Pressure, Cost Accounting, and Resource Allocations: Experimental Evidence on Nonprofit Financial Decision-Making

Peter Schubert,Silke Boenigk

doi:10.1177/08997640211003218

Abstract

Nonprofit organizations are under pressure to contain their overhead costs. This pressure can affect spending behavior and create an impulse to manipulate financial reporting data. Drawing on stakeholder theory, this study develops a comprehensive framework of ratio management pressure and examines the extent to which external and internal pressures affect financial decisions. We conduct a scenario experiment wherein financial managers perform accounting and spending tasks after subjection to various types of pressure: donor pressure, board pressure, or media pressure. We find that donor pressure significantly affects both accounting and spending behavior, whereas board and media pressure affect only accounting choices. Our research generates insights into the extent to which the observed practice of continuous cost containment is driven by external pressure or rather by organizations themselves. These findings are insightful for nonprofit leaders who wrestle with complex financial challenges and the expectations of multiple stakeholder groups.

Highlights

Many nonprofit organizations face pressure to demonstrate financial efficiency
We argue that the primary focus on donor pressure as a key driver of ratio management has come at the expense of a more holistic assessment of the pressure environment faced by financial managers
In light of these research gaps, this article aims to answer the following research question: to what extent do external and/or internal pressures to report low overhead change the behavior of nonprofit financial managers? To answer this question, we conduct a scenario experiment with 223 experienced nonprofit financial managers from German nonprofit organizations, in which we confront them with a set of cost accounting and spending tasks that affect an organization’s overhead ratio

Summary

Introduction

Many nonprofit organizations face pressure to demonstrate financial efficiency. Despite regular criticism on various grounds as a poor efficiency measure, the overhead ratio (i.e., the proportion of total expenses dedicated to administration and fundraising) continues to receive considerable attention among stakeholders and nonprofit organizations themselves (Coupet & Berrett, 2019). Concerns have risen that these practices lead to systemic underfunding of vital administrative infrastructure, such as maintaining well-trained staff, up-to-date information technology, or sustainable fundraising. This underfunding can impair organizations’ ability to effectively deliver on their social mission (Gregory & Howard, 2009; Lecy & Searing, 2015; Schubert & Boenigk, 2019). From an organizational perspective, Parsons et al (2017) conducted a survey among 200 nonprofit managers that explicitly measured their perceptions of donor pressure and their willingness to manage ratios. The authors found that perceived donor pressure is a strong predictor for the willingness to manage ratios and that 52% of the survey participants were openly willing to make spending changes to keep the program ratio at a desirable level

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