Study upends conventional thinking about government grants to not-for-profits

A Telfer School study has found that higher program spending ratios are not consistently helpful to Canadian not-for-profits (NFPs) seeking government grants, overturning common assumptions.

“This finding goes against some conventional expectations about the impact of program spending ratios – the ratio of reported program expenses to total expenses,” said accounting professor Shujun Ding.

NFPs with higher program ratios tend to do better in the donor community. They’re believed to be more accountable, spending relatively more of their revenues on programs and services than administrative and fundraising activities. So it might be expected that higher program ratios would be consistently preferred by governments in their grantmaking decisions.

Not so, say the researchers. Whereas donors emphasize accountability, governments are more focused on reliability: they tend to make grants to organizations with higher administrative ratios.

“This finding is really about governments placing greater confidence in organizations that hire professional management, train staff and upgrade their information systems – the kinds of things that increase administrative costs,” explained professor Ding, who with Qiu Chen and Walid Ben Amar conducted an analysis of 85,398 charities from 2003 to 2013. “So to some extent, the higher administrative ratios are capturing the professionalization level of nonprofit organizations.” 

In another respect, governments aren’t fundamentally different from donors when making funding decisions. The researchers demonstrate that governments, like most sophisticated donors, are capable of identifying poor quality of accounting information. They react to it by being less likely to fund, and to fund less. 

This study provides clear evidence that governments pay close attention to the quality of accounting information in their grant-making decisions. But it also contains a practical takeaway for charity managers, professor Ding noted.  “NFPs that rely heavily on government grants need to think seriously about putting a greater number of resources into improving their administrative infrastructure and reliably delivering programs.”

The findings are discussed in a working paper presented recently at the midyear meeting of the American Accounting Association’s Government and Nonprofit Section. This study is one of severalprojects funded recently by the CPA Accounting and Governance Research Centre.