Can non-profit boards adequately constrain earnings management? The case of UK charities

Nguyen, Tam; Soobaroyen, Teerooven

Abstract

This paper aims to investigate the monitoring ability of a typically unpaid board of directors (or trustees) in the context of not-for-profit organizations (NFPOs). More specifically, since it has been found that NFPOs may be involved in managing their accounting, disclosure and/or reporting practices, we consider whether the characteristics of the trustee board are associated to the level of discretionary accruals, as a proxy for the extent of earnings management practices. Based on a hand-collected sample of 250 UK charities and informed by the resource dependence and stakeholder perspectives, the study firstly reveals that trustee board diversity, specifically with respect to gender and educational background, fosters the monitoring function of the board by lowering the level of discretionary accruals. Secondly, the financial expertise of the audit committee is also a pivotal factor in lowering the extent of earnings management by NFPOs. The findings contribute to the limited knowledge on the influence of trustees and trustee boards in non-profit organizations, and have noteworthy implications for various stakeholders such as (i) donors and funders in terms of how they assess the governance 'risk' of their funding/grant decisions, and (ii) charity policy-makers in terms of the development of relevant governance guidance for the sector.

Citation

Nguyen, T., & Soobaroyen, T. (2016). Can non-profit boards adequately constrain earnings management? The case of UK charities

• Acceptance Date: Mar 1, 2016
• Publication Date: 2016
• Deposit Date: Mar 5, 2019
• Keywords: Accounting quality; earnings management, trustee boards; charity governance, not-for-profit organizations, UK charities
• Public URL: https://nottingham-repository.worktribe.com/output/1607421
• Additional Information: The paper has been presented at the conferences:; 1. 2016 Government and Non-profit Section Midyear Meeting, American Accounting Association (Arlington, VA, USA, March 11-12, 2016);; 2. British Accounting and Finance Association- SWAG- Annual Conference (Bath, UK, September, 2015); and; 3. Southampton Business School Research Seminars (Southampton, UK, July, 2016).; (The paper title has been revised from “Governance and impression management by non-profit organizations: Evidence from UK charities”)