An Examination of Differences between Financial Information Provided in IRS Forms 990 and Audited Financial Statements of U.S. Private Colleges and Universities
Fischer, Mary, Gordon, Teresa, Kraut, Marla, Academy of Accounting and Financial Studies Journal
Internal Revenue Service data derived from the information return filed by tax-exempt organizations is more accessible to researchers than ever before. This study examines the reliability of Form 990 data elements as compared to data derived from the audited financial statements of a sample of colleges and universities. Results indicate that balance sheet elements tend to be more reliable than income statement elements and that highly aggregated information such as total liabilities is more reliable than the detailed components such as tax-exempt bonds payable. Systematic differences between generally accepted accounting principles and Internal Revenue Service instructions are one possible source of discrepancies. An examination of the direction of the differences suggests that consolidation issues are another important source of discrepancies.
The Internal Revenue Service Return of Organizations Exempt from Income Tax (IRS Form 990) is becoming an important resource for understanding not-for-profit organizations (Froelich, 1998; Swords, 1998). Even though not-for-profit managers view audited financial statements as a more representative source of financial information about their organizations than the IRS Form 990 (Froelich and Knoepfle, 1996), an increasing number of individuals, including potential donors, regulators, journalists, policymakers, grant-making foundations, and researchers, rely on the IRS Form 990 (Froelich 1997, 1998; Gordon, et al., 1999). The data from not-for-profit organizations' Form 990 are now publicly available, from the Urban Institute's National Center for Charitable Statistics (NCCS) and the Philanthropic Research, Inc.'s GuideStar website (see Gordon, et al., 1999). Therefore Form 990 data is more accessible than audited financial statements, which must be requested from each individual organization. Unfortunately, there are serious concerns as to the reliability and quality of IRS Form 990 data versus audited financial statements.
Several problems with the IRS Form 990 have been identified by researchers (Froelich, 1997; Froelich and Knoepfle, 1996). The major problem is the lack of correspondence between the information reported in the annual report and the Form 990. Annual financial statements are usually audited by external auditors, whereas the Form 990 is unaudited and many organizations prepare the Form 990 internally. Total revenue, gross profit from sales, total program expenses, and total salaries are often understated on the Form 990 (Froelich and Knoepfle, 1996). According to Froelich (1997, p.147), "this occurs as the Form 990 preparers either do not read the instructions or take liberties when deducting direct costs before calculating revenues from rents, asset sales, sales of goods and services, and fundraising."
Another IRS Form 990 problem area is the recognition of revenues and expenses. Different methods and approaches for allocating expenses are used across organizations (Froelich and Knoepfle, 1996). Different practices in reporting contributions exist as some organizations combine grant income and/or government contracts with other types of contributions (Froelich, 1997). Finally, information reported on the Form 990 often includes errors and omissions that are ignored or overlooked by the preparer (Skelly and Steuerle, 1992).
PURPOSE AND OBJECTIVES
Other recent studies have examined the reliability of data derived from Form 990. For example, Froelich, et al. (2000) looked at charities registered in Minnesota in 1988 and 1994 and concluded that the data was generally reliable. The correlations between 990 and audited financial statement figures for educational charities ranged from .39 to .90. In comparing 1995 Form 990 for nursing homes to data collected by the federal agency responsible for administering Medicare and Medicaid, Gantz ( 1999) found that agreement between the two sources was much better for balance sheet items than revenue and expense items. …