Exploring the accountability relationship between non-profit organisations and the state auditor

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  • 1 University of North Carolina at Charlotte, , USA
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This article explores the accountability relationship between the state auditor’s office and non-profit organisations by examining the audit reports prepared by the North Carolina State Auditor’s Office for non-profit organisations from 2009 to 2018. The data collected for this study show that the extent to which the state auditor conducts audits of non-profit organisations is fairly limited. Yet, when it does audit them, it is doing so to police their behaviours, monitor their expenditures and ensure that they are being good stewards with the resources they have been given. The findings from this study have important implications, in that they suggest that other accountability mechanisms continue to be important, including: training and education for board members about their legal and fiduciary responsibilities; the importance of adhering to best practices and standards; and the important role that third-party watchdog organisations and accreditors can play in ensuring non-profit accountability.

Abstract

This article explores the accountability relationship between the state auditor’s office and non-profit organisations by examining the audit reports prepared by the North Carolina State Auditor’s Office for non-profit organisations from 2009 to 2018. The data collected for this study show that the extent to which the state auditor conducts audits of non-profit organisations is fairly limited. Yet, when it does audit them, it is doing so to police their behaviours, monitor their expenditures and ensure that they are being good stewards with the resources they have been given. The findings from this study have important implications, in that they suggest that other accountability mechanisms continue to be important, including: training and education for board members about their legal and fiduciary responsibilities; the importance of adhering to best practices and standards; and the important role that third-party watchdog organisations and accreditors can play in ensuring non-profit accountability.

In writing about the importance of non-profit accountability, Ebrahim (2016: 104) describes how non-profit organisations are accountable to many stakeholder groups, such as funders, members, clients and themselves. He and others have described how various tools and processes are used to ensure that non-profits are accountable to these stakeholders, such as legal disclosure rules, programme evaluation or performance requirements, and self-regulation or accreditation processes (Ebrahim, 2016; Jeavons, 2016; Mitchell and Berlin, 2017). Another mechanism that is receiving growing attention in the literature are the different audit requirements for non-profit organisations (Pridgen and Wang, 2012; Verbruggen et al, 2015), especially for non-profit organisations with contracts to deliver public services for government agencies (Acheson, 2010; Smith, 2016). With the exception of the occasional headlines that make the news and a few empirical studies about other regulatory agencies, not much is known about the role of the state auditor and its relationship with non-profit organisations. This article presents the findings from a study about one state’s audits of non-profit organisations.

Literature review

According to Gray and Jenkins (1993: 55), ‘accountability is an obligation to present an account of an answer for the execution of responsibilities to those who entrusted those responsibilities’. Accountability has always been an integral part of public administration and public integrity (Denhardt and Denhardt, 2000), but it has become even more paramount, as governments increasingly contract with non-profit organisations to provide public services (Smith, 2016).

Accountability. to whom? for what?

Those who study non-profit accountability do so through a variety of lenses and perspectives. Some focus on the question ‘accountability to whom?’ and examine the accountability relationships between non-profit organisations and different stakeholder groups, such as government agencies, foundations, individual donors, service recipients and the governing board (Schatteman, 2013; Ebrahim, 2016). The accountability relationships among these stakeholder groups are often differentiated in terms of who receives or benefits from the organisation’s services (described as ‘downward accountability’ or ‘demand-side accountability’) and those who fund or regulate the organisation (described as ‘upward accountability’ or ‘supply-side accountability’ (Edwards and Hulme, 1995; Yilmaz et al, 2010; Benjamin, 2013; Ebrahim, 2016).

Others focus on the question ‘accountability for what?’ and examine how non-profit organisations are responsible for providing many different types of performance information to these stakeholders, which include: demonstrating compliance with rules and regulations; accounting for financial expenditures; and providing evidence of achieving programme outputs, outcomes and/or the organisational mission (Kearns, 1994; Benjamin, 2013; Ebrahim, 2016; Clerkin and Quinn, 2019). The consequences of failing to be accountable across these various dimensions can vary. There might be: no consequences, citations or sanctions; resignations or the dismissal of staff; or criminal and civil charges (U.S. Government Accountability Office, 2014; Christie, 2018).

