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.