How Do Government Grants Affect Nonprofit Financial Effectiveness? The Mediation Role of Process Accountability

Abstract

This study examines the role of process accountability in the association between government grants and nonprofit financial effectiveness. Using the Internal Revenue Service Form 990 from 2013 to 2017, our mediation analyses find that government grants make nonprofits accountable for their processes. However, process accountability can reduce nonprofit financial effectiveness and suppress the positive relationship between government grants and nonprofit financial effectiveness. We uncover the underlying mechanism by which government grants affect nonprofit financial efficacy and suggest that too much emphasis on process accountability may hamper the benefits of government support of nonprofit service provision and financial effectiveness.

Keywords

process accountability financial effectiveness government grants nonprofit-government relationship

Introduction

Over the last few decades, nonprofit organizations in the U.S. have faced a crisis of legitimacy and effectiveness regarding whether they respond to the demands of elected leaders, governments, and the citizenry and meet their stakeholders’ expectations (Alexander et al., 2010; Young, 2002). In particular, government grants have become significant revenue sources for many nonprofits and influence nonprofits’ adoption of accountability tools, while there are nonprofit sectoral variations in reliance on government grants (Y.-J. Lee, 2016). The questions of accountability—to whom, for what, and how (Posner, 2002)—have frequently occurred in the relationships between governments and nonprofits (Cheng, 2019). Such a growing financial relationship between governments and nonprofits induces process accountability to consolidate shared performance accountabilities by the governments and nonprofits (Coule, 2015; Coupet & Schehl, 2022; Lambright, 2009; S. Lee, 2021). As such, assessing mediated effects of process accountability in the relationships between government grants and nonprofit financial effectiveness provides valuable information on how government grants work or fail to change nonprofit effectiveness critical for organizational survival or growth.

Process accountability monitors whether particular processes have been deployed by nonprofits (i.e., accountability how) to make nonprofits responsible to their stakeholders and themselves (i.e., accountability for what) (Sinclair, 1995). From the government’s (grantor’s) perspective, having process accountability within nonprofits is essential because specifying service quality standards is complex, and multiple players are involved in the provision of public service (Blomqvist & Winblad, 2022). As the largest grantors for most nonprofits and regulatory actors, governments can impose normative, coercive, or mimetic pressures for nonprofits to adopt process accountability (DiMaggio & Powell, 1983; Y.-J. Lee, 2016). Nonprofits receiving government grants are more likely to comply with process accountability so as to be seen as credible in the eyes of multiple stakeholders and attract more funding and donations in the future (Y.-J. Lee, 2016). Through this process, government grants act as an important force leading to process accountability.

As a means of nonprofits’ financial effectiveness—organizations’ financial capacities “to exploit resources from their environments, using political, institutional, and economic means to sustain their own functioning” (Forbes, 1998, p. 186)—some process accountability tools, such as internal document retention policies and financial statement review procedures, mitigate information asymmetry problems driven by incomplete contracts between the governments and nonprofits (Blomqvist & Winblad, 2022; Van Slyke, 2007). These processes contribute to overcoming insufficient or even lacking transparency regarding nonprofits’ performance responsibilities (Romzek & Johnston, 2005; Van Slyke, 2007). Other process accountability tools, such as conflict of interest policies, whistleblower policies, and mandatory external audit procedures, protect the best interests of organizations, improving nonprofits’ financial effectiveness that determines their survival or growth (Ebrahim, 2016; Kearns, 1996; Saxton et al., 2012; Whitaker et al., 2004).

However, little is presently known about the relationships between government grants, process accountability, and nonprofit financial effectiveness in a holistic way, while complex patterns affecting financial effectiveness need to be modeled in a way that reflects complex reality. Nonprofits have been engaging in accounting for their financial effectiveness, which enhances the governments’ (grantors’) understanding of nonprofit organizations and thus improves their relationships with the governments (grantors) (Alexander et al., 2010). There has been a growing interest in diverse accountability mechanisms that shape government-nonprofit financial relationships and the implied causality between nonprofit process accountability and financial effectiveness. Surprisingly, few empirical studies have examined mediating mechanisms of process accountability that can provide additional information on the effect of government grants on nonprofit financial effectiveness. We aim to examine how process accountability plays a role in transmitting the effect of government grants on nonprofits’ financial effectiveness.

Specifically, we classified process accountabilities into four broad types based on accountability foci or goals (transparency or responsibility) and loci of accountability control (internally- or externally-induced process)—(1) internally-induced transparency process, (2) internally-induced responsibility process, (3) externally-induced transparency process, and (4) externally-induced responsibility process. We investigate how these process accountabilities mediate the impact of government grants on nonprofits’ financial effectiveness, including programmatic service provision, operating efficiency, and long-term sustainability using Internal Revenue Service Form 990 data from 2013 to 2017.

Our mediation analysis demonstrates that government grants make nonprofits accountable for their various processes. However, government grants may not necessarily result in improving operating efficiency and long-term financial sustainability. We also show that government grants’ positive effects on service provision are possibly overrated, and process accountability can suppress the positive relationship between government grants and nonprofit service provision. This study makes a significant contribution to the current scholarly literature on nonprofits’ accountability in government-nonprofit relationships and suggests that too much emphasis on process accountability could lead to proceduralism that may hamper a nonprofit’s financial effectiveness. Our study extends the line of research linking nonprofit-government financial relationships, process accountability, and nonprofit financial management.

Literature Review

Accountability in Nonprofit-Government Relationships

Accountability in nonprofit-government relationships traditionally refers to a situation in which a nonprofit has an obligation to explain and justify its conduct, the government can pose questions and pass judgment, and the nonprofit may face consequences (Bovens et al., 2008). However, accountability and nonprofit governance literature has shown that it is much more complicated than this. Researchers have developed various aspects of accountability or accountability mechanisms rather than talk about accountability per se (S. Lee, 2021; Tacon et al., 2017). For example, Romzek and Johnston (2005) identified legal, professional, and political accountability based on the degree of a nonprofit organization’s autonomy and participating stakeholders’ scope. Kearns (1996) developed four distinctive yet inter-related accountability types—negotiated, compliance, professional/discretionary, and anticipatory/positioning accountability—depending on explicit or implicit effectiveness standards and proactive or reactive organizational responses. Others classified accountability into several typologies focusing on relationships with various stakeholder groups, such as instrumental and expressive accountability (Knutsen & Brower, 2010) and upward (to trustees, donors, and host governments), downward (to partners, beneficiaries, staff, and supporters) (Edwards & Hulme, 1996; Najam, 1996), or lateral accountability (to organizations themselves) (Christensen & Ebrahim, 2006).

Specifically, Ebrahim (2016) divided accountability into process-based accountability (accountability how) and performance-based accountability (accountability for what) that is intrinsically linked to organizational effectiveness. Process accountability works as a means of achieving organizational effectiveness. Process accountability refers to formal and informal mechanisms developed by governments and nonprofits to respond to expectations regarding nonprofit organization effectiveness (Ebrahim, 2003; Kearns, 1996; Whitaker et al., 2004). Accountabilities grow as process mechanisms constrain irresponsible behaviors, engender learning, and avoid accountability loss, which in turn affects whether nonprofits are held to account for what they deliver (accountability for what; Ebrahim, 2016). As diverse stakeholders (e.g., volunteers, board members, paid staff, program directors, public agencies, funders, and citizens) are involved in nonprofits’ service or program delivery, nonprofits develop various process accountabilities while communicating different motivations, institutional logics, and expectations about who carries out which actions or what results should be produced for whom. Thus, process accountability is viewed as a social, political, and moral mechanism that makes nonprofits accountable for how they do this to others engaged in nonprofits’ service delivery (Coule, 2015).