Accountability theories

From a theoretical perspective, the assumptions relating to the need for accountability relationships also vary. For example, Herrera (2013) describes how government in the United States (US) has a long history of ‘policing’ non-profits, citing the need to adopt the Tax Reform Act 1969, which increased federal oversight of non-profits and foundations out of concerns relating to lobbying, corruption and self-dealing (Lenkowsky, 2012; Salamon, 2012). Helge (2009: 7) describes a more current obligation to ‘police’ non-profit organisations, arguing that a ‘barrage of media reports on scandals and abuses in the charitable sector, combined with the perception of lax regulation, has eroded public confidence in the charitable sector’. Accountability from this policing perspective asserts that government should be ‘responsible for searching, discovering and preventing fraud’ (Ittonen, 2010: 3), which, if left unchecked, could be pervasive.

Agency theory, on the other hand, views accountability as a transaction cost, which is an inherent part of the contracting relationship (Berrios and McKinney, 2017). Monitoring and oversight efforts are simply required to minimise problems associated with the agency relationship and contracting (for example, conflicts of interest and information asymmetry between government and non-profits) (Brown and Troutt, 2004; Van Slyke, 2007; Ittonen, 2010). Some suggest, however, that these monitoring and oversight efforts contribute to a culture of auditing, where the focus is on reporting quantitative numbers in reports to others at the expense of conducting meaningful programme evaluation and organisational learning (Dahler-Larsen, 2012; Owczarzak et al, 2016).

Stewardship theory views accountability in a different context, suggesting that government and non-profits have mutual interests, where they can work together as partners to achieve collective goals (Harris, 2010; Kluvers and Tippett, 2011). According to Denhardt and Denhardt (2000: 553), ‘[g]overnment acts, in concert with private and non-profit groups and organizations, to seek solutions to the problems that communities face’. Edgell and Dutton (2017: 26) describe non-profit organisations as ‘experienced public service delivery partners’, which have an ‘ability to provide efficient and effective services’. Accountability in this context has the government serving as the steward of public resources, emphasising the value of strategy, productivity and effectiveness (Kass, 1990; Denhard and Denhardt, 2000).

Audits as an accountability tool

One of the mechanisms that governments use to hold non-profit organisations accountable is the audit. Audits typically involve hiring an external accountant to review the non-profit organisation’s financial records, accounting practices and internal controls, to ensure that the organisation is adhering to commonly accepted accounting standards and practices (Graham, 2020). Audits, in the US and elsewhere, can take a range of forms, and the requirements vary, depending on the size of the organisation, the type of service they provide and revenue streams (Internal Revenue Service, 2021; Damm, 2020).

Independent financial audits. The most common type of audit is the independent financial audit. For the independent financial audit, a non-profit organisation will typically hire a certified public accountant to review the organisation’s financial statements and records to determine whether the organisation is adhering to the accounting standards (for example, Generally Accepted Accounting Principles or Statements of Recommended Practice) (Zeitlow et al, 2007; Morgan, 2011; Clerkin and Quinn, 2019).

In the US, at the federal level, non-profit organisations that receive more than $750,000 in federal funds annually are required to have an independent financial audit (National Council of Nonprofits, 2020). At the state level, 29 states require non-profit organisations to have an independent financial audit, although the criteria (for example, the size of the organisation or service area) vary by state (National Council of Nonprofits, 2020). Other funders, such as city governments, county governments and private foundations, may also require non-profit organisations to conduct an independent financial audit as a requirement to receive funding (Whitaker and Day, 2001; St. Clair, 2016; Cordery et al, 2019).

Investigative audits. Non-profit organisations may also be subject to investigative audits. At the federal level in the US, an investigative audit may be undertaken by the Internal Revenue Service (IRS). These investigative audits by the IRS might include an inquiry into the background and activities of the organisation, a request to tour the organisation’s facilities, a request to review organisational documents to determine the charitable nature of the activities, and a request to review the financial and accounting statements to verify their accuracy (Internal Revenue Service, 2021).

