A new study reports that nonprofits make accounting errors at a relatively high rate compared to their for-profit cousins. The primary culprit for this concerning statistic most likely is because nonprofits try to avoid devoting a high percentage of their funding to administrative costs and often do not invest the proper time and budget into their financial functions.
The study was conducted by Jeffrey Burks an associate professor of accountancy at the University of Notre Dame’s Mendoza College of Business.
Burks’ study indicates that the rate of accounting errors at nonprofits is nearly double that of for-profit businesses of similar sizes.
“Nonprofits of all sizes tend to have high error rates,” Burks said in a statement. “The rate of errors does vary with the size of the nonprofit’s audit firm. The clients of the largest eight audit firms in the country have a significantly lower rate of errors. The clients of these large audit firms tend to be large nonprofits, but the effect does not translate into a lower error rate for large nonprofits overall because so few nonprofits are audited by the top eight audit firms—only about 7 percent of my sample.”
Burks went on to say that the low administrative costs that nonprofits cite to attract donors may actually be contributing to their high rate of accounting errors.
“From talking with nonprofit CFOs and auditors, nonprofits have limited resources and understandably seek to expend the vast majority of those resources on mission-related activities rather than on administrative functions like accounting,” he said. “Although investments in high-quality information systems can pay off by improving a nonprofit’s efficiency and effectiveness, there are difficult tradeoffs to make because dollars spent to upgrade systems or to hire an accountant could mean fewer dollars going to mission-related activities.”