The Costs and Benefits of Voluntary Disclosures by Nonprofit Organizations

1. Benefits The Costs and Benefits of Voluntary Disclosures by Nonprofit Organizations Costs Saleha Khumawala, University of HoustonDan Neely, University of Wisconsin-MilwaukeeTeresa Gordon, University of Idaho Paper Presentation at theAmerican Accounting Assn. Annual Meeting August 2010San Francisco, CA

2. Voluntary Disclosures • 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

3. The Role of Annual Reports • 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

4. Nonprofit Managers as Agents • 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”)

5. Why Donors are Principals of NFP Organizations • 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.

6. Tangible and Intangible Costs and Benefits of Annual Reports – An agency theory approach Figure 2

7. Research Questions Does the quantity of voluntary disclosures in NPO annual reports increase demand for charitable services in the following year? What factors are associated with nonprofit organizations that choose not to provide voluntary disclosures in an annual report? Do the benefits outweigh the tangible and intangible costs of providing an annual report?

8. Sample size • 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)

9. Annual Report Statistics • 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

10. Model to Test RQ #1 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) + 

11. RQ #1 - Regression Results for Models Predicting Subsequent-Year Donations Table 5

12. RQ #2 – DIFFERENCES (2003) In summary, NPOs with annual report tend to be larger, older, more efficient, and more likely to meet industry standards for efficiency Table 6

13. RQ #2 - Logit Results for Model Predicting Disclosure of an Annual Report Table 7

14. RQ #3 examines the 4 types of managers Figure 1 with stats from Table 6

15. RQ #3 - Regression Results for Models Predicting Subsequent-Year Donations ns Table 8

16. A Quick Summary of Results by RQ Does the quantity of voluntary disclosures in NPO annual reports increase demand for charitable services in the following year? YES 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 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????

17. Implications ?? MORE RESEARCH NEEDED! • Taken as a whole, our results may suggest that managers believe the intangible costs of reporting poorefficiencyoutweigh any benefits that could be provided through voluntary disclosures in an annual report. • From the donor perspective, the lack ofan annual report (particularly from largerNPOs) may be a signal that management has something to hide

18. Contact Info • 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