Professor Michelle Yetman has long been fascinated by a critical but less-exampled sector of the American economy: Non-profit organizations. Early in her academic career, the professor at UC Davis Graduate School of Management chose not to tread the familiar ground of corporate reporting and governance. But rather to dive deep into how non-profits reported results and how their governance impacted accurate reporting.
Her research has shown that non-profit reporting on required statements by the Internal Revenue Service is often incomplete and inaccurate. Because these organizations are not subject to taxation, there is little incentive for the IRS to actively audit the forms they file with the agency.
Yetman has been at UC Davis in accounting for 20 years. She began her teaching career at the University of Iowa after earning her PhD in account from the University of North Carolina at Chapel Hill. She also has an MBA from Texas A &M.
In this wide-ranging conversation, part of the Thought Leadership Series at UC Davis Graduate School of Management, Yetman looks back on her career and the insights she has gained on the reporting and governance of non-profit institutions. She is interviewed by former Businessweek Executive Editor and Poets&Quants Editor-in-Chief John A. Byrne. The following transcript has been edited for clarity.
John A. Byrne: What drew you to academia?
Michelle Yetman: I did like being a student. You know, it was kind of funny because I didn’t do that well in high school, or even my first year in college. But then I figured it out after that, and I started doing well. I realized that you spend a lot of time at your job. There are only a few things in life that matter. Your bed, you spend a lot of time in bed; your job, and the people you spend time with. So along those lines, I started thinking about how I wanted to spend my time.
I didn’t want a job; I wanted a career. I wanted something I was passionate about. And the idea of lifelong learning appealed to me. In my second year in college, I started becoming a lot more curious and a lot more into personal development, always wanting to sort of improve and learn. Academics went in line with that.
I was initially attracted to accounting because I was good at it. It was natural. I struggled my first year in college because I went out and had a little bit too much fun, but accounting clicked with me. Most of the other students were struggling in the class. And I’m like, this just clicks with me. I think it spoke to my sort of analytical side, my left brain, and my need for balance.
And that’s initially when I got into it in the long run. I worked as an accountant for several years after my undergraduate degree, and I did find that it was pretty boring to be a corporate accountant doing the same thing every month, every quarter, but I also did learn that accounting wasn’t as much of a science as I thought it was. There was a lot more art in it, a lot more uncertainty, and I was very curious about that, and when I was an undergraduate, I did some teaching in accounting, some tutoring, and I loved teaching. So I just wanted to share that with students.
Byrne: And you decided to get your PhD in the field. The first deep dive you do in research is obviously your PhD dissertation. What did you study?
Yetman: I was at UNC, and they were fairly mainstream. Most of the faculty there at the time did empirical financial research, which was corporations looking at stock prices and accounting information. So I sort of followed along that line, being trained there, doing empirical financial research. My dissertation has nothing to do with what I do now.
I’m glad I can now laugh about my dissertation because it was a tough road for me. I went into a very big pond, where a lot of people were doing research. And it overlapped heavily with a very technical area. I looked at initial public offering (IPO) firms. And I was trying to understand the anomalies that went on with them. I found that they were initially underpriced. And when they go to market, there would be a huge run-up on the first day. The next three years after that, they underperform. So I was trying to understand those anomalies by looking at IPO firms and comparing them to seasoned firms to try to figure out what their price should have been at the public offering. I tried to predict the underpricing and the long-run underperformance.
I was able to do it. However, I was too timid to put my paper out on the web on SSRN. And sure enough, I got scooped by some big-name finance people. I did not get my dissertation published, which was incredibly painful, because I spent so much time on it. And it was a good idea.
Byrne: Did you come away thinking that investment banks deliberately under-price IPOs because they want that one day pop because that would label an IPO successful?
Yetman: It was the market that overvalued them after the initial offering. They got too excited about it, which explains the long-run underperformance.
Byrne: So it was something new and shiny Investors ran to it.
