The Impact of Regulation on the U.S. Nonprofit Sector: Initial Evidence from the Nonprofit Integrity Act of 2004

The early 2000s revealed a series of high-profile financial frauds in the corporate and nonprofit sectors. In response to several of these financial scandals, California passed the Nonprofit Integrity Act (NIA) of 2004. This seminal piece of governance regulation sought to increase financial transparency and mitigate fundraising abuses by California charitable organizations. This study examines the characteristics of California charitable organizations before and after the Act to understand the initial impact the Act had on nonprofit organizations. Key findings from the study include limited reported improvement in financial reporting quality and an increase in accounting fees following the implementation of the Act. California nonprofits subject to the Act's provisions did exhibit an increase in executive compensation following the implementation of the Act; however, the increase was less than that exhibited by the population of nonprofits during the same time period. Overall, the results of this study suggest that the initial impact of regulations similar to the NIA is greatest for organizations that did not previously have a financial statement audit. [PUBLICATION ABSTRACT]