At the state level, there are executive agencies whose mission is to audit and oversee the financial expenditures and performance of the recipients of state funds, such as state agencies, local governments and non-profit organisations. For example, a recent audit by the State of Florida Auditor General of a non-profit organisation that issues scholarships to students for private school tuition and provides transportation to public schools outside of their district, found that the organisation needed to improve the evaluation of a household’s eligibility criteria, develop investment policies to protect and increase investment earnings, and improve the employment recordkeeping (Norman, 2018).

Performance investigations. Similarly, performance investigations might be initiated by audit units in local government agencies. For example, the Durham County Audit Department in North Carolina in the US conducted an audit of the county’s Compliance Office of the Management and Budget Office to determine whether non-profit organisations were spending county grant funds as intended and assess the effectiveness of the county’s grant monitoring system (Durham County Audit Department, 2008).

Empirical research about audits of non-profits

A search for empirical studies about non-profits and audits finds that most studies focus on the independent financial audit. For example, Keating et al (2005) conducted a study that examined the types of firms which provide independent financial audits for non-profits receiving federal funding (for example, Big-5 audit firms, large regional firms and specialist audit firms). They found that smaller non-profits were more likely to have adverse reports from the auditors.

The presence or absence of an independent financial audit is often an independent or control variable in studies about accountability relationships (Gugerty, 2009; Saxton and Neely, 2019). Others have noted, more generally, that smaller non-profit organisations are less likely to have independent financial audits, unless it is required, due to the costs associated with them (Smith, 2016; LeClair, 2019), and calls for more auditing and greater disclosure are often offered as a recommendation for improving accountability (Irvin, 2005; Yilmaz et al, 2010).

With respect to the other types of audits, reports about the findings from state and federal investigative and performance audits often find their way into the media, making for dramatic headlines, such as ‘School nonprofit in Brooklyn overbilled state, audit finds’, ‘State audit challenges foster care agency’s costs’ and ‘Filings disclose pay, bonuses for [organisational name], other business leaders’ (Bischoff, 2002; Ryan, 2008; Born and Potter, 2015; Taylor, 2015).

Lott et al (2016) describe how the responsibility to oversee non-profit organisations at the state level varies considerably, but is typically conducted by the offices of the secretary of state, the state attorneys general and other charity offices. According to their study, ‘[a]lthough high-visibility board issues, fundraising scandals, and other dysfunctional or unlawful behavior in the sector may generate extensive media coverage, most regulatory and enforcement actions receive little attention and are unknown even to other agencies within the state’ (Lott et al, 2016: 2).

Few studies have focused on the substance and findings from the state auditor’s office, which is typically charged with conducting compliance reviews and investigating how state monies have been spent. In this context, the state auditor is responsible for gathering and uncovering evidence, identifying suspicious material and verifying financial statements after a grant or contract has been awarded (Wheat, 1991; Tickner, 2010). These investigations might be part of a purposive, self-directed line of inquiry (police patrol oversight) or they might be reactive inquiries in response to calls to a hotline or complaints by a policy maker (fire alarm oversight) (McCubbins and Schwartz, 1984).

To that end, the present study seeks to fill this gap in the literature, and asks the following research questions:

  • How often does the state auditor audit non-profit organisations?

  • Under what conditions, and why, does the state auditor conduct these audits?

  • What are the outcomes from these audits?

The findings from this study are intended to help non-profit organisations to better understand and meet the accountability expectations that come with government contracting.

Context of the study

This study was conducted shortly after a highly publicised state audit made headlines for months in the US in Charlotte, North Carolina, and resulted in the firing of a chief executive officer (CEO), the resignations of board members and considerable restructuring of a local management entity/managed care organisation charged with administering Medicaid (Bullock, 2017; Morrill et al, 2017). Specifically, the purpose of the state audit was to determine whether the organisation was operating within its statutory mission, and whether it was being a good steward of state and federal resources. The conclusions from the investigation were that: the organisation spent public funds to explore strategic opportunities outside its core mission; the CEO’s salary was excessive; and other expenditures were found to be unreasonable (Wood, 2017: 19). The investigation and its findings raised concerns among advocates and families that state funding for mental health services could potentially be cut (National Alliance on Mental Illness North Carolina, 2017).

