Earnings Management in the Charitable Sector: A Canadian Study

Abstract

This article examines whether charitable organizations use discretionary accruals to manage their surplus or deficit. Linear regression was used to analyze the financial data of a broad sample of Canadian charitable organizations. Results showed that discretionary accruals were used to manage these income figures. This approach is compounded by the magnitude of grants, public benefit, and leverage. The results hold whether the charity anticipates a surplus or a deficit, but not if it displays a high level of public benefit. In that case, charities with an anticipated surplus increase their use of discretionary accruals to decrease earnings, whereas charities that anticipate a deficit are not inclined to manage their deficit toward zero. This study complements prior literature on nonprofits and shows that even though tax laws differ among countries, charity managers in various contexts are motivated to manage earnings and are influenced by various factors in doing so.