The Independent Audit for Nonprofits: Does it Make a Difference?

Prior for-profit literature provides evidence that an independent audit of the financial reports is associated with a corporation's improved investment efficiency and financial performance. In contrast, this study investigates the relationship between independent audits and financial performance in nonprofit organizations. Relying on prior studies, nonprofits that seek an independent audit are expected to have better oversight and higher financial reporting quality, and that improved oversight and reporting quality are associated with less fraud and higher quality decision makings. This study finds that that NPOs that seek independent audits enjoy better financial performance than NPOs that do not seek independent audits.