Process accountability can take diverse forms (Ebrahim, 2003; Kearns, 1996; Romzek et al., 2014; Whitaker et al., 2004). Ebrahim (2016) demonstrates several examples of process accountability tools, including (1) nonprofits’ disclosures and reporting requirements with punitive consequences for noncompliance, (2) nonprofits’ self-regulation such as establishing and accomplishing voluntary codes of conduct or third-party certification standards across nonprofit industries, (3) participatory decision processes such as consultation with community leaders, governments, and private actors and public involvement in collaborative projects, and (4) nonprofits’ adaptive learning practices for their critical reflection on collaboration to make progress toward achieving their collective missions (Ebrahim, 2016). These process accountability mechanisms are associated with relational processes between governments, nonprofits, and stakeholder groups, affecting organizational effectiveness (Mitchell, 2018; A. P. Williams & Taylor, 2013).

While there are many different ways and frameworks to organize process accountability, we pinpoint two essential dimensions of describing this concept: foci or goals (transparency and responsibility) and the locus of control (external and internal; Romzek & Dubnick, 1987; Romzek et al., 2014; A. P. Williams & Taylor, 2013). Building on Koppell (2005) and A. P. Williams and Taylor (2013), the first dimension we refer to as foci or goals indicates intended outcomes or impacts of establishing procedures or processes within nonprofits. It maps out a spectrum of maturity related to meaningful transparency that internal and external stakeholders can use as a resource to evaluate nonprofits’ responsibility, for example, ranging from document retention policy to external audits of financial statements. Transparency is the most fundamental property of a process accountability system that allows nonprofits to achieve accountability and allocate responsibility toward the internal and external stakeholders (A. P. Williams & Taylor, 2013). The second dimension of the spectrum, influenced by Romzek and Dubnick (1987) and Ebrahim (2016), captures whether or not process accountability is realized within an internal organization or an independent external unit. Locus of control explains the extent to which the process accountability mechanism is internally or externally induced. By juxtaposing these dimensions in Figure 1, we present a two-by-two typology that delineates four broad groups of process accountability, described as (1) internally-induced transparency tools, (2) internally-induced responsibility tools, (3) externally-induced transparency tools, and (4) externally-induced responsibility tools.¹

Figure 1.

A typology of process accountability

The passage of the Sarbanes-Oxley Act in 2002 has encouraged nonprofits to establish systems of financial and ethical standards. These process mechanisms are designed to enhance transparency at the basic level, guide ethical behaviors, and increase an organization’s credibility and legitimacy (Y.-J. Lee, 2016; Ostrower, 2007). For example, nonprofits demonstrate accountability by monitoring efforts in the form of external financial statement reviews and audits to other stakeholders involved in public service or program delivery. Such independent third-party reviews and audits enable accountability to governments, donors, and clients regarding contracts. As major financial resource providers and central regulatory actors, governments often require external monitoring processes to determine whether taxpayers’ money has been spent properly on legitimate costs (Lu, 2016; Romzek & Johnston, 2005). Governments can induce nonprofits to be accountable for what they should do and punish deviations through punitive threats such as the revocation of tax-exempt status or loss of funds (Ebrahim, 2016; Girth, 2014). Nonprofits also internally observe high standards of business operations and personal ethics in the conduct of all board members’, officers’, employees’, and volunteers’ duties and responsibilities through conflict of interest, whistleblower protection, and document retention and destruction policies (Herman, 2009), which contribute to nonprofit effectiveness routinely expressed by financial indicators (Kim, 2017; Mitchell, 2017).

Government Grants and Nonprofit Financial Effectiveness

According to Resource Dependence Theory (RDT), organizations are a collection of power relations based on the exchange of resources (Pfeffer & Salancik, 1978). Organizations rely on external resources because they do not internally possess all the resources necessary to achieve their respective missions. However, resources in the external environment are too limited to satisfy all organizations’ needs and demands, and therefore organizations must compete with others and actively seek to manipulate their environment to acquire the necessary resources. Organizations are engaged in constant struggles to control needed resources by modifying their structures and patterns of behavior. Organizations gain overall power by securing resources that others need and decreasing dependence on others for resources crucial to their own needs. In doing so, organizations can ensure their long-term survival (Pfeffer & Salancik, 1978).

RDT provides the basis for understanding how social and material resource exchanges between governments and nonprofit organizations shape their power relations that reflect complicated nonprofit governance mechanisms (J. Lee et al., 2018; Romzek et al., 2014). While governments usually act as external providers of financial resources that nonprofits lack internally, nonprofits and governments show virtually identical degrees of resource dependence on each other (Saidel, 1991). Public grants create the conditions for mutually beneficial stewardship for government and nonprofits and suggest several implications for nonprofit financial effectiveness.

RDT suggests seemingly contradictory views on the relationship between government grants and nonprofits’ financial effectiveness. One line highlights how government grants are positively associated with nonprofits’ financial effectiveness. Financial dependence on government allows nonprofits to secure the stable flow of monetary resources and meet their mission (S. Park & Mosley, 2017). Government grants also complement nonprofits’ other financial sources and help nonprofits broaden the availability of social services to the community (Frumkin & Kim, 2002; Luksetich, 2008). Government grants and contracts became an essential business model for nonprofits and promoted relational contracting, public-private-partnership, or collaborative governance (J. Lee et al., 2018). These public supports can be sustainable and sizable revenue sources for nonprofits, particularly during times of economic uncertainty (S. Park & Mosley, 2017). For instance, in 2010, government grants accounted for approximately two-thirds of human service nonprofits’ total revenue (Boris et al., 2010).

Nonprofits’ financial effectiveness grows in response to the increased availability of government contracts and grants. Cost shifting of government agencies and contracting out of public services have encouraged the development of new nonprofits, nonprofits’ increased operational efficiency, and improved quality of nonprofit services (Frumkin & Kim, 2002; Luksetich, 2008). Competition between nonprofits for public grants increases organization effectiveness by incentivizing nonprofits to work harder, cut unnecessary costs, and improve effectiveness and political influence. Accordingly, public grants ensure that high-performing nonprofits thrive, and ineffective nonprofits fade out (Parks, 2008). Nonprofits and government relations are commonly regulated by performance-based contracts entailing specific accountability obligations (Benjamin, 2008; Greiling & Stötzer, 2015). While describing an informally structured relationship between governments and nonprofits, Kramer and Grossman (1987) claimed that public grants help nonprofits build their legitimacy and attract resources, management capacity, and political power (Frumkin & Kim, 2002), contributing to nonprofits’ financial effectiveness. We suggest the following hypothesis.

H1a: Government grants are positively associated with nonprofits’ financial effectiveness.