According to the state auditor:

Article V, Chapter 147 of the North Carolina General Statutes, gives the Auditor broad powers to examine all books, records, files, papers, documents, and financial affairs of every state agency and any organization that receives public funding. The Auditor also has the power to summon people to produce records and to answer questions under oath. (Wood, 2017: 5)

A review of the duties of the Office of the State Auditor finds that the office, indeed, engages in a range of financial and investigative activities. Some of these activities could be classified as simply ‘monitoring’. For example, the Office of the State Auditor collects the audits of community colleges, occupational licensing boards, or component units of the state conducted by private certified public accountant firms and posts these online on its website (North Carolina Office of the State Auditor n.d.-c, para 3).

The Office of the State Auditor, however, also performs financial audits, performance audits, investigative audits and audits of information systems for government agencies, universities, community colleges, clerks of the court, licensing boards and non-profit organisations (see Table 1). These activities are more substantive in nature, and the implications of the findings can range from recommendations for corrective action to referrals to state and federal law enforcement agencies. In addition to these audits, the state auditor routinely speaks at community events and meetings, describing the agency’s operations and the impact of their efforts. The Office of the State Auditor is also very active on social media, posting links to recently released audit reports, releasing a quarterly newsletter and sharing other important information for the public (North Carolina Office of the State Auditor, n.d.-a).

Table 1:

Number and types of audits by the North Carolina Office of the State Auditor

2009201020112012201320142015201620172018Total
Financial related2494238483433282928313
Performance audit5710363141242
Investigative971211975107481
information systems731243245031

Source: North Carolina Office of the State Auditor webpage, https://www.ncauditor.net/pub42/TypesOfAudits.aspx

A review of the statute authorising the creation of the North Carolina Office of the State Auditor finds language that is consistent with the three accountability theories. For example, with respect to agency theory, the statute describes how the audits should focus on ‘financials and compliance’ and ‘whether financial operations are properly conducted, whether the financial reports of an audited entity are presented fairly, and whether the entity has complied with applicable laws and regulations’ (Auditor, Article 5A, § 147–64.4. Definitions, 1a). With respect to stewardship theory, the statute describes how audits should focus on ‘economy and efficiency’ and ‘whether the entity is managing or utilising its resources (such as personnel and property) in an economical and efficient manner’ (Auditor, Article 5A, § 147–64.4. Definitions, 1b). With respect to policing, the statute authorises the auditor to investigate reports of improper governmental activities including misappropriation, mismanagement, waste of state resources, fraud and violations of state or federal laws, rules or regulations (Auditor, Article 5A, § 147–64.6B, Reports of improper governmental activities, a, b). It also directs the auditor to report relevant findings and allegations of misconduct to the State Ethics Commission, the Secretary of State, the State Bureau of Investigation, the District Attorney for the affected county or the State Purchasing Officer (Auditor, Article 5A, § 147–64.6, Duties and responsibilities, c19, c20, c21).

Data and methods

For this study, the audit reports prepared by the North Carolina Office of the State Auditor for non-profit organisations from 2009 to 2018 were downloaded from the auditor’s website (state law requires that the audit reports are publicly available). The time period was selected in order to correspond to the term of the current state auditor. The contents from each of the reports were copied into a text file so that it could be reviewed and coded in ATLAS.Ti. The coding procedures used a combination of directed content analysis, using pre-codes corresponded to the tenants of the three accountability theories (policing, agency theory and stewardship), and a conventional content analysis, which allowed additional codes to emerge from the data (Hsieh and Shannon, 2005; Goodrick and Rogers, 2015).

Descriptive data from each of the organisations were also compiled (from IRS 990 data or the organisation’s website). These data included: the year the organisation was incorporated; the type of organisation (based on the mission statement); and information about the organisation’s revenues and expenses (where available). These data were imported into ATLAST.Ti as attributes and matched to the audit text. The coded data were then exported to Excel, where the analysis focused on teasing out the ‘story’ embedded in each audit report (Silverman, 1993). In an effort to determine whether these organizations were still operating after the audits, the most recent 990 Form was compiled and reviewed.

