Are Audit-Related Factors Associated with Financial Reporting Quality in Nonprofit Organizations?

Abstract

SUMMARY We examine the effects of several audit-related factors on nonprofit financial reporting quality (FRQ). Using four different measures of FRQ, we demonstrate that the findings of nonprofit accounting research might be sensitive to the choice of FRQ proxy. Nonetheless, we consistently find that specialist auditors and unexplained audit fees have a significant positive effect on FRQ in nonprofit organizations. Interestingly, we observe changes to FRQ in the period after the Sarbanes-Oxley Act of 2002, despite the fact that the legislation does not apply to nonprofit audits. In fact, the results suggest nonprofits selected less-obvious methods of ratio management post-SOX, compared to pre-SOX. Finally, we do not find that Big N auditors consistently provide the highest quality, a result very different from for-profit studies.