Does transparency come at the cost of charitable services? Evidence from investigating British charities

Dang, Canh Thien; Owens, Trudy

Abstract

Recent high-profile scandals related to misuse of funding and donations have raised the demand for scrutiny over financial transparency and operational activities of non-profit organizations in developed countries. Our analysis challenges the common practice in the sector of using programme ratios and overhead costs as indicators for non-profit accountability. Using Benford's Law to measure irregularities in financial data for a large sample of public charities we estimate that 25% of the sample potentially misreport their financial information. We show theoretically and empirically that charities with a higher programme ratio (their level of spending on charitable activities), will be less likely to misreport their financial information only when their overhead costs (spending on governing activities) are also sufficiently high. Tighter monitoring becomes ineffective in increasing the sectoral transparency and accountability unless accompanied by a sufficiently high level of charitable spending. JEL Classifications : L31; D82; H83; H49

Citation

Dang, C. T., & Owens, T. (2020). Does transparency come at the cost of charitable services? Evidence from investigating British charities. Journal of Economic Behavior and Organization, 172, 314-343. https://doi.org/10.1016/j.jebo.2020.02.020

• Journal Article Type: Article
• Acceptance Date: Feb 26, 2020
• Online Publication Date: Mar 19, 2020
• Publication Date: 2020-04
• Deposit Date: Mar 4, 2020
• Publicly Available Date: Sep 20, 2021
• Journal: Journal of Economic Behavior & Organization
• Print ISSN: 0167-2681
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 172
• Pages: 314-343
• DOI: https://doi.org/10.1016/j.jebo.2020.02.020
• Keywords: non-profits; misinformation; public provision of financial reports; Benford's Law; heteroskedasticity-based instruments
• Public URL: https://nottingham-repository.worktribe.com/output/4089250
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0167268120300640
• Additional Information: This article is maintained by: Elsevier; Article Title: Does transparency come at the cost of charitable services? Evidence from investigating British charities; Journal Title: Journal of Economic Behavior & Organization; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.jebo.2020.02.020; Content Type: article; Copyright: Crown Copyright © 2020 Published by Elsevier B.V. All rights reserved.