Canadian Journal of Administrative Sciences vol:29 issue:3 pages:205-217
Prior research documented earnings management in for-profit settings. Nonprofit organizations are thought to pay less attention to the bottom line of the income statement. Earnings management research in nonprofit settings has therefore focused on the manipulation of expenses in order to improve efficiency ratios or taxable income, not reported earnings per se. Considering a different institutional setting characterized by the absence of such ratios and the presence of important subsidies, management of the actual bottom line is analyzed in the light of the importance of these subsidies. The results of our analyses suggest that organizations drive their results towards zero profit and that this is intensified by increased governmental funding when unmanaged results are positive. The relation between downward earnings management and the presence of subsidies is particularly evident for organizations whose accumulated reserves are high.