Findings

To answer the first question, ‘How often does the state auditor audit non-profit organisations?’, the findings from this study showed that audits of non-profit organisations comprised a small percentage of the auditor’s reports (4.7%) in that:

  • just one of the 43 (2.3%) performance audits was for a non-profit organisation;

  • 13 of the 313 (4.2%) financial-related audits were for non-profit organisations;

  • eight of the 81 (9.9%) investigative audits were for non-profit organisations; and

  • none of the 31 (0%) information system audits were for non-profit organisations.

In total, 19 non-profit organisations were audited (one non-profit organisation received two performance audits; another non-profit organisation received two financial-related audits). One of the 19 organisations was a non-profit foundation created to manage and distribute grants from a master settlement agreement.

The number of audits per year ranged from a low of one in 2009 to a high of eight in 2013, with the average number of audits per year being three. Most of the organisations were quite well established, being founded between 1967 and 2010. In reviewing the types of organisations that were audited, it was found that they were all organisations that provided services to vulnerable populations: children, people in need of medical care and people in low-income or disadvantaged communities. The organisations were ranged considerably in terms of revenues (from less than $200,000 per year to more than $24 million) (see Table 2).

Table 2:

Summary of the non-profit organisations and audit reports

Organisation IDService areaYear incorporatedType of auditYear of investigation
01Children and education1998Investigative2010
02Children and education1994Investigative2010
03Medical care1970Investigative2010
04Children and education1981Investigative2011
05Children and education2008Investigative2012
06Health and human services2010Investigative2014
06Financial2014
07Animal welfare1987Investigative2017
08Children and education1967Investigative2017
09Children and education1994Financial2013
10Children and education1995Financial2013
11Children and education1998Financial2013
12Children and education1994Financial2013
13Children and education1994Financial2013
14Children and education1994Financial2013
15Children and education1996Financial2013
16Legal services2001Financial2011
16Financial2014
17Economic development1987Financial2014
17Economic development1987Financial2013
18Children and education1994Financial2012
19Grantmaking1999Performance2009

The second question was about ‘under what conditions, and why’ does the state auditor perform an audit on non-profit organisations. For the eight investigative reports, these seemed to align most closely with policing theory.

Policing theory

Four of the eight investigative audit reports came about because a complaint was registered with the state auditor’s hotline (organisations 1, 4, 7 and 8). The hotline asks citizens to report fraud, waste or abuse in a variety of ways. There is a free 800 phone number (1-800-730-TIPS), as well as a fax number. There is a hotline app available from the iTunes and Google stores. There is also an online reporting form, which includes screens for: an introduction; contact information; agency or organisation; individual(s) involved; nature of the allegation; supporting details – guidance; supporting details – response; adding attachments (files or photographs); finishing up; and confirmation (North Carolina Office of the State Auditor, n.d.-b).

The other four of the eight investigative audit reports came about because:

  • a non-profit organisation made a complaint about possible payroll irregularities at a service-providing subcontractor (organisation 2);

  • an advisory board member made a complaint to a state funding agency about the potential misuse of grant funds (he and many of the other advisory board members resigned after the executive director failed to provide detailed financial statements) (organisation 3);

  • an organisation failed to provide a state funding agency with sufficient documentation about how grant funds were used (organisation 5);

  • a state agency requested the audit after identifying the possibility of the mismanagement or misuse of state and federal funds (organisation 6).

The investigative reports also described how the auditors relied on multiple sources of data in order to respond to the allegations of potential fraud and misuse of funds, including: conducting site visits and interviews with CEOs, staff, accountants and other relevant stakeholders; reviews of financial records, programme-related documents, correspondence, policies and procedures; and observing programmatic activities.

