Audit Signals of Accountability and Transparency in the Marketplace of Donor Information

Abstract

Potential donors have many sources of information when evaluating charities. IRS Form 990 is a readily accessible source of information. Charity rating organizations exist to help donors evaluate charities (i.e. Charity Navigator, CharityWatch, Give.org, etc.) and their evaluations are easily accessible. While many charities are required to have an audit, there is generally no uniform requirement to make the audit easily accessible to donors, and extant research indicates that a majority of charities do not make their audits easily accessible. This research project reasons that a financial statement audit is unique among information sources and thus sends accountability signals that other information sources cannot. Charities can further send a transparency signal to donors by making their audit easily accessible. Do donors receive the accountability and transparency signals of the audit? How do the accountability and transparency signals sent by the audit interact with other sources of information available to donors? I examine these questions using an experiment. I find that donors value the accountability signal sent when an organization has an audit. I also find that donors incrementally value the transparency signal sent when the organization makes the audit easily accessible. I do not find sufficient evidence to conclude that the audit signals interact with other information available to donors.