However, another line of thinking influenced by RDT explains that resource dependence can create a power imbalance between resource holders (governments) and resource seekers (nonprofits). Such dependence also makes resource seekers devote a disproportionate share of time and attention to resource holders at the expense of client-related activities (J. Lee et al., 2018; LeRoux, 2009). This dependence often leads to a loss in organizations’ (resource seekers’) autonomy and diminished power in their interdependent relationships with resource holders. Thus, the organizations’ (resource seekers’) behaviors and practices are bound by the preferences and constraints imposed by the external resource holders on which they are dependent (H. H. Park & Rethemeyer, 2014; Pfeffer & Salancik, 1978). The reduced autonomy is negatively related to factors that enhance organizations’ effectiveness, such as innovation, strategic decisions, and the degree of internalization (Gammelgaard et al., 2012). Heavy reliance on government grants may increase nonprofits’ likelihood of adopting an instrumental orientation to resolve financial insufficiency instead of serving their missions and clienteles. Similarly, previous studies guided by modern portfolio theory claim that diversifying revenue streams while avoiding excessive financial dependence on government grants can provide greater flexibility and reduce an organization’s financial risks by enhancing organizational autonomy, thereby improving nonprofit financial effectiveness (Carroll & Stater, 2009; Froelich, 1999; Hung & Hager, 2019; Y. J. Park & Peng, 2020). Therefore, we suggest the complementary hypothesis as follows:

H1b: Government grants are negatively associated with nonprofits’ financial effectiveness.

Government Grants and Process Accountability

When an organization is heavily dependent on the sources of the same external institution, it is less likely to resist various institutional pressures that constrain its actions (Pfeffer, 1982; Scott, 1987). Institutional theory supports this idea by emphasizing the influence of normative, coercive, and mimetic pressures on isomorphic organizational behavior (DiMaggio & Powell, 1983). Governments are the largest funders for many nonprofit organizations and serve as the most important institutional actors by imposing their legal mandates on nonprofits or normatively setting boundaries between what is accepted and what is not (Guo, 2007). Governments can coercively pressure nonprofits to comply with formal rules and regulations. As such, nonprofits that receive a large amount of government grant funding are more likely to comply with governments’ higher accountability expectations regarding financial and managerial practices (Guo, 2007; Y.-J. Lee, 2016). Currently, nonprofits receiving more than $750,000 in federal funds must conduct an external compliance audit (Office of Management and Budget, 2014), while small nonprofits voluntarily choose to undergo an external audit.

Mutual dependence between governments and nonprofits through grants and contracts can incentivize nonprofits to alter their existing culture toward professionalization. As the number of government grants available to nonprofits increases, governments can facilitate change in nonprofits’ professional work cultures by requiring them to meet specific financial and managerial standards in exchange for additional resources. Nonprofits normatively adjust their routines and working practices that are endorsed by their respective governments, signaling their credibility and legitimacy to other funders to attract more donations in the future (Coupet et al., 2020; Frumkin & Kim, 2002; Guo, 2007; Y.-J. Lee, 2016). For instance, Vermeer et al. (2006, 2009) found that nonprofits’ dependence on external resources, including government grants, is associated with the nonprofits’ professional audit committee composition and monitoring activities.

Also, governments often establish sophisticated regulatory and procedural requirements, organization effectiveness standards, and monitoring and reporting systems for their contracting nonprofits, which leads to the emergence of professionalism in nonprofits (Guo, 2007; Siegel, 1999). In order for nonprofits to comply with these procedural requirements, they rely more on experienced professional staff and less on volunteers. Professional culture, represented by bureaucratic and rationalized operating procedures, emerged among nonprofits working with governments and/or receiving government grants throughout the 1980s and 1990s (Guo, 2007). An independent examination of financial statements becomes a ubiquitous phenomenon in the nonprofit sector. Thus, it is reasonable to expect that government grants triggered improvements in nonprofits’ professional culture as signified by more rationalized operating procedures, making nonprofits receiving government grants more likely to adopt process accountability (Guo, 2007). Our second hypothesis is as follows:

H2: Government grants are positively associated with nonprofits’ process accountability.

Process Accountability and Nonprofit Organization Effectiveness

As Romzek and Dubnick (1987) pointed out, responsibility for organization effectiveness is a central feature of accountability systems. Previous studies have assumed that process accountability is closely linked to higher organizational effectiveness. However, few empirical studies have confirmed the assumed association with large quantitative data. Instead, previous studies anecdotally describe how process accountability can offer many benefits that potentially make nonprofits perform better and more effectively. For instance, process accountability can help increase an organization’s transparency (Moynihan & Ingraham, 2007), induce information spillover as a positive externality from nonprofits, reduce search and transaction costs for donors and stakeholders, limit opportunistic information disclosure (Baber & Gore, 2008; Calabrese, 2011), increase confidence to external stakeholders (Wholey, 2001), and promote public accountability (Hatry et al., 2005), all of which constitute various aspects of organizational effectiveness.

However, doing things in the right way does not guarantee that organizations achieve effectiveness, at least from the financial effectiveness perspective. Procedural demands associated with process accountability tend to carry high transaction costs—the “comparative costs of planning, adapting, and monitoring task completion under alternative governing structures” (Williamson, 1981, pp. 552, 553). Reporting and accounting for government grants often require a substantial amount of time and effort in preparing the necessary documentation. The managerial and financial costs of either required or voluntary audits on nonprofits are high (Ebrahim, 2003; Frumkin & Kim, 2002). Transactions with the governments may become more costly as a nonprofit has to adjust to the many rules and norms in the field (adoption of process accountability measures) as a response to strong institutional pressures. As such, too much emphasis on process accountability may end up lowering organizational financial effectiveness due to increased transaction costs and complexity.

Scholars debate whether process accountability is helpful or hurtful (Han & Hong, 2019). The assumed negative association between process accountability and organizational effectiveness has not been extensively examined (Dubnick & Yang, 2010; Ebrahim, 2016; Han, 2020; Han & Hong, 2019). Focusing on organizational financial effectiveness, we suggest the following hypothesis:

H3: Process accountability is negatively associated with nonprofits’ financial effectiveness.

Government Grants, Process Accountability, and Financial Effectiveness

To better ground our predictions in RDT and institutional theory (DiMaggio & Powell, 1983), we address the role of process accountability in mediating the relationships between government grants (as an important characteristic of an organization) and nonprofit financial effectiveness. Governments generally set higher accountability standards for nonprofits receiving government grants (Y.-J. Lee, 2016). Beyond the procurement of external resources, nonprofits receiving government grants are more likely to embrace the rules of external resource providers and meet the expectations of diverse stakeholders in public as a strategic response to obtain necessary resources in the future. Nonprofits with government grants tend to follow the professional cultures where similar nonprofits adopt process measures, which contributes to gaining organizational legitimacy (Eikenberry & Kluver, 2004; Lu, 2015). Thus, nonprofits receiving more government grants tend to adopt process accountability tools (Hypothesis 2). However, at the same time, this may decrease financial effectiveness due to the increased administrative costs and perceived complexity (Hypothesis 3). As such, we hypothesize that even if government grants directly improve financial effectiveness (Hypothesis 1a), the indirect negative effects of government grants on financial effectiveness through process accountability (Hypothesis 3) are greater. Alternatively, if government grants directly decrease financial effectiveness due to reduced nonprofit autonomy and increased clientelism toward the bureaucracy (Hypothesis 1b), government grants’ total negative effects on financial effectiveness are strengthened with the indirect negative effects (Hypothesis 3). Our hypothesis is as follows:H4: The total effects (direct and indirect) of government grants on nonprofits’ financial effectiveness are negative.

In a nutshell, the previous hypotheses can be summarized in Figure 2.

Figure 2.

Mediating role of process accountability between government grants and nonprofit financial effectiveness

Methods

In order to examine how government grants affect nonprofit effectiveness, we use a longitudinal study design. Our study population is charitable nonprofit organizations in the U.S. from 2013 to 2017 (N = 896,531).

