Who Pays the Piper Calls the Tune: Funding Sources and Earnings Management in Charities

This study examines how funding structures shape earnings management behaviour in charities and, in doing so, contributes to the nonprofit accountability literature. Drawing on resource dependence theory, we argue that funding sources create distinct accountability environments that influence managers’ incentives and opportunities to manage reported financial performance. Using a large panel of U.K. charities from 2007 to 2023, we investigate both accrual-based and real earnings management around a zero-surplus benchmark. The findings indicate that charities employ discretionary accruals as well as adjustments to fundraising and support costs to influence reported outcomes. However, these behaviours vary systematically across funding structures. Charities funded by sophisticated funders and those more reliant on donations exhibit lower levels of accrual-based earnings management, whereas service-oriented charities exhibit higher levels. The findings suggest that donor monitoring, fund restrictions, and accountability pressures play an important role in constraining financial reporting discretion and strengthening financial integrity within charitable organisations.