Compensating Controls and Agency Conflicts in the Absence of Owners: The Case of Nonprofit Charter Schools
This dissertation consists of three essays using publicly reported internal control deficiencies to examine agency conflicts in the unique organizational setting provided by nonprofit charter schools. In my first essay, I find evidence that increased agency conflicts in nonprofit charter schools are not associated with increased internal control weaknesses, as charter schools are less likely to disclose internal control weaknesses in federal single audits than are (1) nonprofits in general and (2) traditional public schools in California and Texas serving students in the same communities. My second essay finds evidence that charter school Boards of Directors consider both current and prior year internal control weaknesses when setting executive compensation, rewarding managers who show improvements in controls. My third essay examines the relationship between reported internal control weaknesses and subsequent behavior of external stakeholders, including donors and customers. I find that, contrary to prior research, contributions to nonprofit charter schools are positively associated with prior year reports of internal control deficiencies. This outcome may reflect donors' responding to control weaknesses by increasing support for schools without resources sufficient to implement adequate internal controls, or it may indicate that donors are committed to the mission of the school and are not dissuaded by the presence of internal control issues. In contrast, I find no relationship between customer demand as measured by student enrollment, indicating that customers (i.e., students and their parents) are either unaware of or unconcerned by reports of internal control deficiencies.
This dissertation will help inform the debate over internal control reporting and its efficacy as a governance mechanism for nonprofits, thereby providing information useful to donors, taxpayers, and other constituents in making resource allocation decisions, including requirements for federal single audits.