Data

We examined IRS Form 990 as our primary dataset. Most tax-exempt organizations are required to submit this form to the IRS as a part of their annual reporting. Organizations with gross receipts greater than or equal to $200,000 or total assets greater than or equal to $500,000 are required to report their financial information using this form.² In addition, the dataset only includes organizations that electronically filed with the IRS.

This dataset has been widely used to improve public administration practices. It is “the IRS’ primary tool for gathering information about tax-exempt organizations, educating organizations about tax law requirements, and promoting compliance” (Internal Revenue Service, n.d.-a). In addition, this dataset allows a nonprofit organization to share information on its programs with the public. Further, most states use this dataset to perform regulatory oversight and compliance work related to state income tax when applicable (Internal Revenue Service, n.d.-a). IRS 990 filings in a machine-readable format were retrieved from the Amazon Web Services (Internal Revenue Service, n.d.-c). We detect and winsorize outliers in financial effectiveness measures and control variables, including total employees and volunteers, at 1 percentile and 99 percentile, which left 92% of observations. This process resolves common problems in financial datasets (e.g., negative liabilities and outliers in employees and volunteers).

Variables

Dependent variable

The dependent variable is a nonprofit’s financial effectiveness. While a nonprofit organization’s effectiveness is an elusive concept, financial indicators are routinely used as a proxy for nonprofit organization effectiveness (Kim, 2017; Y. J. Park et al., 2021). Conceptually, there have been various perspectives in defining it, such as (a) a goal attainment model focusing on the achievement of self-selected goals, (b) a systems resource model using organizational survival or growth as a proxy for effectiveness, (c) a reputation model relying on various perceptions relevant to stakeholders, and (d) a multidimensional model incorporating and balancing the first three models (Forbes, 1998; Liket & Maas, 2015). Of the many conceptual and theoretical models of nonprofit organizations’ effectiveness, this study utilizes the systems resource model relating to a nonprofit organization’s ability to respond to the properties of the external environment, to use its resources to maintain the organizational system, and to optimize its use of resources in an environment (Cunningham, 1978; Forbes, 1998; Liket & Maas, 2015). Also, with the emphasis on practical challenges of measuring nonprofit organizational effectiveness in terms of scalability, collectability, objectivity, and comparability across organizations, we primarily focus on nonprofit financial effectiveness (Liket & Maas, 2015).

Specifically, nonprofit financial effectiveness is measured in three ways: (1) program expenses for service provision, (2) operating margin, and (3) equity ratio. Program expenses measure nonprofits’ perceived financial effectiveness directly related to carrying out their missions through service and program delivery.³ In addition, operating margin and equity ratio are used as proxies of financial effectiveness. Since the focus of the systematic resource approach is “organizations’ abilities to exploit resources from their environments, using political, institutional, and economic means to sustain their own functioning” (Forbes, 1998, p. 186), operating margin (i.e., short-term financial health metric) and equity ratio (i.e., long-term financial health metrics) are used as financial effectiveness measures (Charity Navigator; Bowman, 2011; Tuckman & Chang, 1991). First, program expenses indicate a nonprofit’s financial effectiveness in fulfilling its mission amid external actors’ expectations and are measured by the amount of a nonprofit’s resources being used to develop, maintain, or deliver services (Garven et al., 2016). A nonprofit reports “program service accomplishments through specific measurements such as clients serviced, days of care provided, number of sessions or events held, or publications issued” (Internal Revenue Service, n.d.-b) along with the description of the activity’s objective. Since nonprofits provide services in diverse service fields, the measurements of program service accomplishments vary widely. IRS Form 990 further requires nonprofit organizations to report program service accomplishments using program service expenses. External donors and charity rating agencies, such as the Better Business Bureau’s Wise Giving Alliance, Charity Navigator, and the American Institutes of Philanthropy, are found to consider to what extent a nonprofit’s resources are allocated to programs in their giving and evaluating decisions (Garven et al., 2016). Following IRS Form 990’s instructions and previous studies, we used the natural log of the dollar amount of the program service accomplishments.

Second, operating margin implies a nonprofit’s financial effectiveness in producing a potential surplus, and is calculated as an organization’s surplus (or deficit) standardized by its revenue size (Tuckman & Chang, 1991). Greater operating margins allow a nonprofit to maintain and improve a program (Hager, 2001; Tuckman & Chang, 1991) and also provide a nonprofit with funds that can be saved to build equity. Thus, it is known to predict a nonprofit’s short-term financial effectiveness and operating efficiency (Bowman, 2011; Tuckman & Chang, 1991). An organization makes a surplus if the measure is greater than zero, and it has a deficit if the indicator is less than zero.

Third, equity ratio indicates a nonprofit’s financial ability to borrow or convert available resources into cash or seek funds from capital markets relying on the equity, and is calculated as total assets minus liabilities, divided by total assets (Tuckman & Chang, 1991). Equity refers to “the amount left over when a nonprofit’s liabilities are subtracted from its assets” (Tuckman & Chang, 1991, p. 451). Higher equity balances contribute to nonprofits’ sustainability and indirectly allow some flexibility of nonprofits’ operation in a financial crisis. Thus, the higher the equity ratio, the greater the ability of the organization to finance its activities and pay debts. An equity ratio is often used to predict long-term financial effectiveness and stability since having more assets allows organizations to borrow or convert an unrestricted portion of net assets to cash to overcome unexpected financial difficulties (Bowman, 2011; Tuckman & Chang, 1991).

Independent variable

The independent variable is government grants to a nonprofit organization. We operationalized the proportion of government grants as “the total amount of contributions in the form of grants or similar payments from local, state, or federal government sources, as well as foreign governments” (Internal Revenue Service, n.d.-b, p. 38) divided bytotal revenue. According to IRS Form 990’s instructions, the primary purpose of government grants is to “enable the organization to provide a service to, or maintain a facility for, the direct benefit of the public rather than to serve the direct and immediate needs of the governmental unit” (Internal Revenue Service, n.d.-b, p. 38).

Mediating variables

Following our typology of process accountability, we capture four types of accountability and operationalize them as follows: (1) Internally induced transparency tools measured by whether an organization has a written document retention and destruction policy; (2) Externally induced transparency tools measured by whether an organization’s financial statements are compiled or reviewed by an independent accountant; (3) Internally induced responsibility tools measured by (a) whether an organization has a written conflict of interest policy and (b) whether an organization has a written whistleblower policy; and (4) Externally induced responsibility tools measured by whether an organizations’ financial statements are audited by an independent accountant (Internal Revenue Service, n.d.-b).⁴ These variables are coded as one for “yes”; and zero for “no.”

