Eric Chan (UT Austin) and FJRG affiliate Xinyu Zhang (Cornell) examine why nonprofits often misreport their financial information and provide potential solutions for this behavior. They found that nonprofit pay level is key. Lower-paying nonprofits tend to select mission-focused managers who misreport to advance their nonprofit’s mission, whereas higher-paying nonprofits tend to attract self-focused managers who misreport for their personal outcomes. The authors also find that because of the selection effect of pay level, in lower-paying nonprofits penalizing the nonprofit is a more effective misreporting deterrent. However, in higher-paying nonprofits, penalizing the manager is more effective.

The full-text paper, published in The Accounting Review, is available at: https://doi.org/10.2308/TAR-2019-0620