An Investigation of Nonprofit Reporting of Significant Diversions of Assets

Archival research suggests that nonprofit organizations are inaccurately reporting significant asset diversions on IRS Form 990. This suggests that information reported on Form 990 may be misleading. This study investigates three possible causes for the underreporting of significant diversions of assets, including reading the Form 990 instructions, how the threshold for reporting is met, and the threat of outside detection of the theft. Our findings suggest that reading the instructions for Form 990, positively and significantly influences disclosure of an asset diversion. We also examine press release reporting and find that risk of detection of the theft is a significant predictor of press release disclosure. We conduct a second study to test our suggested changes to the wording of the Signature Line and Governance Section of Form 990. Adjusting the wording of the significant diversion of assets question to be more transparent results in greater disclosure.