In the nonprofit sector, where transparency and accountability are paramount, financial audits play a crucial role in shaping governance practices. Raphael Duguay’s study, published in The Accounting Review, offers significant insights into how audits impact the management and operational policies of nonprofit organizations.
The study utilizes a sophisticated regression discontinuity design to explore how financial statement audits influence nonprofits, particularly those hovering around revenue-based exemption thresholds. The findings are compelling: financial audits lead nonprofits to adopt robust governance mechanisms, including conflict of interest policies, whistleblower policies, and formal processes for approving CEO compensation.
These changes in governance are not merely procedural; they have substantial practical implications. The study documents noticeable reductions in nepotism and a more equitable CEO-to-employee pay ratio, indicating that audits effectively curtail managers‘ opportunities to derive private benefits from their positions.
The positive effects of audits on governance are especially pronounced in organizations with certain characteristics: those overseen by an audit committee, those with an independent board, and those facing a high demand for oversight from their charitable supporters.
This research underscores the value of financial audits far beyond their traditional role of financial oversight. By enforcing and encouraging good governance practices, audits contribute to a healthier, more transparent operational environment in the nonprofit sector.
For more detailed analysis and findings, the full study is accessible here.