Hi everybody I am Catenya McHenry at the McCombs School of Business,
thank you so much for joining us today on a new big ideas.
We delve deeper into faculty research happening here at
the McCombs School of Business.
Joining me today is Eric Chan he is an assistant professor of accounting
and we are talking today about a brand new piece of research that
he has recently published.
Welcome, it's good to see you!
- You to Catenya, thanks for having me.
- Yes, absolutely!
I love your research and I love -- for the content and also I think
in the timing of it is fantastic.
As we been going through COVID, lots of non-profits have been seeing an increase
in -- donations and funding.
And so your research focuses on the non-profit industry.
I want to read the title of the paper it's called,
"Understanding and Deterring Misreporting in NonProfits: The Joint Effects of Pay
"Level and Penalty Type"
So give me a little bit of a summary that focuses on what the paper
is about.
- Yeah, yeah so yes this is a research study that I collaborated with
(inaudible) who actually got her PhD here at Texas and is now
an assistant professor at (inaudible) University.
And so we wanted to understand the why behind, why nonprofits misreport.
So we know that there's quite a bit of evidence that suggest that nonprofit
organizations often inflate the financial performance.
Obviously trying to attract donor contributions.
But we don't really know why, so we know how but not why.
And so we want to dive deeper into, what are some motivations
at the management level that would lead them to justify and at the end
misreport their information.
- So what did you guys learn about why they're doing this?
So it is true that they have been misreporting, right?
So that's one fact that has truth. So what did you learn about the why?
- Yeah, so what we theorized is that the big picture would be obviously the
high in financial performance the more likely you get more donations but at
the miniature level we theorized that the pay level may be one important factor
that might drive them to be more or less likely to misreport.
So what we find is that when nonprofit pays a manager low pay what you get
a manager that really care deeply about the mission.
So that's their motivation.
And how they justify it is quite interesting.
So what we find is that using more licensing fury that they think back
to sort of they're sacrificing a person of wealth.
I-- you know gave up this high paying job and now I'm working for this low paying
nonprofit, now I have this moral licenses to misreport.
And then on the other hand when you have a nonprofit that pays more, managers who
care as much deeply about the mission as those in the low pay nonprofits.
They care as them much but no one has the moral license to misreport.
So we find out when they pay more they actually find it harder to misreport
and justify doing so.
- So, so let me understand.
So when-- so one of the reasons they misreport is to attract more
donors, so if they say they have made less money over a course of time that
is more attractive to potential donors or even company donors, is that right?
- Yeah, so what they inflate is the program ratio.
So the program ratio is the ratio of how much money is expenses that go into
the mission, so the beneficiaries.
So over the total expenses. So what that means would be
if you have a 75% program ration that means that for every dollar
you donate 75 cents will actually get to the beneficiaries.
Or as equal if you choose an organization-- obviously you care
about the mission first, right that's number one.
But or as equal at the same mission you're more likely to give money to
the nonprofit that's more efficient, right.
That will use your money more efficiently get it to the right
places the right people.
- Right, and the nonprofits that you looked at in the study did any of them
have an instance where the money that was donated was not going
to the beneficiaries but going to the managers or people at
the management level?
- Yeah, so we used experimental studying to really understand
the psychology of it.
So our aim of it wasn't to document that because prior studies have
and so for example there was a study in private research that was looking
at a sample of-- a pretty large sample of nonprofits.
And what they found was that half of them reported zero fund rating expenses,
but when they looked at the history of the online activity, clearly they
had some fundraising activity and events.
And so that would be a clear indication that they misreported the fundraising
expenses in order to increase or inflate the program ratio.
Now where that money goes into I don't think it goes into pockets
of executives.
That would be a little bit aggressive.
But I would think that it's just the efficiency.
So there's more admin there's overhead.
So in order to attract more contribution, it's like let's forge it
little bit and instead of 70% let's get it up to 75 or 80%.
- Yeah, so how many nonprofits did you guys look at in the study,
and then what were the sizes of the nonprofits?
Were they all over the country, were large small, were they nonprofits we would
know or we would recognize the name of them?
- Yes, so our study really focuses on a abstract setting.
So we did look at -- so we weren't trying to document actual nonprofit
managers misreporting.
What we wanted to do was create a setting where we get participants online--
participants who would choose into different types of abstract settings.
And they get to choose you know I really -- I get a list of nonprofits
I want to represent this nonprofit.
So we create a game essentially to capture some of those frictions
you see in the real world.
But we didn't actually capture you know what actual real nonprofit managers
were doing.
- I got you.
So it's interesting that you talked a little bit about the mission
and how the mission made a difference in just the level of pay and why
the manager took the particular position in the nonprofit.
Because I think with some nonprofits their mission is something that
the managers take to heart and it's more of a moral decision.
So that's a very interesting aspect of the nonprofit that
you menetioned.
You know rather than just taking the job for the pay.
- Yes, that's right. Yes I think what you get is with
different pay levels in nonprofits you get different types of managers.
So if the nonprofit pays low then what you get are people
who really care deeply about the mission and we're gonna call them the mission
focused managers.
But then what we find as a trend in nonprofit sector is that pay level
is actually rising, especially in an executive level.
So a lot of nonprofits are thinking, you know what we want to get someone
with corporate experience, someone who has different skills set.
In order to track those people, we better increase our pay.
So what we find in our experiment that when we increase the pay.
we get a mix, right.
So you still get some people who care deeply about the mission,
while that pays more good right, that's something extra.
But then you also get a larger proportion of who we call self-focused.
Who really don't care about the mission, but hey it pays more I'm gonna go
in and help out this nonprofit.
So they view as more of a full profit firm above us.
- Yeah, do you think since we've been in this pandemic
seems like forever now, but about 7 months or so.
Do you feel like people -- nonprofit are doing better because we're
in the pandemic?
- So I think donations are likely to go down.
So in 2019, there's a survey or index that shows that U.S. is actually
the number one most generous country.
And with the pandemic hitting the U.S. particularly hard
we probably get a mix, right.
People who would usually donate-- I think the statics on that every 10
household, six households actually gave something to nonprofits.
I expect some of that to go down especially for those who are struggling
under the pandemic.
But then at the other level,
the rich, who are less affected might feel the greater need to donate.
We'll probably see a balance act.
And we'll see if we keep that ranking aa the most generous country for this year,
but my guess in donations in total will likely go down.
- Wow, and it's interesting you say that, because you would think that they would
do better but with the idea that lots of people aren't doing well right now
financially and our economy is not doing well right now so that makes
perfect sense,
why donations would fall this year, interesting.
Well if you would like to read Eric's paper it is called,
"Understanding and Deterring Misreporting in Nonprofits:
"The Joint Effects of Pay Level and Penalty Type"
and we'll have a link in the video description in the very bottom.
Thank you so much for joining us today Eric, it's great to talk to you and great
to get more insight about your research.
- Yeah, thank you so much for having me, appreciate it.
- Absolutely, we'll see you next time on our big ideas.
Thanks for joining us today!