In keeping with the policing framing of auditing, the eight investigative reports identified more than 45 findings and recommendations relating to: asset misappropriation and misuse of funds; excessive executive pay, bonuses, travel and other expenses; questionable purchases and/or missing funds; lack of accounting and/or internal controls; board oversight failures; and other issues. Moreover, when the executive director of one non-profit organisation did not cooperate with the investigation, a subpoena was issued and the findings from the investigative audit report were forwarded to seven different law enforcement agencies for follow-up (organisation 1). Similarly, in a report for another non-profit organisation, the auditors wrote: ‘We provided the Executive Director multiple opportunities to furnish adequate supporting documentation for the reimbursement requests submitted by [organisation name]. The Executive Director was unresponsive which eventually led to her being served with a subpoena prepared by the Office of the State Auditor’ (organisation 5).

Agency theory

In contrast to the investigative reports, the nature and findings of the financial-related audit reports were more consistent with agency theory. Most of these reports were not triggered by a specific inquiry. Rather, they were conducted as routine monitoring associated with state contracts. Eight of the 13 reports were almost identical. They examined the organisation’s internal controls relating to services and contract expenditures (ensuring that state funds were spent as planned) and salary expenditures (ensuring that salaries did not exceed the limits set by state law). Each of these reports was nine pages in length and included five sections: background; auditing scope and objectives; methodology; results and conclusions; and ordering information. Each report started out with the following language:

As authorized by Article 5A of Chapter 147 of the North Carolina General Statutes, we have conducted a financial related audit at [organisational name]. There were no special circumstances that caused us to conduct the audit, but rather it was performed as part of our effort to periodically examine and report on the financial practices of state agencies and institutions. (Organisation 11, p. 1)

The time period for the audit would be listed (for example, ‘Our audit scope covered the period July 1, 2011 through June 30, 2012’) and the methodology would be explained using the same exact language. The eight reports also had the same findings: ‘The results of our audit disclosed no internal control deficiencies or instances of noncompliance or other matters that are considered reportable under generally accepted government auditing standards’ (organisations 9, 10, 11, 12, 13, 14, 15 and 18).

The other five financial-related audits, however, were somewhat different in that they were more reflective of how a state might increase the frequency of audits when conditions merit. For example, one financial-related audit was carried out in conjunction with an investigative report. This was, by far, the most detailed report (more than 80 pages) whereby auditors investigated 60 allegations of fraud and financial irregularities at the request of a federal agency (organisation 6). Another audit was initiated as a result of legislation passed by the North Carolina General Assembly requiring the state auditor to conduct a financial audit into a specific programme to ensure that state and federal funds were not co-mingled. The audit of this programme, and the subsequent audit of the larger organisation, revealed that state funds were never awarded, so they could not have been co-mingled (organisation 16). The other two audits examined one organisation’s grants management process, which seemed to trigger a subsequent report focused on the accounting for interest earned (organisation 17).

Stewardship theory

Within the audit reports, there were also statements consistent with stewardship theory, suggesting that mutually trusting and collaborative relationships were still possible, in spite of the execution and findings from the audits (organisations 1, 6, 7 and 17). For example, on the auditor’s side, the authors of reports took great care to explain, in considerable detail, the issues they uncovered, the ultimate findings and their recommendations for the organisations. In some audits, the issues were very straightforward (for example, misuse of a credit card, falsifying fire drill reports or not completing a compliance report). Other audits, however, revealed more complicated schemes to fraudulently obtain financial reimbursements from the state and other misdeeds. Yet, overall, the reporting on these activities and the recommendations for corrective action were easy for the non-profits to understand.

In responding, some non-profits made it a point to express ‘appreciation’ and ‘gratitude’ for the ‘courtesy’, ‘cooperation’, ‘assistance’ and ‘professionalism’ provided by the auditor’s office staff. They also provided detailed descriptions about how specific findings had prompted the organisation to make improvements in the operations of the organisation. For example, as the board chair of one non-profit organisation wrote: ‘We feel confident that the constructive recommendations provided in this report will strengthen operations and improve the quality of services provided by [organisation name]’ (organisation 1, p. 20).

