Misleading Motives: Incentives for Accounting Bias in Not-for-Profit Pension Plans

Abstract

In this study, we examine whether not-for-profit organizations actively manage their pension accounting assumptions and whether their assumptions are, as prior research suggests, more aggressive than those of for-profit organizations. Using a 17-year panel dataset collected from audited financial statements, we compare the accounting assumptions (the expected rate of return and the discount rate) of not-for-profit and for-profit firms. We also examine the not-for-profit sample alone to test for accounting bias motivated by various financial incentives. We model accounting assumptions as levels (between-firms) as well as changes over time (within-firms). Contrary to prior research, we find no evidence that not-for-profits use more aggressive assumptions than for-profits. Furthermore, we find that most of the accounting biases of not-for-profits are explained by between-firm variation rather than within-firm variation, suggesting that although not-for-profits use biased assumptions, they may not actively adjust them to target financial benchmarks.

Keywords

not-for-profit management pension accounting accounting choice

Get full access to this article

View all access options for this article.

References

American Academy of Actuaries. (2004). Fundamentals of current pension funding and accounting for private sector pension plans. https://www.actuary.org/sites/default/files/pdf/pension/fundamentals_0704.pdf

Amir

Guan

Oswald

(2010). The effect of pension accounting on corporate pension asset allocation. Review of Accounting Studies, 15(2), 345–366.

Anand

. (2003). SEC warns companies might have to restate financial data. Pensions & Investments, 31(7), 1–1.

Armstrong

C. S.

Guay

W. R.

Weber

J. P.

(2010). The role of information and financial reporting in corporate governance and debt contracting. Journal of Accounting and Economics, 50(2–3), 179–234.

Asthana

. (1999). Determinants of funding strategies and actuarial choices for defined-benefit pension plans. Contemporary Accounting Research, 16(1), 39–74.

Bayer

F. A

. (1988). Understanding discount rates under SFAS 87. Journal of Applied Business Research (JABR), 4(1), 1–11.

Bergstresser

Desai

Rauh

(2006). Earnings manipulation, pension assumptions, and managerial investment decisions. The Quarterly Journal of Economics, 121(1), 157–195.

Brickley

J. A.

Van Horn

R. L.

(2002). Managerial incentives in nonprofit organizations: Evidence from hospitals. The Journal of Law and Economics, 45(1), 227–249.

Brooks Automation, Inc. (2016). 2016 10-K form. https://www.annualreports.com/HostedData/AnnualReportArchive/b/NASDAQ_BRKS_2016.pdf

10.

Brown

. (2004). The impact of pension assumptions on firm value [Working paper]. https://ssrn.com/abstract=596666

11.

Burgstahler

Dichev

(1997). Earnings management to avoid earnings decreases and losses. Journal of Accounting and Economics, 24(1), 99–126.

12.

Calabrese

T. D.

(2020). Nonprofit finance: A synthetic review. Voluntaristics Review, 4(5), 1–89.

13.

Calabrese

T. D.

Searing

E. A.

(2019). The strategic use of pensions by not-for-profit organizations. Journal of Pension Economics & Finance, 18(3), 388–414.

14.

Cannon

J. N.

Lamboy-Ruiz

M. A.

Watanabe

O. V.

(2018). The influence of ownership type and the affordable care act on earnings management in US hospitals [Working paper]. https://ssrn.com/abstract=3149931

15.

Chuk

E. C

. (2013). Economic consequences of mandated accounting disclosures: Evidence from pension accounting standards. The Accounting Review, 88(2), 395–427.

16.

Comprix

Muller

K. A.

III . (2011). Pension plan accounting estimates and the freezing of defined benefit pension plans. Journal of Accounting and Economics, 51(1–2), 115–133.

17.

Congressional Budget Office. (2005). A guide to understanding the pension benefit guaranty corporation. https://www.cbo.gov/publication/17179

18.

Dahlquist

Ibert

(2021). How cyclical are stock market return expectations? Evidence from capital market assumptions [Working paper]. https://doi.org.10.2139/SSRN.3763796

19.

Desai

M. A.

Yetman

R. J.

(2015). Constraining managers without owners: Governance of the not-for-profit enterprise. Journal of Government & Nonprofit Accounting, 4(1), 53–72.

20.

DiMaggio

P. J.

Powell

W. W.

(1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147–160.

21.

Eldenburg

Soderstrom

(1996). Accounting system management by hospitals operating in a changing regulatory environment. The Accounting Review, 71(1), 23–42.

22.

