Nonprofit governance: Mechanisms and outcomes
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While governance has been widely explored in for-profit accounting research for well over a decade, the topic has only recently attracted comparable interest in a nonprofit setting. In this dissertation, I contribute to the growing body of literature by studying various facets of nonprofit governance. More specifically, I carry out my study by examining those mechanisms specifically outlined on IRS Form 990 as well as two broader tools: internal controls and executive inside debt. In Study I, I investigate the factors associated with nonprofits’ choice to remediate internal control deficiencies as well as the benefits enjoyed by nonprofits that do remediate. I find that remediation is more likely among nonprofits that are larger, are not at risk of liquidating within the next year (i.e., do not receive a going concern opinion), have lower overall audit risk, have slower growth, have December fiscal year-ends, disclose material weaknesses, have higher scaled surplus, have higher federal expenditures, and that have recently experienced an auditor switch. I also find that remediation provides a number of operational benefits with respect to subsequent spending, public support, implementation of other governance mechanisms, cost of debt, and audit delays. In Study II, I examine the relationship between the presence of external oversight and the disclosure/adoption of internal governance mechanisms as specifically outlined on Form 990. I generally find that internal governance and external oversight are complements to rather than substitutes for one another and that the presence of a handful of external oversight mechanisms drive the nonprofit to also be well-governed internally. Further, I study the impact of internal governance on a wider range of performance factors and find that better internally governed nonprofits have better financial reporting quality, more efficient and stable operations, and less costly external debt financing. Finally, in Study III, I examine contracting as a form of governance measured as executive inside debt (deferred compensation). Based on my examination of the determinants of CEO inside debt, I find that it is more often used and comprises a higher proportion of a CEO’s total compensation when the nonprofit is larger, younger, growing, less leveraged, more charitable-oriented, operates in a high income tax state, has a less powerful CEO, and has generally otherwise poor governance. Further, I find that a higher proportion of inside debt in a CEO’s pay structure is associated with a higher program ratio, a lower likelihood of program ratio manipulation, a lower probability of a going concern opinion, a lower probability of internal control material weaknesses over financial reporting, and the receipt of higher external credit ratings. Collectively, the results from my study indicate that nonprofits simultaneously use a number of governance mechanisms. Further, the presence and proper operation of those mechanisms help a nonprofit to improve its performance and better align its operations with the needs and desires of stakeholders.