Misguiding donors and non-profit management by regulation: the role of ‘overhead’ costs
DOI:
https://doi.org/10.60733/PMGR.2025.03Keywords:
Non-profit organizations, overhead costs, cost calculation, cost disclosureAbstract
Overhead costs and the concomitant efficiency notion are frequently used both to measure non-profit organisations’ performance in research and to select non-profit organisations worthy of donations. The main message of this article is that their concept and interpretation are not always correctly understood, even not by (influential) regulators imposing some potentially misleading disclosure rules. The arguments presented in this article depart from a short overview of the relevant cost concepts and their correct calculation, and contrasts them with the indicators usually looked at in practice and research. The article closes with some recommendations for non-profit organisations, potential donors, and governments.
References
A. Bhimani, C.T. Horngren, S.M. Datar, and M.V. Rajan, Management and cost accounting. Harlow: Pearson Education, 2012 (5th ed.).
Internal Revenue Service, 2024 Instructions for Form 990 return of organization exempt from income tax. https://www.irs.gov/instructions/i990. Accessed on May 12, 2025.
W.R. Baber, P.L. Daniel. and A.A. Roberts, “Compensation to managers of charitable organisations: An empirical study of the role of accounting measures of program activities”, Accounting Review, 77: 679-693, 2002, doi: 10.2308/accr.2002.77.3.679.
R.I. Bloch, E.E. Harris, and A.N. Peterson, “Interlocking boards in nonprofit organizations”, Accounting Horizons, 34: 1-17, 2020, doi: 10.2308/horizons-16-104.
J.L. Callen, A. Klein, and D. Tinkelman, “Board composition, committees, and organisational efficiency: The case of non-profits”, Nonprofit and Voluntary Sector Quarterly, 32: 493-520, 2003, doi: 10.1177/0899764003257462.
P. De Andrés-Alonso P., N. Martín Cruz, and M.E. Romero-Merino, “The governance of non-profit organisations: Empirical evidence from nongovernmental development organisations in Spain”, Nonprofit and Voluntary Sector Quarterly, 35: 588-604, 2006: doi: 10.1177/0899764006289765.
K.F. Hallock, “Managerial pay and governance in American non-profits”, Industrial Relations, 41: 377-406, 2002, doi: doi.org/10.1111/1468-232X.00252.
G.M. Kistruck, I. Qureshi, and P.W. Beamish, “Geographic and product diversification in charitable organizations”, Journal of Management, 39: 496-530, 2013, doi: doi.org/10.1177/0149206311398.
D. Tinkelman and K. Mankaney, “When is administrative efficiency associated with charitable donations?”, Nonprofit and Voluntary Sector Quarterly, 36: 41-64, 2007, doi: https://doi.org/10.1177/0899764006293176.
A.R. Finley, C.M. Hall, E. Harris, and S.J. Lusch, “The effect of large corporate donors on non-profit performance”, Journal of Business Ethics, 172: 463-485, 2021, doi: doi.org/10.1007/s10551-020-04516-2.
J.L. Garner and T.D. Harrison, “Boards, executives excess compensation, and shared power: evidence from nonprofit firms”, Financial Review, 48: 617-643, 2013, doi: doi.org/10.1111/fire.12018.
J. Kähler J. and A. Sargeant, “The size effect in the administration cost of charities”, European Accounting Review, 11: 215-243, 2002: doi: doi.org/10.1080/0963818022000006870
N. Hyndman, “Charity accounting – an empirical study of the information needs of contributors to UK fund raising charities”, Financial Accountability and Management, 6: 295-307, 1990, doi: doi.org/10.1111/j.1468-0408.1990.tb00335.x.
H. Falk, “Towards a framework for not-for-profit accounting”, Contemporary Accounting Research, 8: 468–499, 1992, doi: doi.org/10.1111/j.1911-3846.1992.tb00855.x.
S. Buchheit S. and L.M. Parsons, “An experimental investigation of accounting information’s influence on the individual giving process”, Journal of Accounting and Public Policy, 25: 666-686, 2006, doi: doi.org/10.1016/j.jaccpubpol.2006.09.002.
L.M. Parsons, “Is accounting information from non-profit organisations useful to donors? A review of chariable giving and value-relevance”, Journal of Accounting Literature, 22: 104-129, 2003.
F.A. Jacobs F.A. and N.P. Marudas, “The combined effect of donation price and administrative inefficiency on donations to US non-profit organisations”, Financial Accountability and Management, 25: 33-53, 2009, doi: doi.org/10.1111/j.1468-0408.2008.00464.x.
C. Hung, M.A. Hager, and Y. Tian, “Do donors penalize nonprofits with higher non-program costs? A meta-analysis of donor overhead aversion”, Nonprofit and Voluntary Sector Quarterly, 52: 1587-1608, 2023, doi: doi.org/10.1177/08997640221138260.
M.H. Yetman and R.J. Yetman, “Do donors discount low-quality accounting information?” Accounting Review, 88: 1041-1067, 2013, doi: 10.2139/ssrn.1268582.
B.K. Yörük, “Charity ratings”, Journal of Economics and Management Strategy, 25: 195-219, doi: doi.org/10.1111/jems.12139.
L.E. Grant, “Does the introduction of ratings reduce giving? Evidence from charities”, Economic Inquiry, 59: 978-995, 2021, doi: doi.org/10.1111/ecin.12920.
R.A. Cnaan, K. Jones, A. Dickin, and M. Salomon, “Nonprofit watchdogs: do they serve the average donor?”, Nonprofit Management and Leadership, 21: 381-397, 2011, doi: doi.org/10.1002/nml.20032.
J.M. Trussel, “Assessing potential accounting manipulation: The financial characteristics of charitable organisations with higher than expected program-spending ratios”, Nonprofit and Voluntary Sector Quarterly, 32: 616-634, 2003, doi: 10.1177/0899764003257459.
R. Krishnan, M.H. Yetman, and R.J. Yetman, “Financial disclosure management by non-profit organisations”, University of California at Davis, Working Paper, 2004.
R. Krishnan, M.H. Yetman, and R.J. Yetman, “Expense misreporting in non-profit organisations”, Accounting Review, 81: 399-420, 2006, doi: doi.org/10.2308/accr.2006.81.2.399.
R. Krishnan R. and M.H. Yetman, “Institutional drivers of reporting decisions in nonprofit hospitals”, Journal of Accounting Research, 49: 1001-1039, 2011, doi: doi.org/10.1111/j.1475-679X.2011.00413.x.
L.M. Parsons, C. Pryor, and A.A. Roberts, “Pressure to manage ratios and willingness to do so: evidence from nonprofit managers”, Nonprofit and Voluntary Sector Quarterly, 46: 705-724, 2017, doi: https://doi.org/10.1177/0899764017692037.
B.N.Quosigk and D.A. Forgione, “The association of program ratios and consolidation choices: evidence from nonprofit hospitals”, Accounting Horizons, 32: 147-163, 2018, doi: https://doi.org/10.2308/acch-52180.
P. Schubert and S. Boenigk, “The nonprofit starvation cycle: empirical evidence from a German context”, Nonprofit and Voluntary Sector Quarterly, 48: 467-491, 2019, doi: https://doi.org/10.1177/0899764018824669.
U. Gneezy, E.A. Keenan, and A. Gneezy, “Avoiding overhead aversion in charity”, Science, 346: 632-635, 2014: doi: 10.1126/science.1253932.
Downloads
Published
