Maintaining Public Trust: The Influence of Transparency and Accountability on Donor Response to Fraud

Abstract

All organizations, including charities, are vulnerable to the risk of losses due to fraud. Using a sample of 562 nonprofit organizations that report an asset diversion between 2008 and 2011, we examine whether fraud disclosures are relevant to donors’ giving decisions. We find, all else equal, the disclosure of an asset diversion is associated with a significant decrease in contributions. Our evidence suggests that the negative donor response is attenuated for organizations with stronger corporate governance. In addition, we find that providing pertinent information about the diversion mitigates the negative response. Donors appear to respond to content of the fraud disclosures, including the fraud amount, the ability of the organization to recover its losses, and the identity of the perpetrator. Overall, our results are consistent with a high level of donor sophistication in understanding the qualitative information on the IRS Form 990 and highlight the value of transparency when problems occur.