Assessing Potential Accounting Manipulation: the Financial Characteristics of Charitable Organizations with Higher than Expected Program-Spending Ratios

Abstract

Accounting manipulation is defined as when the managers of an organization intentionally misstate their financial information to favorably represent the entity’s financial performance.Managers of nonprofit organizations may have incentives to manipulate their reported program-spending ratios because donors use them in determining contribution decisions.The program-spending ratio is the percentage of expenses that is allocated to programs rather than to administrative or fundraising functions.In this study, I analyze the financial characteristics of potential accounting manipulators: those organizations that have program-spending ratios significantly higher than expected.I limit the study to relatively large nonprofit charitable organizations (charities) and use six financial indicators of accounting manipulation to develop a predictive model.The model is significant, with most of the financial indicators significantly contributing to the overall model. Also, within certain parameters, the model can predict with reasonable accuracy whether or not a charity is a potential accounting manipulator.