The Single Audit Act: How Compliant Are Nonprofit Organizations?
Keating, Elizabeth K., Fischer, Mary, Gordon, Teresa P., Greenlee, Janet, Journal of Public Budgeting, Accounting & Financial Management
Nonprofit accountability has been thrust on to the public agenda by a series of financial scandals, revelations of excessive compensation, and concerns over unethical behavior. Lapses in accountability have affected nonprofit organizations as varied as the United Way of America (Murawski, 1995), Adelphi University (Thornburg, 1997), and the NAACP (Greene 1995). In response to increasing public concern, Congress has instituted measures designed to increase accountability and oversight in this sector.1 However, little attention has focused on the impact of these measures. The particular measure examined in this paper is the effectiveness of a long-standing form of oversight, the Single Audit Act (SAA). Single audits were mandated by Congress to improve financial management of the over $100 billion in annual federal assistance through a uniform set of auditing requirements for federal grants.
Effective January 1, 1990, most nonprofit organizations receiving government funding became subject to the SAA and its associated regulations as promulgated in OMB Circular A-133: Audits of States, Local Governments, and Nonprofit Organizations. Since 1996, any nonprofit entity expending at least $300,000 in federal funds in any one year must undergo an annual A-133 audit. Each A-133 audit consists of a traditional audit conducted by a licensed certified public accountant (CPA), an assessment of the internal control structure, and procedures that assess the use of federal funds and compliance with certain laws and regulations. Since an A-133 audit demands skills beyond those necessary for a standard CPA audit, auditors are required to obtain specialized training and expertise. Overall, A-133 audits are a highly rigorous form of nonprofit oversight, which is expensive and challenging for both the auditor and the auditee.
Kearns (1996, p. 9) describes nonprofit accountability, in part, as that "wide spectrum of public expectations dealing with organizational performance, responsiveness ... of nonprofit organizations." Under the Kearns framework, single audits would be categorized as a compliancetype of accountability designed to fulfill legal and regulatory requirements. They are externally imposed by a higher authority and implemented through explicit standards. Several researchers have questioned the effectiveness of the monitoring and enforcement of other forms of legal accountability imposed upon nonprofit organizations (Chisholm, 1995; Brody, 2002) but did not address the implementation of the Single Audit Act. According to Kearns, nonprofit organizations make strategic and tactical decisions to respond to the accountability system.
Our study is designed to empirically examine nonprofit organizations' response to legal accountability requirements imposed by the Single Audit Act. Anecdotally, we observe that some nonprofit organizations, such as Tuskegee University, have lost government funding due to adverse audit findings arising from its A-133 audit (Tuskegee University, 1997). This loss of funding for Tuskegee resulted in significant declines in service provision and weakened the financial health of the university. McKenzie College, established in 1885, went out of business in 1992 when it lost both government financial aid funding and accreditation (HED, 1993). These potentially unfavorable outcomes from noncompliance with the Single Audit Act suggest that nonprofits may make strategic and tactical decisions to comply, in fact and/or appearance, with the A-133 requirements. We examine two research questions that are indicative of these decisions:
1. Nonprofits can select from a large pool of potential auditors who may vary in their level of experience. Are nonprofits choosing audit firms with extensive general and/or specialized A-133 audit experience?
2. Nonprofits can undertake measures to reduce the likelihood of adverse audit findings. What is the likelihood that a nonprofit is found to be out of compliance with the A-133 requirements? …