The role of the paid preparer in nonprofit reporting quality

The purpose of this paper is to examine whether the preparer of the Form 990 influences the Form 990 reporting quality. Currently, the Form 990 is the only widely available source of governance and financial information for nonprofit organizations. The leading rater of nonprofit organizations, Charity Navigator, relies primarily on information from the Form 990 in developing their ratings. We identify misreporting by utilizing five measures of reporting quality. We find organizations that hire an outside accounting firm to prepare the Form 990 report higher quality financial information than organizations that choose to prepare the Form 990 in house. Interestingly, the size of the accounting firm is not associated with the quality of Form 990 reporting with the exception that paid preparers who are sole proprietors are more likely to misreport. Further exploration reveals that paid preparers who file more returns are less likely to misreport indicating that specialization is associated with more accurate reporting on Form 990. Our study contributes to the literature by using multiple reporting measures to examine the impact of paid preparers on the reporting quality of 990s. Furthermore, our study is the first to consider how specialization affects the accuracy of 990 returns.     

The role of rating agencies in the market for charitable contributions: An empirical test

Rating agencies play the role of information intermediaries in the market for donations. These watchdog organizations obtain and interpret accounting data and other information about charitable organizations and report ratings to help donors select among the many organizations soliciting contributions. In the age of the internet, information from Internal Revenue Service Form 990 returns prepared by tax-exempt organizations is more readily accessible than ever before. This study examines whether the zero- to four-star ratings provided by Charity Navigator have additional information content for donors. Charity Navigator was selected because its rating system relies almost exclusively on the 990 returns and presumably adds value by incorporating peer-group expectations for various ratios and by presenting straightforward and concise data. Using a random sample of 405 charities rated by Charity Navigator, our results suggest that rating changes do impact contributions. Positive rating changes were associated with an increase in contributions and organizations with a decline in rating were associated with decreased contributions. These effects were in addition to what would be predicted using an efficiency ratio commonly computed from Form 990 accounting data and other control variables.     

A note on public debt, tax-exempt bonds, and Ponzi games

By issuing tax-exempt bonds, the government can incur debt and never pay back any principal or interest, even if the economy without public debt evolves on a dynamically efficient growth path. The welfare effects of such a Ponzi type borrowing scheme are mixed. The current young will unambiguously benefit. Depending on preferences and the aggregate technology, a finite number of subsequent generations may also benefit. However, the welfare of all generations thereafter will be lower than in the economy without public debt.     

Credit unions and earnings management to mitigate political scrutiny over tax-exempt status

In this paper, we examine whether credit unions manage earnings to mitigate political scrutiny. In particular, we study whether credit unions increased loan loss provisions to decrease earnings around a 2005 congressional hearing on the efficacy of credit unions’ tax-exempt status. On average, we find evidence consistent with credit unions managing earnings downward via the loan loss provision in the quarters leading up to and surrounding the congressional hearing. In addition, we find that credit unions with higher earnings before the loan loss provision engaged in more downward earnings management than credit unions with lower earnings before provision. Our findings contribute to the literature examining the use of downward earnings management to avoid political scrutiny and the banking literature. Likewise, our results inform the continued debate as to whether credit unions should be tax-exempt.