Call Me Maybe? - An Experimental Analysis of Donor Backlash to Voluntary Nonprofit Fraud Disclosure

Whether by embezzlement, theft, or other illegal actions, not-for-profit organizations (NFPs) must report significant asset diversions (i.e., fraud) on IRS Form 990. Given the inherent delay in providing annual tax filings, NFPs may choose to voluntarily alert donors to occurrences of fraud in a timelier manner. Prior research has not yet examined the effects of the source or context of such disclosures. In this study, we examine how the source of an NFP’s voluntary fraud disclosure affects donors’ subsequent giving decisions. We find that differently-sourced voluntary fraud disclosures lead to divergent levels of donor backlash depending on a donor’s prior involvement with the organization. Specifically, involved donors respond more favorably to a fraud disclosure made by the board of directors versus one made by management. Our findings have implications for how NFPs can communicate with donors about frauds that have taken place in ways that may minimize post-fraud organizational damage.