The Impact of Audit Committees on US Nonprofit Organizations’ Governance

  • Husam Abu-Khadra Heller College of Business, Roosevelt University, Chicago

Abstract

All public companies in the United States are required by the securities and exchange commission (SEC) to have an audit committee. Such enforcement can be attributed to high-profile corporate failures and their connections to nonexistence, ineffective or weak audit committees and governance. Despite the efforts to establish a similar argument and enforcement structure for the nonprofit sector, the internal revenue service (IRS) has not pursued legislation, and no empirical evidence has been established to support any public policy changes. This paper contributes to the literature in this field by being the first study to examine 124,980 nonprofit organizations during the period of 2010 to 2015 to test the association between governance in nonprofit organizations and audit committees. We included fifteen measures from these organizations’ IRS Form 990 filings to formulate the study variables. We found significant evidence that the existence of audit committees improves the governance scores of nonprofit organizations. Our study findings have significant implications for nonprofit executives, policy makers and any other interested parties; these findings act as preliminary evidence to support more proactive policies regarding mandatory audit committees for nonprofit organizations. 

Downloads

Download data is not yet available.

References

Abu-Khadra, H., Stinnette, U., & Friel, T. (2017). Fraud in nonprofit education organization. Paper presented at Proceedings of North American Accounting Society Conference. Chicago, MBAA International Conference.
ACFE. (2018). Report to the nations: 2018 global study on occupational fraud and abuse. Retrieved April 20, 2019 from https://www.acfe.com/uploadedFiles/ ACFE_Website/Content/rttn/2018/RTTN-Government-Edition.pdf
Albrecht, W. S., Albrecht, C. I., Albrecht, C. C., & Zimbelman, M. F. (2016). Fraud examination (5th ed.). Boston, MA, USA: Cengage Learning.
Beasley, M. S., Carcello, J. V., Hermanson, D. R., & Neal, T. L. (2010). The audit committee oversight process. Contemporary Accounting Research, 26(1), 65-122.
Becker, W., Saisana, M., Paruolo, P., & Saltelli, A. (2017). Weights and importance in composite indicators: Closing the gap. Ecological Indicators, 80, 12-22. Doi: 10.1016/j.ecolind.2017.03.056.
Cadbury, S. A. (1992). Report of the committee on the financial aspects of corporate governance (1st ed.). London: Gee & Co. Ltd.
Cressey, D. R. (1950, December). The criminal violation of financial trust. American Sociological Review, 15(6), 738-743. Doi: 10.2307/2086606.
DC Bar Pro Bono. (2015). Conflict of interest policies: Disclosure, montioring, and enforecement. Public Service Report, DC Bar. Retrieved December 2, 2018 from https://www.probonopartner.org/wp-content/uploads/2016/08/dc-bar-alertconflict-of-interest-disclosure-10-15.pdf.
Eaton, T. V., & Akers, M. D. (2007, June). Whistleblowing and good governance. The CPA Journal, 77(6), 66-71.
Elliott, A., & Woodward, W. (2007). Statistical analysis quick reference guidebook with SPSS examples (1st ed.). London: Sage Publications.
Fox, J. (2008, February 23). Conflict of interest policies: Not just more nonprofit documents. Retrieved January 23, 2019 from https://nonprofitquarterly.org/ 2018/02/23/conflict-interest-policies-not-just-nonprofit-documents/
George, D., & Mallery, P. (2016). SPSS for Windows step by step: A simple guide and reference, 11.0 update (14th ed.). Boston, MA: Allyn & Bacon.
Ghafran, C., & O’Sullivan, N. (2013, October). The governance role of audit committees: Reviewing a decade of evidence. International Journal of Management Review, 15(4), 381-407. Doi: 10.1111/j.1468-2370.2012.00347.x.
Ghasemi, A. & Zahediasl, S.(2012). Normality tests for statistical analysis: A guide for non-statisticians. International Journal of Endocrinology & Metabolism, 10(2), 486-489.
Harris, E., Petrovits, C. M., & Yetman, M. H. (2015, March). The effect of nonprofit governance on donations: Evidence from the revised form 990. The Accounting Review, 90(2), 579-610. Doi: 10.2308/accr-50874.
Klemash, S., & Lee, J.(2018, December 2). 2018 year-end issues for audit committees. Retrieved February 3, 2019 from https://corpgov.law.harvard.edu/2018/12/02/2018-year-end-issues-for-audit-committees/
