Auditing, Attestation, and Financial Reporting for an Early American Charity

Abstract

ABSTRACT Our study examines assurance and attestation practices of the Charleston Orphan House from 1790 to 1825 and represents a response to Alchian and Demsetz's (1972) call for research into the nature of stewardship and agency costs among nonprofits by providing evidence of the largely unexplored early American practices (Moussalli 2008; Sargiacomo and Gomes 2011). We document the origins of the assurance and attestation techniques used to legitimize the Charleston Orphan House and to minimize the agency costs faced by its public and private funders. We find that assurance and attestation practices were reflected in the routine publication of the Committee on Accounts reports that served as vital elements of a governance structure that enabled the municipality and philanthropists to monitor the financial condition of the institution. These oversight efforts helped minimize agency costs that naturally arose between the Orphan House and resource providers, making it possible for the City of Charleston and private funders to efficiently allocate limited resources to mitigate social costs of managing the post-revolutionary orphan problem. Our findings provide new insights into early assurance and attestation practices and support Alchian and Demsetz's (1972) conjecture that nonprofits face similar economic motivations for utilizing financial reporting, auditing, and attestation as monitoring mechanisms as do their profit-seeking counterparts.