JPAM Featured Article: How Do Nonprofits Respond to Regulatory Thresholds: Evidence from New York's Audit Requirements
June 7, 2016 03:22 PM
"How Do Nonprofits Respond to Regulatory Thresholds: Evidence from New York's Audit Requirements"
As part of our ongoing effort to promote JPAM authors to the APPAM membership and the public policy world at large, we are asking JPAM authors to answer a few questions to promote their research article on the APPAM website.
By: Travis St.Clair
What was the genesis/history of the idea for your research?
I was interested in looking at the burden imposed on nonprofits by certain regulatory requirements, especially requirements that affect even fairly small organizations. The state requirement to file audited financial statements is a particularly tough one for many small organizations that don’t have much back-office support, and New York represented an interesting case because the revenue thresholds there were so low. As soon as I looked at the data, one thing really jumped out; there was clear evidence that organizations near the thresholds were reducing their revenues in order to avoid the requirement.
What is the main conclusion that becomes evident from your research? (Or, what is our main takeaway?)
Nonprofits in New York that are near the thresholds for the state’s audit requirements have responded by reducing their reported revenues – by about $1,300 on average in the case of a review and $1,400 in the case of a full audit. These estimates are considerably lower than the price of audit services, but they are higher than the estimates from other work that has looked at impact of the Form 990. These avoidance costs are only part of the story – obviously financial reporting requirements have many benefits as well – but they do underscore the burden that we impose on small organizations when we demand financial transparency from them.
What are some of the more interesting or surprising findings/conclusions, you discovered during this process?
I initially thought that organizations would reduce their revenues by much more in response to the (higher) audit threshold than in response to the (lower) threshold for a review engagement. But in fact, the extent of bunching is much greater at the lower threshold, and even the estimates of the avoidance cost are not that far apart. As organizations grow larger, they are more likely to have the infrastructure in place to comply with these types of requirements and are also more likely to see the benefits. For example, grantors often want to see audited financial statements, and so as organizations grow in size they have other reasons for producing financial statements beyond just the regulatory requirements.
From a methodological standpoint, I was also a little surprised to see how much the static estimates overstated the extent of bunching. I was not expecting to see such a large difference between the static and dynamic estimates.
Travis St.Clair, @t_stclair, is an assistant professor at the University of Maryland’s School of Public Policy, teaching courses on public finance and financial management. His research is motivated by two overarching questions: what are the long-term fiscal challenges facing state and local governments in the United States, and what are the impacts of fiscal institutions on budgetary outcomes in the public and not-for-profit sectors. Current projects examine how state governments manage contribution risk in defined benefit pension plans and what effect regulatory thresholds have on nonprofit financial management. In addition to his substantive interests in public finance, Prof. St.Clair also has methodological interests in causal inference, and in particular, the conditions under which quasi-experimental research designs provide unbiased estimates of causal effects. Prof. St.Clair received his PhD in public policy from George Washington University and a BA in chemistry from Harvard. From 2012-2013, he was a post-doctoral fellow at Northwestern University’s Institute for Policy Research.