Large Sample Evidence of the Determinants of Nonprofit Monitoring Costs: A Resource Dependence Framework

Abstract

Despite the importance of audit and accounting services in nonprofit organizations, few studies have examined determinants of these monitoring costs in this setting. This study provides large sample evidence (n = 32,283 nonprofit entity-years) that reliance on external resources in the form of government grants is associated with higher monitoring costs, and that this effect is increased for large nonprofit organizations. In contrast, reliance on direct contributions, which are more likely to comprise smaller amounts from a more diverse group of resource providers, is associated with lower monitoring costs. We also find that, for larger nonprofits, reliance on internal resources (e.g., investment income) is associated with lower monitoring costs. These results are consistent with the tenets of resource dependence theory, i.e., reliance on certain external support that is hard to replace results in increased monitoring costs, and reliance on internal resources can reduce monitoring costs. These results demonstrate the implications of resource dependence on monitoring and offer practical benefit from the predictive models.Data Availability: Data are available from sources indicated in the text.