Control variables

We controlled for several financial and non-financial variables that may influence a nonprofit’s adoption of process accountability tools and financial effectiveness (Jaskyte, 2013). First, an organization’s expenditures were controlled for as it captures organizational size from the financial perspective and may function as a confounding factor, directly affecting financial effectiveness (Jaskyte, 2013) and the adoption of accountability tools (Y.-J. Lee, 2016). Second, as a non-financial measure of the size of an organization, we controlled for an organization’s number of employees and volunteers (Matsunaga et al., 2010). Lastly, an organization’s revenue concentration (i.e., the opposite concept of revenue diversification) is controlled for. Revenue concentration refers to the extent to which a nonprofit establishes and maintains multiple revenue sources, such as earned income, government grants, private contributions, and investment income (Carroll & Stater, 2009). Previous theoretical and empirical studies have produced mixed claims on the relationships between revenue concentration (or revenue diversification) and financial effectiveness (Froelich, 1999). Modern portfolio theory has suggested that organizations can enhance flexibility and autonomy and reduce financial risks through diversifying revenue streams (Carroll & Stater, 2009; Froelich, 1999; Hung & Hager, 2019). However, revenue concentration is pursued as transaction costs and administrative burdens through diversifying revenue streams increase (Hung & Hager, 2019). We measured the revenue concentration using the Hirschman-Herfindahl Index (HHI), a common measure of revenue concentration in the nonprofit literature (Carroll & Stater, 2009). Higher HHI values indicate higher levels of revenue concentration for a nonprofit organization.

Model Specifications

To identify how process accountability plays a role in nonprofits’ effectiveness within an organization, we use panel data analysis and mediation analysis with fixed effects. As we have observations on the same organization for multiple years, the fixed effects analysis allows us to compare data on the same nonprofit organization over time. A fixed effects model offers a means of control for omitted variable bias if the omitted variables are time-invariant (e.g., subsector of a nonprofit and state in which a nonprofit operates) or time-constant (e.g., age of an organization); and have the same effect across time (Wooldridge, 2010).

First, we tested the relationship between grants and nonprofits’ effectiveness (hypothesis 1) using panel data analysis with fixed effects:

\begin{array}{l} {Nonprofit}^{’} s {effectiveness}_{i, t} \\ = β_{0} + β_{1} * G o v e r n m e n t F u n d i n g_{i, t} + β_{n} * C o n t r o l s_{i, t} \end{array}

where i is a nonprofit organization and t is the year.

Second, after establishing a relationship between government grants and nonprofits’ effectiveness, we further examined the role of process accountability in determining the relationship (Hypotheses 2, 3a, 3b, and 4) using mediation analysis with fixed effects. The analysis elucidates whether there is a causal process by which grants influence nonprofits’ effectiveness (hypothesis 3a: mediation effects; James & Brett, 1984) or process accountability reduces the magnitude of the effect of grants on nonprofits’ effectiveness (hypothesis 3b: suppression effects; MacKinnon et al., 2000, 2007). The following two regression equations are estimated:

\begin{array}{l} {Nonprofit}^{’} s {effectiveness}_{i, t} = β_{01} + τ^{'} * G o v e r n m e n t F u n d i n g_{i, t - 1} \\ + β * P r o c e s s A c c o u n t a b i l i t y_{i, t - 1} + β_{n} * C o n t r o l s_{i, t - 1} + ε_{i, t} \\ P r o c e s s A c c o u n t a b i l i t y_{i, t - 1} = β_{02} + α * G o v e r n m e n t S u p p o r t s_{i, t - 1} + ε_{i, t - 1} \end{array}

In these regression equations, the coefficient of the latent variable is constrained to one, and the other coefficients are constrained to be the same across all time points (R. Williams et al., 2018). Total effects, direct effects, and indirect effects are formally presented as follows:

Total Effect = $α * β$ + $τ^{'}$

Direct Effect = $τ^{'}$

Indirect Effect = $α * β$

Results

Table 1 summarizes nonprofits’ characteristics (N = 790,704) in the United States from 2013 to 2017. These summary statistics present an overall picture of nonprofit organizations by showing how government grants flow to community services through nonprofits’ activities and programs and how nonprofits make themselves effective and accountable for what they should deliver through process accountability. Our dependent variable is a nonprofit’s financial effectiveness measured by (1) the natural log of program expenses, (2) operating margin, and (3) equity ratio. The natural log of program expenses was, on average, 13.03, meaning that $456,644 was used to develop and manage their programs or services. Operating margin, on average, was 2%, meaning that a nonprofit makes $0.02 profit for each $1 of revenue. Equity ratio, on average, was 0.7, implying that a nonprofit has 70% of its assets free and clear. As an independent variable, the nonprofit’s average proportion of government grants out of total revenue was 10%. In addition, 50% of the nonprofits had external audits…60% had independent examinations of their financial statement through either compiling, reviews, or audits. On average, out of all nonprofits in the data, 60% had a written conflict of interest policy, 50% had a written whistleblower policy, and 50% had a written document retention and destruction policy. The summary statistics for the control variables in the mediation analysis are also presented in Table 1.

Table 1.

Summary Statistics of Charitable Nonprofit Organizations in the U.S. 2013 to 2017.

Variables	M	SD	Minimum	Maximum
Dependent variable (financial effectiveness)
(ln) program expenses	13	1.7	7.1	18
Operating ratio	0.02	0.3	−3.1	0.9
Equity ratio	0.7	0.4	−2.8	1
Independent variables
The proportion of government grants (% total revenue)	0.1	0.3	0	1
Externally-induced responsibility process
Financial statements audited by an independent accountant^a	0.5	0.5	0	1
Externally-induced transparency processes
Financial statements complied or reviewed by an independent accountant^a	0.1	0.3	0	1
Internally-induced responsibility processes
(a) Having a written conflict of interest policy^a	0.6	0.5	0	1
(b) Having a written whistleblower policy^a	0.5	0.5	0	1
Internally-induced transparency processes:
Having a written document retention and destruction policy^a	0.5	0.5	0	1
Control variables
(ln) total expenditures	13	1.6	9.6	18
Total number of employees	32	79	0	642
Total number of volunteers	82	238	0	2,651
Revenue concentration (HHI)	0.8	0.2	0.3	1

Note. Approximately a half of the observations do not receive any government grants.

Dummy variables.

To test our first hypothesis, we examined the total effect of government grants on three aspects of nonprofit effectiveness using a fixed effect panel data analysis: (1) (ln) Program expenses (programmatic service provision), (2) Operating margin (short-term financial effectiveness and operating efficiency), and (3) Equity ratio (long-term financial effectiveness and organizational stability) models. As shown in Table 2, we found that nonprofits with more funding through government grants are more likely to fulfill the expectations of programmatic service delivery and show higher operating efficiency as short-term organizational effectiveness (see the positive and significant coefficients on Government grants in (ln) Program expenses and Operating margin models in Table 2). A 1 percentage point increase in government grants out of total revenue leads to a 2% increase in the program service expenditures (coefficient = .02, p < .01) and an 11 percentage point increase in operating margin (coefficient = .09, p < .01), which supports H1a. However, nonprofits with an increased dependence on government grants tend to be less effective and stable from the long-term perspective (see the negative and significant coefficient on Government grants in the Equity ratio model in Table 2). A 1 percentage point increase in government grants out of total revenue lowers the equity ratio by 2 percentage points (coefficient = −.02, p < .01), which supports H1b. Our findings demonstrate that there is a relationship between government grants and nonprofit effectiveness. Also, they suggest that various aspects of a nonprofit’s effectiveness need to be considered to better understand how government grants come into play in nonprofit financial effectiveness.

Table 2.

The Effects of Government Grants on Nonprofit Effectiveness in the U.S. 2013 to 2017 from Fixed Effect Panel Data Analysis.

