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Why Bad Things Happen to Good Organizations: The Link Between Governance and Asset Diversions in Public Charities

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  • Erica Harris

    (Villanova University)

  • Christine Petrovits

    (The College of William and Mary)

  • Michelle H. Yetman

    (University of California, Davis)

Abstract

In the United States, the IRS now requires charities to publicly disclose any significant asset diversion, which is the theft or unauthorized use of assets, that the charity identifies during the year. We use this new disclosure to investigate whether strong governance reduces the likelihood of a charitable asset diversion. Specifically, for a sample of 1528 charities from 2008 to 2012, we simultaneously examine eleven measures of governance that capture four broad governance constructs: board monitoring, independence of key individuals, tone at the top, and capital provider oversight. We find consistent evidence that good governance across all four constructs is negatively associated with the probability of an asset diversion. Of the eleven governance measures, our results indicate that monitoring by debt holders and government grantors, audits, and keeping managerial duties in-house are most strongly associated with lower incidence of fraud. Our results also indicate that the likelihood of a fraud is negatively associated with a board review of the Form 990, the existence of a conflict of interest policy, and the presence of restricted donations. In addition, we document that the likelihood of an asset diversion is negatively associated with program efficiency and positively associated with growth and organizational complexity.

Suggested Citation

  • Erica Harris & Christine Petrovits & Michelle H. Yetman, 2017. "Why Bad Things Happen to Good Organizations: The Link Between Governance and Asset Diversions in Public Charities," Journal of Business Ethics, Springer, vol. 146(1), pages 149-166, November.
    • Handle: RePEc:kap:jbuset:v:146:y:2017:i:1:d:10.1007_s10551-015-2921-9
    DOI: 10.1007/s10551-015-2921-9
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    References listed on IDEAS

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    Cited by:

    1. Jeroen Veldman & Tanusree Jain & Christian Hauser, 2023. "Virtual Special Issue on Corporate Governance and Ethics: What’s Next?," Journal of Business Ethics, Springer, vol. 183(2), pages 329-331, March.
    2. Keval Amin & Erica Harris, 2022. "The Effect of Investor Sentiment on Nonprofit Donations," Journal of Business Ethics, Springer, vol. 175(2), pages 427-450, January.
    3. Gregory D. Saxton & Daniel G. Neely, 2019. "The Relationship Between Sarbanes–Oxley Policies and Donor Advisories in Nonprofit Organizations," Journal of Business Ethics, Springer, vol. 158(2), pages 333-351, August.
    4. Rajeev K. Goel & Michael A. Nelson, 2024. "Ending COVID-19 vaccine apartheid through vaccine donations: the influence of supply chains," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(3), pages 592-613, September.
    5. Gianni Onesti & Riccardo Palumbo, 2023. "Tone at the Top for Sustainable Corporate Governance to Prevent Fraud," Sustainability, MDPI, vol. 15(3), pages 1-16, January.
    6. Saffet A. Uygur & Christopher J. Napier, 2024. "Understanding Fraud in the Not-For-Profit Sector: A Stakeholder Perspective for Charities," Journal of Business Ethics, Springer, vol. 190(3), pages 569-588, March.
    7. Rajeev K. Goel, 2020. "Uncharitable Acts in Charity: Socioeconomic Drivers of Charity‐Related Fraud," Social Science Quarterly, Southwestern Social Science Association, vol. 101(4), pages 1397-1412, July.

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