Are audit-related factors associated with financial reporting quality in nonprofit organizations?

What is it about?

Given the significance of the nonprofit sector to the U.S. economy, the level of both public and private support nonprofits receive, the increasing demand for accountability, and the potential for the misallocation of scarce resources, it is important to consider how governance mechanisms, such as monitoring by external auditors, impact the quality of this sector’s financial reports. Specifically, we examine the likelihood of higher financial reporting quality as a function of several audit-related factors. We find that specialist auditors and unexplained audit fees have a significant positive effect on financial reporting quality in nonprofit organizations. Interestingly, we observe changes to reporting quality in the period after the Sarbanes-Oxley Act of 2002, despite the fact the legislation does not apply to nonprofit audits. We do not find consistent support for a positive or negative effect of auditor tenure on financial reporting quality. Finally, our results do not provide support that Big N auditors consistently provide higher quality than both medium and small CPA firms, a finding very different from for-profit studies.

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