	Nonprofit financial effectiveness
	(ln) program expenses	Operating margin	Equity ratio
Government grants	0.02*** (0.00)	0.09*** (0.00)	−0.02*** (0.00)
(ln) total expenditures	1.07*** (0.00)	−0.25*** (0.00)	−0.02*** (0.00)
Total number of employees	−0.00*** (0.00)	0.00*** (0.00)	0.00 (0.00)
Total number of volunteers	−0.00 (0.00)	0.00*** (0.00)	0.00 (0.00)
Revenue concentration	0.00 (0.00)	0.12*** (0.00)	−0.01*** (0.00)
Constant	−1.18*** (0.01)	3.19*** (0.02)	1.05*** (0.01)
Observations	790,704	790,704	790,704
R ²	.79	.07	.00
Number of EIN	236,559	236,559	236,559

Note. Standard errors in parentheses.

p < .1. **p < .05. ***p < .01.

Next, we tested whether the association between government grants and nonprofit effectiveness is mediated through four types of process accountability measured by five procedures: (1) Externally induced responsibility processes: externally audited financial statements by an independent accountant, (2) Externally induced transparency processes: compiled or reviewed financial statements by an independent accountant, (3) Internally induced responsibility processes: (a) conflict of interest policy and (b) whistleblower policy, and (4) Internally induced transparency processes: document retention and destruction policy. Table 3 presents fully mediated models with fixed effects that allow the comparison of direct and indirect effects of government grants on Program service expenditure (programmatic service provision). The direct effects of government grants on Program service expenditure, after controlling for the mediators (i.e., process accountability), are positive (see coefficients on Government grants (t − 1) in effectiveness (t) across five models), which supports H1a. Thus, government grants help nonprofits continue to have a greater impact on their charitable missions by providing programs and services.

Table 3.

The Mediation Effects of Process Accountability on the Relationship between Government Grants and (ln) Program Service Expenditure in Nonprofit Organizations in the U.S. 2013 to 2017^a from Fixed Effect Mediation Analysis.

	Model 1		Model 2		Model 3				Model 4
	Effectiveness (t)	Audited (t − 1)	Effectiveness (t)	Compiled or reviewed (t − 1)	Effectiveness (t)	Conflict of interest policy (t − 1)	Effectiveness (t)	Whistle-blower policy (t − 1)	Effectiveness (t)	Retention and destruction policy (t − 1)
Externally-induced responsibility processes: Audited (t − 1)	−0.82*** (0.00)
Externally-induced transparency processes: Compiled or reviewed (t − 1)			−0.83*** (0.00)
Internally-induced responsibility processes: (a) Conflict of interest policy (t − 1)					−0.94*** (0.00)
Internally-induced responsibility processes: (b) Whistleblower policy (t − 1)							−0.93*** (0.00)
Internally-induced transparency processes: Retention and destruction policy (t − 1)									−0.94*** (0.00)
Government grants (t − 1)	0.03*** (0.00)	0.00 (0.00)	0.06*** (0.00)	−0.02*** (0.00)	0.06*** (0.00)	−0.01** (0.00)	0.05*** (0.00)	−0.01*** (0.00)	0.06*** (0.00)	−0.01** (0.00)
(ln) Total expenses (t − 1)	0.96*** (0.00)		1.00*** (0.00)		0.98*** (0.00)		0.98*** (0.00)		0.98*** (0.00)
Number of employees (t − 1)	0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)
Number of volunteers (t − 1)	−0.00 (0.00)		0.00* (0.00)		−0.00 (0.00)		−0.00* (0.00)		−0.00 (0.00)
Revenue concentration (t − 1)	−0.00 (0.00)		0.00* (0.00)		−0.00 (0.00)		−0.00* (0.00)		−0.00 (0.00)
α	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)
Constant	0.77*** (0.01)	0.52*** (0.00)	−0.03*** (0.01)	0.13*** (0.00)	0.63*** (0.01)	0.66*** (0.00)	0.48*** (0.01)	0.49*** (0.00)	0.51*** (0.01)	0.53*** (0.00)
Number of EIN	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721

Note. Standard errors in parentheses. The positive relationship between government grants (t − 1) and program service provision (t) is suppressed by process accountability, measured by whether an organizations’ financial statements are audited by an independent accountant (model 1); whether an organization’s financial statements are compiled, reviewed, or audited by an independent accountant (model 2); whether an organization has a written conflict of interest policy (model 3); whether an organization has a written whistleblower policy; and whether an organization has a written document retention and destruction policy (model 5).

Equity ratio is from 2014 to 2017; and all other variables are from 2013 to 2016.

p < .1. **p < .05. ***p < .01.

Turning to the indirect effect of government grants on Program service expenditure through process accountability, interestingly, we found a suppression effect. Nonprofits with more government grant funding tend to be more accountable for their processes across four types, which does not bring greater accountability to their program expenditures (organization effectiveness). The effects of government grants on process accountability are negative and significant under three conditions: (1) when a nonprofit’s financial statements are compiled or reviewed by an independent accountant (the externally-induced transparency processes); (2) when a nonprofit has a written conflict of interest policy or when a nonprofit has a whistleblower policy (internally-induced responsibility processes), and (3) when a nonprofit has a document retention and reduction policy (internally-induced transparency processes; see the negative and significant coefficients on Government grant (t − 1) in Compiled or reviewed (t − 1) of Model 2, Conflict of interest (t − 1) and Whistleblower policy (t − 1) of Model 3, and Retention and destruction policy (t − 1) of Model 4 at the 1% significance level), which do not support H2. The impact of government grants on externally-induced responsibility processes is insignificant (see the insignificant coefficients on Government grants (t − 1) in Audited (t − 1) of Model 1). However, we found a negative effect of process accountability on Program service expenditure. Table 3 presents that coefficients on Audited (t − 1) in effectiveness of Model 1, Compiled or reviewed (t − 1) in effectiveness of Model 2, Conflict of interest policy (t − 1) and Whistleblower policy (t − 1) in effectiveness of Model 3, and Retention and destruction in effectiveness of Model 4 are all negative and statistically significant at the 1% level. Hypothesis 3b is supported. We found that three types of process accountability—externally-induced transparency processes, internally-induced responsibility processes, and internally-induced transparency processes—negatively mediate the relationships between government grants and nonprofit financial effectiveness, partially supporting Hypothesis 4.

Next, as shown in Table 4, the mediated models of government grants on Operating margin (short-term nonprofit financial effectiveness and operating efficiency) indicate that the direct effects of government grants on Operating margin, controlling for process accountability (i.e., mediators), are negative (see coefficients on Government grants (t − 1) in effectiveness (t) across four models). Thus, government grants may not necessarily make a nonprofit more efficient from the short-term perspective, supporting H1b.

Table 4.

The Mediation Effects of Process Accountability on the Relationship between Government Grants and Operating Ratio in Nonprofit Organizations in the U.S. 2013 to 2017^a from Fixed Effect Mediation Analysis.

