Efficient Funding: Auditing in the Nonprofit Sector

Natalie Privett () and Feryal Erhun ()
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Natalie Privett: Department of Management Science and Engineering, College of Engineering, Stanford University, Stanford, California 94305
Feryal Erhun: Department of Management Science and Engineering, College of Engineering, Stanford University, Stanford, California 94305

Manufacturing & Service Operations Management, 2011, vol. 13, issue 4, 471-488

Abstract: Nonprofit organizations are a critical part of society as well as a growing sector of the economy. For funders there is an increasing and pressing need to ensure that society reaps the most social benefit for their money while also developing the nonprofit sector as a whole. By routinely scrutinizing nonprofit reports in an effort to deduce whether a nonprofit organization is efficient, funders may believe that they are, in fact, giving responsibly. However, we find that these nonprofit reports are unreliable, supporting a myriad of empirical research and revealing that report-based funding methods do not facilitate efficient allocation of funds. In response, we develop audit contracts that put funders in a position to enact change. Auditing, perhaps obviously, supports funders; however, we find that it also benefits the population of nonprofits. Moreover, auditing results in improved efficiency for the nonprofit sector overall. Indeed, our conclusions indicate that nonprofits may want to work with funders to increase the use of auditing, consequently increasing efficiency for the sector overall and impacting society as a whole.

Keywords: public sector; nonprofit sector; audit contracts; adverse selection; principal-agent framework; resource allocation; operational transparency (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (11)

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