Outcomes

The last research question pertained to the outcomes from these audits. Among nine reports where the auditors reported specific findings and recommendations (the eight investigative audits and one performance audit), the non-profit organisations and other organisations that were involved (such as funders or subcontractors) had the opportunity to respond. These responses varied. Some organisations ‘concurred’ with most, if not all, of the findings and recommendations provided by the auditors, and offered improvement or action plans for making up the deficiencies. Some non-profit organisations ‘disagreed’ with the findings, but also offered plans for corrective action.

Two organisations clearly disagreed with some of the auditor’s findings. In response to the finding of ‘[t]he executive director misrepresented the use of grant funds to state officials’, the organisation countered with ‘[n]o misrepresentation was made to state officials’ and provided a two-page interpretation of the auditor’s activities and inquiries (organisation 3). Another organisation responded with an eight-page letter that began with: ‘With all due respect to the Office of the State Auditor, we disagree with the findings contained in the Draft Report…’, and went to indicate where there were points of disagreement and points of agreement, and summarised any corrective actions already taken or planned.

Finally, a review of the most recent IRS 990 Form revealed that 17 of the 19 organisations appear to still be operating. One organisation, however, is operating under a new name (organisation 6). Another organisation is operating in a different state (organisation 3). Two organisations appear to be closed (organisations 4 and 5).

Discussion

The findings from this study show how the state auditor plays a unique role in the accountability space, relying on multiple data sources and data collection methods to make their assessment, and compelling a non-profit organisation to cooperate using subpoenas and other legal channels if need be. At the same time, some non-profit organisations reacted to the findings from the state auditor in the same way as they do with other external assessments or evaluations, by criticising the methods, trying to avoid blame and offering explanatory accounts (Benjamin, 2008; Murray, 2010; Williamson et al, 2017).

The tone and lines of inquiry from the state auditor were consistent with the three accountability theories: policing, agency theory and stewardship theory. The investigative audits, not surprisingly, were consistent with policing and accountability, while the financial-related audits, where the agency was conducting routine monitoring or responding to directives for additional monitoring from policy makers, were consistent with agency theory. Stewardship theory came across in the tone and framing of some of the exchanges between the auditor and the non-profits, with expressions of gratitude and appreciation for constructive recommendations.

The findings from this study, however, also illustrate that the extent to which the state audit office’s monitors non-profit organisations is fairly limited. With the exception of the occasional monitoring of the financial management of state grants, inquiries were initiated only when there was a clear directive from policy makers or an allegation of wrongdoing. Other types of entities, such as government agencies, universities and community colleges, were more likely to be audited by the state, and the focus of these audits was usually financial.

Implications

The findings from this study have several broader implications for non-profit management and governance. First, the findings suggest that, for whatever reason, non-profit board members need to be reminded of their legal and fiduciary responsibilities – the duties of care, obedience and loyalty (Renz, 2016: 129) – and make sure they understand what is happening in the organisation (Leadbeater, 2010: 250). While many of the board members in this study concurred, apologised and agreed to corrective plans once the audits were completed, this does not erase the fact that they allowed the issues (some of which were quite egregious) to happen to begin with.

Bowman (2016: 288) describes how ‘boards can forestall problems by adopting formal policies on budgeting, cash management, investing, and internal controls’. He also suggests that governing boards should have a finance and audit committee that works with staff and monitors the implementation of the budget and financial expenditures (Bowman, 2016). In addition, not only should all board members be able to read and understand financial statements and trends (Jackson and Fogarty, 2005; Renz, 2016), but also having financial audit is an important internal control and accountability best practice (Gugerty, 2009; Graham, 2020).

Second, the findings show that government monitoring and oversight of non-profits is not only fairly limited at the federal level, but it is also, in this case, fairly limited at the state level as well. The findings underscore the importance and value of other accountability tools and mechanisms (Saxton and Neely, 2019).

