Audit Avoidance by Not-for-Profit Organizations

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Abstract

Financial audits are an increasingly popular nonprofit governance mechanism with state governments. By 2008 nineteen states required that their not-for-profit organizations (NPOs) obtain financial statement audits based on the NPOs' reported levels of gross revenues. This study provides evidence that an unexpectedly large number of NPOs just avoid reporting revenues that would require state-mandated audits. Audit avoidance is most pronounced in Illinois, Massachusetts, and New York; the only states that freely disclose NPOs' audited financial statements online. These findings suggest that state-mandated financial audits and public disclosure of audit results can be costly for NPOs. Results of logistic regressions suggest that NPOs with low or no management compensation are more likely to engage in audit avoidance behavior. I find no evidence that the strength of general state enforcement is associated with audit avoidance. These results have implications for recent and ongoing efforts to improve non-profit governance and accountability via specific public policies.

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