The purpose of this study is to examine the frequency, determinants and implications of misreporting fundraising activities. We compare state telemarketing campaign reports with the associated information from nonprofits' annual Form 990 filings to directly test nonprofits' revenue and expense recognition policies. Our study indicates that smaller nonprofits, and those with less accounting sophistication, are more likely to inappropriately report telemarketing costs as a component of net revenues rather than as expenses. In addition, less monitored firms are more likely to report telemarketing campaign revenues net of expenses. Additionally, among those firms that do report telemarketing costs as expenses, we find that smaller firms, and those with relatively less officer compensation, are more likely to allocate telemarketing expenses to nonfundraising expense categories.

We survey 200 nonprofit executives to investigate the pressure they experience to manage so-called efficiency ratios, and their reactions to that pressure. Specifically, we investigate whether managers’ perceptions of donor pressure are influenced by (a) the degree to which they rely on contributions and government grants, (b) the existence of restricted gifts, (c) oversight by monitoring institutions that may affect donor giving decisions, and (d) the sophistication of management. We then examine factors that affect the likelihood that managers will engage in ratio management. Interestingly, we find no evidence that nonprofits that rely more heavily on donor support feel greater donor pressure. Instead, we provide evidence that specific donors, such as those who make restricted gifts and government grantors, influence perceptions of pressure. Furthermore, more sophisticated managers perceive less pressure to manage ratios. When facing pressure to manage ratios, monitors and sophisticated managers reduce the likelihood of ratio management.

We investigate how unique features of charities affect the manner in which they compensate their executives. We find that changes in compensation are significantly positively associated with changes in spending on programs that advance organization objectives, whether changes in program spending are attributable to changes in revenue raised or to changes in the relative costs of administering the charity. The results suggest that accounting performance measures can play a role in nonprofit organizations whose objectives are typically subjective and nonfinancial, and thus, whose progress toward objectives is difficult to quantify.

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Analysis in this study demonstrates how differences in strategy can be incorporated into evaluations and comparisons of financial statements of charitable organizations. The ratio of program spending to total spending, a metric commonly used in practice to evaluate charities, is the focus of the analysis. Our approach involves classifying charities according to how they access markets for donated resources and then using regression analysis to predict an organization's program-spending ratio, given the organization's strategic choice, size, and charitable objective. We then compare the predicted ratio to the organization's actual ratio to identify candidates for further review and investigation. In doing so, this paper illustrates how considering strategic choice enhances the analysis of financial statements of charitable organizations and informs assessments of organization effectiveness.