Earnings management by non-profit organizations: evidence from UK charities

Nguyen, Tam and Soobaroyen, Teerooven (2015) Earnings management by non-profit organizations: evidence from UK charities. 38th Annual Congress of the European Accounting Association, Glasgow, United Kingdom. 27 - 29 Apr 2015. 39 pp .

Record type: Conference or Workshop Item (Paper)

Abstract

Informed by stakeholder theory and resource dependence theory, this paper investigates for the first time whether UK charities are engaged in earnings management (EM) practices. The study relies on data from a large sample of 1414 charities over a five year period (2008-2012), selected on a stratified basis in relation to size (total incoming resources) and classified in eleven different sectors of activity. The results firstly suggest that UK charities use discretionary accruals to drive their financial results toward a zero surplus/deficit; this result also reveals that the distribution of reported earnings around zero is a preferable result of UK charities. Secondly, the empirical results point to a negative association between leverage and EM behaviour engaged by charities, specifically, charities with high level of leverage tend to manage earnings downward. Thirdly, EM behaviour appears to significantly differ between charitable sectors, and in particular, some sectors (Law, Advocacy and Politics, and International organisations) are more aggressively involved in EM than others. The findings have important implications for standard-setters, policy-makers and users of accounting information in the charitable sector.

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