For example, best practices relating to governance and administrative standards, as well as other self-policing efforts, provide specific guidance for non-profit organisations that might be struggling to meet the accountability expectations of the stakeholders. The North Carolina Center for Nonprofits offers a variety of resources geared specifically for non-profits in the state (North Carolina Center for Nonprofits, 2020). Other state and national organisations offer guidance about best practices relating to all of the issues the state auditor identified in this study, such as poor record-keeping, lack of oversight by the governing boards and unreasonable expenditures and/or compensation (for example, Standards for Excellence®, Principles for Good Governance, Governance Pages) (Nunan, 2010; National Association of Nonprofit Organizations and Executives, 2020). Most of these resources are affordable, and they are designed for organisations of all sizes. They are also designed to help educate board members, volunteers and staff who may not understand that the laws, norms, values and accountability expectations for non-profit organisations are different from those of the private sector (Silverman and Taliento, 2006).

Third, the findings underscore the value of the third-party charity-rating organisations (for example, Charity Navigator, Better Business Bureau, Central Bureau of Fundraising). While these organisations have been criticised for being too focused on financial metrics and flawed scorecard approaches (Steinberg and Morris, 2010; Szper and Prakash, 2011), their very presence as watchdog groups can add value, and the size and scope of their assessment efforts (as imperfect as they might be) surpass the uncoordinated, decentralised monitoring and oversight by government. Accreditation is also another option for non-profit organisations seeking to ensure they are meeting good governance and oversight standards (Gugerty, 2009; Schatteman, 2013).

Limitations and future research

There are a number of limitations to the study. First, the study relies on the audits prepared by the North Carolina State Auditor’s Office. These are legal and technical documents, and as such, they are lacking commentary or descriptions about any politics or interpersonal issues that might be at play in the inquiry. Tips to the hotline are described in a passive way (for example, ‘the auditor received a complaint’) and there are no characterisations about the credibility of the tips. The chronologies of events are dispassionately presented, and the reports follow a standardised format. Thus, details that might be relevant and interesting to others could be lacking (Bibel, 2015). Future research could rely on other sources of data that might be better suited for capturing the more political and controversial issues at play.

Second, it is unclear why the frequency of non-profit audits is low. Is it because the state auditors have capacity issues and can only look at a limited number of cases involving non-profit organisations? Or, is it because their efforts are deliberately focused on auditing larger state agencies where their findings and recommendations could potentially have a greater impact? Alternatively, might it be that board members, donors, recipients of services and citizens do not even know they can report suspicions of waste, fraud and abuse to the state auditor? There might also be disincentives for even bringing fraudulent activities to light, such as fear of attracting the attention of the media or concerns about creating a conflict within the organisation (for example, conflict between the executive director and the board). Future research could explore these issues as well.

Third, findings from the study are limited with respect to their generalisability. On the one hand, the number of non-profit organisations per capita in North Carolina is fairly comparable to other southern states. The State Auditor’s Office has a similar mission when compared to those in other states. And, like other southern states, North Carolina is a fairly conservative state, very pro-business and has an anti-regulation orientation to many state and local politics and policies. Yet other states (for example, California and New York) are much more regulatory, and they may provide greater scrutiny and oversight (Anechiarico and Goldstock, 2007; National Council of Nonprofits, 2020). Future research, using a comparative or a more comprehensive approach, would help to shed some light on this potential for variation across the states, as well the potential for variation across different countries.

Conclusion

The purpose of this article was to learn more about the accountability relationship between the state auditor’s office and non-profit organisations. The data collected for this study show that the extent to which the state auditor conducts audits of non-profits is fairly limited. It is more focused on overseeing and monitoring government agencies, universities, community colleges and other governmental agencies. Yet, when it does audit non-profit organisations, it is doing so to police their behaviours, monitor their expenditures and ensure that they are being good stewards with the resources they have been given. Given that monitoring and oversight are limited at the state and federal level, other accountability practices continue to be important, including: training and education for board members about their legal and fiduciary responsibilities; adhering to best practices and standards; and involving third-party watchdog organisations and accreditors in ensuring non-profit accountability.

Conflict of interest

The author declares that there is no conflict of interest.

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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Export Citation
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    • Search Google Scholar
    • Export Citation
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    • Export Citation
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    • Export Citation
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  • 1 University of North Carolina at Charlotte, , USA

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