Abstract Accountability is an increasingly important issue for charitable organizations given the recurring scandals that have plagued the not-for-profit sector and accusations by critics that creative accounting techniques are used to mislead contributors. This paper analyzes the status of accounting standards for nonprofit entities and examines how individual donors use financial statements prepared under the Financial Accounting Standard Board's Statements of Financial Accounting Standards (SFAS) No. 116 and No. 117 in their decision-making process. Subjects received condensed financial statements for four charitable organizations. Half of the subjects received financial statements and narrative and quantitative information on service efforts and accomplishments while the other half received only the three financial statements required under SFAS No. 117. The results suggest several modifications are needed and highlight problems that will be encountered in helping donors understand the new statements. Specifically, subjects found the nonfinancial information more useful than the financial statements, which argues for making information about service efforts and accomplishments a requirement rather than an option. Subjects clearly wanted the type of information found in a statement of functional expense which is also optional for most types of nonprofit entities. In addition, most subjects agreed that restricted contributions were earned when the money was used for the designated purpose and not upon receipt as required by SFAS No. 116.
Khumawala et al. (Mon,) studied this question.