Eldenburg

L. G.

Gunny

K. A.

Hee

K. W.

Soderstrom

(2011). Earnings management using real activities: Evidence from nonprofit hospitals. The Accounting Review, 86(5), 1605–1630.

23.

Financial Accounting Standards Board. (1985). Employers’ accounting for pensions (Statement of Financial Accounting Standards 87).

24.

Glaum

. (2009). Pension accounting and research: A review. Accounting and Business Research, 39(3), 273–311.

25.

Gupta

Calabrese

(2021). Biased actuarial assumptions and SFAS 132R: The not-for-profit response. Journal of Governmental & Nonprofit Accounting, 10(1), 110–133.

26.

Hoerger

T. J

. (1991). “Profit” variability in for-profit and not-for-profit hospitals. Journal of Health Economics, 10(3), 259–289.

27.

Hofmann

M. A.

McSwain

(2013). Financial disclosure management in the nonprofit sector: A framework for past and future research. Journal of Accounting Literature, 32(1), 61–87.

28.

Jegers

. (2013). Do nonprofit organisations manage earnings? An empirical study. VOLUNTAS: International Journal of Voluntary and Nonprofit Organizations, 24(4), 953–968.

29.

Khumawala

S. B.

Parsons

L. M.

Gordon

T. P.

(2005). TRACKS: Assessing the quality of not-for-profit efficiency ratios: Do donors use joint cost allocation disclosures? Journal of Accounting, Auditing & Finance, 20(3), 287–309.

30.

Krishnan

Yetman

M. H.

Yetman

R. J.

(2006). Expense misreporting in nonprofit organizations. The Accounting Review, 81(2), 399–420.

31.

Lancksweerdt

Van Caneghem

Reheul

A. M.

(2021). Accruals management to avoid the current ratio falling below one: An empirical analysis among nonprofits. Nonprofit and Voluntary Sector Quarterly, 50(3), 578–597.

32.

Leone

A. J.

Van Horn

R. L.

(2005). How do nonprofit hospitals manage earnings? Journal of Health Economics, 24(4), 81–37.

33.

Manne

G. A

. (1999). Agency costs and the oversight of charitable organizations. Wisconsin Law Review, 1999(2), 227–272.

34.

Moody’s. (2021, May 24). Moody’s seasoned Aaa Corporate Bond Yield (AAA). FRED, Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/series/AAA

35.

Mykrolis Corporation. (2005). 2004 10-K form. http://www.getfilings.com/o0001193125-05-047972.html

36.

Nguyen

Soobaroyen

(2019). Earnings management by non-profit organisations: Evidence from UK charities. Australian Accounting Review, 29(1), 124–142.

37.

Parsons

L. M

. (2007). The impact of financial information and voluntary disclosures on contributions to not-for-profit organizations. Behavioral Research in Accounting, 19(1), 179–196.

38.

Parsons

L. M.

Pryor

Roberts

A. A.

(2017). Pressure to manage ratios and willingness to do so: Evidence from nonprofit managers. Nonprofit and Voluntary Sector Quarterly, 46(4), 705–724.

39.

Pratt

. (2019). The true story of nonprofits and taxes. Nonprofit Quarterly. https://nonprofitquarterly.org/the-true-story-of-nonprofits-and-taxes/

40.

Steinberg

Burger

(2020). Abiding by the law? Using Benford’s law to examine the accuracy of nonprofit financial reports. Nonprofit and Voluntary Sector Quarterly, 49(3), 548–570.

41.

Scott

W. R

. (2013). Institutions and organizations: Ideas, interests, and identities. SAGE.

42.

St. Clair

. (2016). How do nonprofits respond to regulatory thresholds: Evidence from New York’s audit requirements. Journal of Policy Analysis and Management, 35(4), 772–790.

43.

Trussel

J. M.

Parsons

L. M.

(2007). Financial reporting factors affecting donations to charitable organizations. Advances in Accounting, 23, 263–285.

44.

Urban Institute. (2019). The nonprofit sector in brief 2019. https://nccs.urban.org/publication/nonprofit-sector-brief-2019#the-nonprofit-sector-in-brief-2019

45.

Vermeer

T. E.

Edmonds

C. T.

Asthana

S. C.

(2014). Organizational form and accounting choice: Are nonprofit or for-profit managers more aggressive? The Accounting Review, 89(5), 1867–1893.

46.

Yetman

M. H.

Yetman

R. J.

(2012). The effects of governance on the accuracy of charitable expenses reported by nonprofit organizations. Contemporary Accounting Research, 3(29), 738–767.

Supplementary Material

Please find the following supplemental material available below.

For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.

For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.

0.00 MB

0.19 MB