	Model 1		Model 2		Model 3				Model 4
	Effectiveness (t)	Audited (t − 1)	Effectiveness (t)	Compiled, reviewed (t − 1)	Effectiveness (t)	Conflict of interest policy (t − 1)	Effectiveness (t)	Whistle-blower policy (t − 1)	Effectiveness (t)	Retention and destruction policy (t − 1)
Externally-induced responsibility processes: Audited (t − 1)	−0.86*** (0.00)
Externally-induced transparency processes: Compiled or reviewed (t − 1)			−0.75*** (0.00)
Internally-induced responsibility processes: (a) Conflict of interest policy (t − 1)					−0.95*** (0.00)
Internally-induced responsibility processes: (b) Whistleblower policy (t − 1)							−0.95*** (0.00)
Internally-induced transparency processes: Retention and destruction policy (t − 1)									−0.95*** (0.00)
Government grants (t − 1)	−0.03*** (0.00)	0.04*** (0.00)	−0.02*** (0.00)	0.00 (0.00)	−0.03*** (0.00)	0.01** (0.00)	−0.03*** (0.00)	0.00 (0.00)	−0.03*** (0.00)	0.01*** (0.00)
(ln) Total expenses (t − 1)	−0.02*** (0.00)		0.01*** (0.00)		−0.00* (0.00)		−0.00*** (0.00)		−0.00*** (0.00)
Number of employees (t − 1)	0.00*** (0.00)		0.00 (0.00)		0.00* (0.00)		0.00 (0.00)		0.00 (0.00)
Number of volunteers (t − 1)	0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)
Revenue concentration (t − 1)	0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)
α	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)
Constant	0.71*** (0.01)	0.51*** (0.00)	−0.04*** (0.01)	0.13*** (0.00)	0.66*** (0.01)	0.66*** (0.00)	0.51*** (0.01)	0.48*** (0.00)	0.55*** (0.01)	0.53*** (0.00)
Number of EIN	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721

Equity ratio is from 2014 to 2017; and all other variables are from 2013 to 2016.

p < .1. **p < .05. ***p < .01.

Regarding the indirect effect of government grants on Operating margin through process accountability, we found that nonprofits with more government grant funding are more likely to show a greater level of process accountability. The positive effect of government grants on process accountability is shown in three conditions of process accountability in Table 4 (see the positive and significant coefficients on Government grants (t − 1) in Audited (t − 1) of Model 1, Conflict of interest policy (t − 1) of Model 3, and Retention and destruction policy (t − 1) of Model 4 at the 1% significance level). Therefore, our hypothesis 2 is partly supported.

However, it turns out that four types of process accountability decrease a nonprofit’s operating margin. Table 4 presents that coefficients on Audited (t − 1) in effectiveness of Model 1, Compiled or reviewed (t − 1) in effectiveness of Model 2, Conflict of interest policy (t − 1) and Whistleblower policy (t − 1) in effectiveness of Model 3, and Retention and destruction in effectiveness of Model 4 are all negative and statistically significant at the 1% level. Nonprofits observing many types of process accountability are less likely to be efficiently operating from the short-term perspective (i.e., low operating margin), supporting Hypothesis 3b. We found that three types of process accountability—externally-induced responsibility processes, internally-induced responsibility processes, and internally-induced transparency processes—negatively mediate the relationships between government grants and nonprofit financial effectiveness, partially supporting H4.

Table 5 shows the direct effects of government grants on Equity ratio (long-term nonprofit effectiveness and organization’s sustainability), after controlling for the mediators (i.e., process accountability), are negative and significant (see coefficients on Government grants (t − 1) in effectiveness (t) across four models at the 1% significance level). Our hypothesis 1a is supported. Heavy reliance on government grants can make nonprofits less effective and stable financially, which indirectly suggests the importance of diversifying revenue streams in nonprofit resource management (Y. J. Park & Peng, 2020).

Table 5.

The Mediation Effects of Process Accountability on the Relationship Between Government Grants and Equity Ratio in Nonprofit Organizations in the U.S. 2013 to 2017^a From Fixed Effect Mediation Analysis.

	Model 1		Model 2		Model 3				Model 4
	Effectiveness (t)	Audited (t − 1)	Effectiveness (t)	Compiled, reviewed (t − 1)	Effectiveness (t)	Conflict of interest policy (t − 1)	Effectiveness (t)	Whistle-blower policy (t − 1)	Effectiveness (t)	Retention and destruction policy (t − 1)
Externally-induced responsibility processes: Audited (t − 1)	−0.97*** (0.00)
Externally-induced transparency processes: Compiled or reviewed (t − 1)			−0.73*** (0.00)
Internally-induced responsibility processes: (a) Conflict of interest policy (t − 1)					−0.98*** (0.00)
Internally-induced responsibility processes: (b) Whistleblower policy (t − 1)							−0.97*** (0.00)
Internally-induced transparency processes: Retention and destruction policy (t − 1)									−0.98*** (0.00)
Government grants (t − 1)	−0.13*** (0.00)	0.05*** (0.00)	−0.14*** (0.00)	0.02*** (0.00)	−0.16*** (0.00)	0.01*** (0.00)	−0.16*** (0.00)	0.01*** (0.00)	−0.15*** (0.00)	0.02*** (0.00)
(ln) Total expenses (t − 1)	−0.06*** (0.00)		−0.05*** (0.00)		−0.06*** (0.00)		−0.06*** (0.00)		−0.06*** (0.00)
Number of employees (t − 1)	0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)
Number of volunteers (t − 1)	0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)
Revenue concentration (t − 1)	0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)		0.00*** (0.00)
α	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)	1.00*** (.00)
Constant	2.10*** (0.01)	0.51*** (0.00)	1.53*** (0.01)	0.13*** (0.00)	2.22*** (0.01)	0.66*** (0.00)	2.06*** (0.01)	0.48*** (0.00)	2.10*** (0.01)	0.53*** (0.00)
Number of EIN	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721	78,721

Equity ratio is from 2014 to 2017; and all other variables are from 2013 to 2016.

p < .1. **p < .05. ***p < .01.

Turning to the indirect effect of government grants on Equity ratio through process accountability, we found that nonprofits with more government grant funding are more likely to demonstrate higher process accountability. The positive effect of government grants on process accountability is consistent across five conditions of process accountability (see the positive and significant coefficients on Government grants (t − 1) in Audited (t − 1) of Model 1, Compiled or reviewed (t − 1) of Model 2, Conflict of interest policy (t − 1) and Whistleblower policy (t − 1) of Model 3, and Retention and destruction policy (t − 1) of Model 4 at the 1% significance level). Thus, our hypothesis 2 is supported, indicating the positive effects of government grants on nonprofit’s process accountability.

However, we found a negative effect of process accountability on Equity ratio. Table 3 presents that coefficients on Audited (t − 1) in effectiveness of Model 1, Compiled or reviewed (t − 1) in effectiveness of Model 2, Conflict of interest policy (t − 1) and Whistleblower policy (t − 1) in effectiveness of Model 3, and Retention and destruction in effectiveness of Model 4 are all negative and statistically significant at the 1% level. When nonprofits are subject to an external examination of their financial statements through compiling, reviewing, or auditing or through internally observing their activities under conflict of interest, whistleblowing, or document retention/destruction policies, they are less likely to show long-term effectiveness (i.e., Equity ratio). As such, Hypothesis 3b is supported. Our mediation analysis indicates that government grants can increase process accountability, but it does not necessarily lead to long-term effectiveness, supporting Hypothesis 4.

Discussion and Conclusion

Along with the explosion of contracted public services, government grants have become a significant source of revenue for many nonprofit organizations in the U.S. and a normative, coercive, and mimetic force that shapes nonprofits’ accountable behaviors. Understanding how nonprofits and governments deal with issues of accountability is an important topic in public and nonprofit management. Process accountability (accountability how), a means of organization effectiveness (financial effectiveness in this study), is widely recognized as a way to ensure that nonprofits are transparent with multiple relevant stakeholders and responsible for their deliverables.

