Earnings Management in Australian Not-for-Profit Disability Services

Abstract

The Australian not-for-profit and charitable sector is an important component in that country’s social capital. It delivers services and supports to some of the most vulnerable people in the community. However, up until recently, poor data sets related to the sector’s financial performance and position have meant that the examination of its financial capacity has been unable to be undertaken. This paper reports on our findings relative to earnings management in the context of Not-for-profit disability service providers. Assessing a longitudinal data set providing financial data relative to 154 such not-for-profits, we have identified that the sector is subject to earnings management, that such activities are aimed at reducing reported profit likely in order for these organisations to meet the normative financial expectations of stakeholders including public sector funders and philanthropists. This finding has significant implications for our understanding of not-for-profit financial, regulatory and audit arrangements in place and accounting standards as they apply to this sector.