦ Managers could siphon contributions into

excessive compensation and other perquisites◦ Managers could make choices to help beneficiaries

in ways that are unpalatable to a particular donor.

Why Donors are Principals of NFP Organizations

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Tangible and Intangible Costs and Benefits of Annual Reports – An agency theory approach

Benefits Costs Tangible Future contributions Production & distribution

costs

Intangible

Satisfy duty to be accountable

A mechanism for donor recognition

A signal of management talent

Out-of-pocket costs decrease program services (increase price to donors)

Potential revelation of information that could be detrimental

Figure 2

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1.Does the quantity of voluntary disclosures in NPO annual reports increase demand for charitable services in the following year?

2.What factors are associated with nonprofit organizations that choose not to provide voluntary disclosures in an annual report?

3.Do the benefits outweigh the tangible and intangible costs of providing an annual report?

Research Questions

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Initial sample = 533 entities listed at BBB Give.org website

From this list, we were able to obtain 259 usable annual reports (and other data) to test RQ #1

From among the nonrespondents, we obtained 990 data for organizations that did not have an annual report (158 for 2003 and 155 for 2004)◦ Necessary for RQ #2 & #3, the comparison

between those with and without annual reports (total sample size 263 in 2003 and 262 in 2004)

Sample size

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Report length ranged from 2 to 95 pages Mean = 25 pages

◦ Average length of content: Service efforts & accomplishments = 13 pages Donor recognition pages = 3 Financial data pages = 3

Annual Report Statistics

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This model similar to prior research (Weisbrod & Dominguez 1986, etc.) with the addition of a voluntary disclosure variable:

LDONt+1 = 0 + 1TP Rankt + 2LPRICEt + 3LFRt + 3LAGEt + 4 (LAGEt x LFRt) + 5 (LAGEt x TP Rankt) +

Model to Test RQ #1

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RQ #1 - Regression Results for Models Predicting Subsequent-Year DonationsIndependent Variable Model 1

N = 259 Model 2 N = 258

Model 3 N = 203

TP RANK (voluntary disclosures) 1.50 *** 1.37 *** 1.30 ** LPRICEt -2.43 *** -2.35 *** -3.46 *** LFRt (fundraising expense) 0.57 *** 0.51 *** 0.66 *** LAGEt (age of organization) -0.25 -0.09 0.17 LAGE x LFR 0.02 0.01 -0.01 TP RANK x LAGE -0.43 ** -0.40 *** -0.37 ** LASSETt (size) 0.25 *** 0.32 *** 0.25 *** LREVCON (reliance on contributions)

0.75 ***

TP RANK x LREVCON -0.18 PASS (all 20 BBB stnds) -0.32 ORGTYPE YES YES YES YEAR YES YES YES

Adjusted R2 73% 79% 72%

Table 5

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RQ #2 – DIFFERENCES (2003)

Variable Annual Report

No Annual Report

2003 T-Test

2004 T-Test

DONt 38,200,000 17,900,000 * ASSETSt 122,000,000 25,700,000 ** REVt 50,300,000 21,800,000 ** ** ADMIN 2,378,000 1,561,000 *** FRt 3,371,000 2,307,000 *** AGEt 27 years 22 years ** *** PRICEt 1.28 4.08 * Adminratio 0.08 0.11 * FRRATIO 0.11 0.23 *** *** FundEff 0.27 43.12 REVCONt 0.73 0.82 ** ** MeetBoth (BBB ratios) 0.90 0.60 ***

***

Table 6

In summary, NPOs with annual report tend to be larger, older, more efficient, and more likely to meet industry standards for efficiency

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RQ #2 - Logit Results for Model Predicting Disclosure of an Annual ReportIndependent Variable

2003 N = 263

2004 N = 262

LPRICEt -2.13 * -1.92 *** LFRt 0.24 ** 0.43 *** LAGEt 0.15 0.07 LASSETt 0.07 -0.02 LREVCON -0.05 -0.19 MEETBOTH 1.01 * 1.05 * INTERCEPT -6.01 *** -7.28 *** ORGTYPE YES YES Pseudo R2 19% 19% % Correctly Classified 70% 71%

Table 7

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RQ #3 examines the 4 types of managers

Figure 1 with stats from Table 6

Distribution

Has AR 49 – 52%

No AR 21-23%

Has AR 9-11%

No AR 23-26%

Has AR 20 – 20%

No AR 17-20%

Has AR 17-23%

No AR 33-37%

Large Nonprofit Organization

Small Nonprofit Organization

Mature Organization

BureaucratType 1

IdeologueType 2

Young OrganizationWarm glow

Type 3Entrepreneur

Type 4

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RQ #3 - Regression Results for Models Predicting Subsequent-Year Donations

Table 8

2003 2004N = 263 N = 262

TREATED 0.1 -0.02MGMT2t (Ideologue) -1.14 *** -0.72 *** MGMT3 t (Warm Glow) 0.32 0.40 ** MGMT4t (Entrepreneur) -0.42 * -0.57 ** MEETBOTH 0.59 ** 0.28LADMINt 0.62 *** 0.66 *** INTERCEPT 6.81 *** 6.49 *** ORGTYPE YES YES

Adjusted R2 52% 60%

Independent Variable

ns

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1. Does the quantity of voluntary disclosures in NPO annual reports increase demand for charitable services in the following year? YES

2. What factors are associated with nonprofit organizations that choose not to provide voluntary disclosures in an annual report?Lower efficiency including failure to meet industry efficiency standards

3. Do the benefits outweigh the tangible and intangible costs of providing an annual report? Apparently not – NPO managers do not appear to use an annual report to explain their performance because it might lower (rather than increase) future contributions????

A Quick Summary of Results by RQ

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Taken as a whole, our results may suggest that managers believe the intangible costs of reporting poor efficiency outweigh any benefits that could be provided through voluntary disclosures in an annual report. ◦ From the donor perspective, the lack of

an annual report (particularly from largerNPOs) may be a signal that management has something to hide

Implications

??MORE RESEARCH NEEDED!

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For copy of paper, send email to any one of us:◦tgordon@uidaho.edu◦saleha@uh.edu◦neely@uwm.edu

For an annotated bibliography of research on what impacts contributions to nonprofits that was presented at ARNOVA in November 2009 go to http://www.cbe.uidaho.edu/tgordon and navigate to “presentations and comment letters” page or send email to Gordon or Neely

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