Focusing on nonprofits’ financial dependence on governments as a normative, coercive, and mimetic pressure for the adoption of process accountability, we examine how process accountability mediates the associations between public grants and nonprofit effectiveness. Using data from IRS Form 990 from 2013 to 2017, our mediation analysis reveals that (1) government grants are positively associated with nonprofits’ programmatic service provision while it is negatively associated with nonprofits’ operating efficiency and long-term sustainability, (2) government grants and process accountability are positively related, and (3) process accountability does not automatically , make nonprofits more financially effective. It can suppress the positive relationship between government grants and nonprofits’ financial effectiveness. These findings help clarify the inconsistent relations between public grants and nonprofit financial effectiveness (S. Park & Mosley, 2017; Pfeffer & Salancik, 1978). This study also improves our understanding of process accountability in government-nonprofit relationships by showing the suppression effect of process accountability in linking government grants and nonprofit financial effectiveness.

First, we developed a typology of process accountability based on goals or foci (transparency or responsibility) and loci (internally- or externally-induced process) of accountability control. They constitute (1) an internal transparency tool (e.g., document retention and destruction policy), (2) an internal responsibility tool (e.g., written conflict of interest policy and written whistleblower protection policy), (3) an external transparency tool (e.g., external financial review or compilation), and (4) an external responsibility tool (e.g., external financial audit). The typology provides a core set of descriptive, multidimensional features determining process types and helps illustrate similarities and differences between empirical examples of process accountability tools. While our empirical analyses do not show any significant variations in the ways that different types of process accountability mediate the relationships between government grants and financial effectiveness, this typology helps theorize and characterize process accountability in public and nonprofit management.

Second, we fully uncover the mechanism of the relationship between government grants and nonprofits’ financial effectiveness by conducting a longitudinal analysis of charitable nonprofit organizations in the U.S. (2013–2017). This study is among the first to provide empirical evidence on the significance of government grants in nonprofit effectiveness captured by three important aspects of nonprofit financial management: programmatic service provision, operating efficiency, and long-term sustainability. To date, a multidimensional approach to measuring nonprofit organization financial effectiveness is not well explored. Claims on the relationship between public grants and nonprofit financial effectiveness demonstrate mixed responses and are largely examined through anecdotal evidence. Guided by resource dependence theory, some emphasize how stable grant streams from the governments increase nonprofits’ financial effectiveness. In contrast, others claim that heavy reliance on government grants makes nonprofit organizations vulnerable to loss of control over their operations, decreasing financial effectiveness (S. Park & Mosley, 2017). Our findings suggest that government grants can help perform nore efficiently in fulfilling or expanding program and service goals when process accountability is controlled for. As Salamon’s (1987) voluntary failure theory pointed out, government grants help address the nonprofits’ inability to generate resources on a scale that is adequate and reliable enough to cope with service provision problems. However, government grants may not necessarily help nonprofits build their financial capacity and can potentially deteriorate their operating efficiency and organizational sustainability from short-term as well as long-term perspectives.

Third, our study provides a deeper understanding of the role of various types of process accountability in explaining nonprofit financial effectiveness concerning government grants. Our analyses show that government grants make nonprofits accountable for their processes. Government sponsorships institutionalize values of transparency and responsiveness, promote professionalism, and enhance nonprofit process accountability (LeRoux, 2009). However, we found that process accountability favoring such democratic values does not always guarantee an organization"s financial effectiveness. While scholars debate whether process accountability is helpful or hurtful, it is often assumed that process accountability enhances the effectiveness of public or nonprofit organizations (Han & Hong, 2019). This study found that the assumed relationship may not be valid, at least from the organizational financial effectiveness perspective. Reporting and accounting for government grants often require a substantial amount of time, commitment, and effort in terms of documentation preparation. The managerial and financial costs of either required or voluntary audits are high (Ebrahim, 2003; Frumkin & Kim, 2002). Too much emphasis on monitoring whether particular processes, such as document retention or conflict of interest policies, have been deployed can lead to proceduralism that may hamper nonprofit financial effectiveness. The increased transaction costs and complexity may encourage nonprofits to make suboptimal and inefficient decisions, thereby leading to lower nonprofit service activities, operating efficiency, and organizational sustainability (Bovens, 2009; Bovens et al., 2008). While government grants can directly increase nonprofit programmatic service provision, the positive relationship between public grants and nonprofit service provision is offset by “burdensome” process accountability. This is accentuated when a nonprofit receives several separate public grants and is required to meet distinct documentary requirements of those public grant programs (Guo & Acar, 2005; Snavely & Tracy, 2000). Our findings signal the need for more extensive research within nonprofit financial effectiveness and nonprofit-government relationship research that accounts for the mediating roles of process accountability.

While our findings provide novel insights into the mediating effects of process accountability on the association between government grants and nonprofit financial effectiveness, many compelling questions remain. First, researchers need to examine the potential variation in the relationship among financial dependence, process accountability, and nonprofit financial effectiveness among different types of financial resources, such as government versus private grants. In addition, given that approximately half of the organizations do not receive government grants in our sample and there are variations in government grants by subsectors, readers should exercise caution in applying the point estimates directly. Or, future research can examine how process accountability differently affects the relationship between governments and nonprofits’ financial effectiveness depending on nonprofits’ characteristics, such as degree of wealth, size, subsectors, and geographic location. Second, future research needs to consider various types of process accountability, such as a nonprofit board’s internal monitoring and oversight, a nonprofit’s participatory decision processes, and a nonprofit’s adaptive learning practice (Ebrahim, 2016). For instance, this could reveal that a nonprofit board’s internal monitoring and oversight might positively mediate the association between government grants and nonprofit financial effectiveness. In doing so, future studies can provide a more comprehensive understanding of the many roles process accountability play in nonprofit financial effectiveness. Third, while this study mainly focuses on nonprofit financial effectiveness from the system resource perspective, future study needs to consider diverse nonprofit effectiveness, such as goal attainment and reputation, as well as non-financial aspects of organizational effectiveness. Doing so will broaden our understanding regarding the relationship among government grants, process accountability, and nonprofit organizational effectiveness. Fourth, future study needs to conduct an in-depth analysis of the motivations behind the adoption of various process accountabilities and their relationships with government grants through a qualitative study using interviews with nonprofit managers. Lastly, scholars in public and nonprofit management need to clarify why process accountability suppresses the association between public grants and nonprofit financial effectiveness by employing qualitative approaches. This will help us better understand which specific aspects of process accountability mediate and suppress the association and provide more substantive guidance to examining multidimensions of process accountability.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Jeongyoon Lee

Notes

Author Biographies

relationships between government grants, process accountability, and financial effectiveness

Jeongyoon Lee (jle240@uky.edu) is an assistant professor at the Martin School of Public Policy and Administration at the University of Kentucky. Her scholarship is grounded in theories on how various working relationships among stakeholders (networks) are managed in the design of public policy and implementation. Her research focuses on inter-organizational and inter-personal network management in the public sector, negative relationships, and nonprofit organizational sustainability.

Young Joo Park (park@unm.edu) is an assistant professor in the School of Public Administration at the University of New Mexico. She studies public financial management with particular focus on financial condition analysis, nonprofit finance, and health care finance.

Xi Gong (xigong@unm.edu is an assistant professor in the Department of Geography & Environmental Studies at the University of New Mexico (UNM). His current research interests include Geographical Information Science (GIScience), big data science and analytics, spatiotemporal data mining, health and the environment, and GIS-based modeling. He also leads the Spatially Integrated Social Science (SISS) Lab at the UNM, which explores the spatial-temporal dimension of the complex human and social dynamics using GIScience.

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