Krzeminska, A., & Zeyen, A. (2016, April). A stewardship cost perspective on the governance of delegation relationships: The case of social franchising. Nonprofit & Voluntary Sector Quarterly, 46(1), 71-91. Doi: 10.1177/0899764016643610.
Lampkin, L. M. (2008). Principles from the panel on the nonprofit sector: Yet another list of “shoulds”? Retrieved February 3, 2019 from https://www.guidestar.org/Articles.aspx?path=/rxa/news/articles/2008/principles-from-the-panel-on-thenonprofit-sector.aspx
Lee, P. C. (2015, June). Problems of implementing audit committee and supervisory board simultaneously in China. Journal of Accounting, Auditing & Finance, 30(4), 509-528. Doi: 10.1177/ 0148558X15587649.
Lee, T. A. (2001). A crisis of confidence: US auditing in the 21st century. International Journal of Auditing, 5(1), 1-2. Doi: 10.1111/1099-1123.00321.
McDonnell, D., & Rutherford, A. C. (2018). The determinants of charity misconduct. Nonprofit & Voluntary Sector Quarterly, 47(1), 107-125. Doi: 10.1177/0899764017728367.
Narayanaswamy, R., Raghunandan, K., & Rama, D. V. (2015, April 27). Satyam failure and changes in Indian audit committees. Journal of Accounting, Auditing & Finance, 30(4), 529-540. Doi: 10.1177/0148558X15584124.
National Council of Nonprofits. (2018). Board’s role & audit committees. Retrieved April 11, 2019 from https://www.councilofnonprofits.org/nonprofit-auditguide/board-role-audit-committee
Nau, R. (2018). What’s a good value for R-squared? Retrieved March 10, 2019 from https://people.duke.edu/~rnau/rsquared.htm#top
Pallant, J., (2007). SPSS survival manual, a step by step guide to data analysis using SPSS for windows (3rd ed.). Sydney: McGraw Hill.
Puri, R., Trehan, R., & Kakkar, H. (2010, January & April). Corporate governance through audit committee: A study of the Indian corporate sector. The IUP Journal of Corporate Governance, 9(1 & 2), 47-56.
Saibaba, M. D., & Ansari, V. A. (2012, May). Audit committees and corporate governance: A study of select companies listed in the Indian bourses. The IUP Journal of Accounting Research & Audit Practices, 10(3), 46-54.
Shleifer, A., & Vishny, R. W. (1997, June). A survey of corporate governance. The Journal of Finance, 52(2), 737-783. Doi: 10.1111/j.1540-6261.1997.tb04820.x
Sommer, A. (1991). Auditing audit committees: An educational opportunity for auditors. Accounting Horizons, 5(2), 19-93.
Song, M.-K., Lin, F.-C., Ward, S. E., & Fine, J. P. (2013, January-February). Composite variables: When and how. Nursing Research, 62(1), 45-49. Doi: 10.1097/NNR.0b013e3182741948.
Templeton, G. F. (2011, January). A two-step approach for transforming continuous variables to normal: Implications and recommendations for IS research. Communications of the Association for Information Systems, 28(1), 41-58. Doi: 10.17705/1CAIS.02804.
The Panel on the Nonprofit Sector. (2007, October 1). Principles for good governance and ethical practice: A guide for charities and foundations. Washington, DC: Independent Sector.
The Washington Post. (2013). Millions missing, little explanation. Retrieved October 10, 2018 from http://www.washingtonpost.com/wp-srv/special/local/nonprofitdiversions-database/
Todd, K. J. (2016, October 28). Why corruption always requires a conflict of interest. Retrieved October 10, 2018 from https://www.forensicstrategic.com/blog/whycorruption-always-requires-a-conflict-of-interest
Turley, S., & Zaman, M. (2004, September). The corporate governance effects of audit committees. Journal of Management & Governance, 8, 305-332. Doi: 10.1007/s10997-004-1110-5.
UCLA Stats. (2016). Poisson regression: SPSS annotated output. Retrieved February 10, 2019 from https://stats.idre.ucla.edu/spss/output/poisson-regression/
UCLA Stats. (2019). What does Cronbach’s alpha mean? SPSS FAQ. Retrieved February 10, 2019 from https://stats.idre.ucla.edu/spss/faq/what-does-cronbachs-alphamean/
Published
2020-05-01
How to Cite
ABU-KHADRA, Husam. The Impact of Audit Committees on US Nonprofit Organizations’ Governance. Journal of Accounting, Business and Management (JABM), [S.l.], v. 27, n. 1, p. 30-41, may 2020. ISSN 2622-2167. Available at: <http://journal.stie-mce.ac.id/index.php/jabminternational/article/view/560>. Date accessed: 03 june 2020. doi: https://doi.org/10.31966/jabminternational.v27i1.560.
Section
Articles

Keywords

audit committee, nonprofit, governance, IRS Form 990, fraud, internal control