Yetman: It wouldn’t be in the best interest of anyone to underprice anything. You want to make sure that it’s successful. But I didn’t do any more valuation research after that. Sometimes things happen in life and you think it’s the end of the world. You think it’s the end of your career. I lost so much sleep over that. But it ended up being a really good thing in hindsight because I shifted out of valuation research. I realized that was a tough area because there were a lot of players in that field. I shifted to the nonprofit area where very few researchers were doing work, despite how important non-profits are to the economy. There were so many fundamental questions that hadn’t been answered in the non-profit arena that I was able to get in there and make huge contributions to my papers.
I was able to become a big fish in a small pond, so to speak, and make a lot of contributions. rather than marginal incremental contributions in my research.
Byrne: What would you say is your most significant discovery in all the years of research you’ve done?
Yetman: My first non-profit paper with co-authors was a follow-on to an accounting office report that found that half of non-profits were reporting zero fundraising expenses. Let me give you a little background here. Non-profits don’t care about the bottom line or net income. What their reports show is how they spend their funds. They’re required to report this on IRS form 990, which is publicly available. They’re required to take all of their expense line item, including compensation, and allocate it across three areas. Administrative, fundraising, and programs.
As a donor, what you care about when you give a dollar is how are you using your dollar to feed the hungry. Are you using my dollar for the charitable mission or are you using it for administrative purposes? Or are you spending much money to get that dollar from me? That’s not what donors want. They want their money to go toward a charitable purpose. This GAO report and other anecdotal evidence in the press found that many non-profits were reporting zero fundraising expenses. So my co-authors and I attempted to gain a better understanding of this. In that paper, we found that it’s hard to prove whether they’re misreporting.
We looked at their websites for evidence of fundraising costs and we looked for evidence of activities that would be associated with fundraising costs. And if they’re reporting zero on their 990, but their website suggests that they’re doing fundraising activities, that doesn’t make sense. We also found that some non-profits have audited financial statements and were able to get a sample of them in our study.
We discovered that the audited statements often reported fundraising expenses, whereas on the publicly available 990, they didn’t. That’s pretty definite evidence that there’s misreporting. More importantly, we asked, ‘Is this intentional?’ Or do they just not know what they’re doing in filling out this 990 form? To determine whether it was intentional, we built on the research that showed compensation and donations are associated program ratios–the organization’s expenses divided by total expenses. So if you’re a manager at a non-profit and you know that the donations you receive or the compensation that you’re paid is a function of this program ratio, that’s going to increase your incentive to manipulate results. So we developed a measure of the incentive to misreport based on that association. We suggested that they were intentionally misreporting.
Byrne: To make them look more attractive to donors? So that became a new way to judge a non-profit’s performance.
Yetman: Yes. One is what they’re doing, but the other is what they are reporting. If you’re a donor and you can’t observe what they’re doing directly, you have to go to these reports and pull the 990. Some donors will do that and others might get it from watchdogs. There are watchdogs out there that report on these ratios, but the watchdogs get their analysis from the 990s. The question is, is that 990 accurate or not?
Byrne: As an aside, I have found long reporting lags by non-profits filing 990 forms. Why is that so? There seems to be no enforcement.
Yetman: Right, this is one of the things that surprised me most when I got into non-profit accounting research. It’s very different from corporate accounting, and non-profits are important. They represent about 6% of our GDP. They employ 10% of our workforce. And over half the population gives to non-profits. Annual giving is about $500 billion annually. So these are really important things. If donors don’t have the right information about a non-profit, then donations can be misallocated. So there are really important policy implications here.
Yet, it’s only been 25 years that you could even get a 990. Big delays are common. The IRS takes a long time to process the data. It got even worse during the pandemic. And then the data is often not accurate. A lot of my research shows that they’re not reporting this correctly. It’s not high-quality reporting. I mean, some organizations have high-quality reporting, but there’s a lot of low-quality reporting. And the IRS isn’t auditing them because there’s no tax due.
It’s not a tax return. It’s an informational return. The IRS is short on resources, so it’s not auditing these organizations. And then there is the issue of governance. For-profit firms have to follow specific governance procedures as a result of Sarbanes-Oxley. Non-profits don’t. It wasn’t until 2008 that they even had to report on their governance. Before that, we didn’t know how they were governed. So you give your donations to a non-profit but you don’t know how they’re governed. Even if they’re reporting spending on the charitable mission, you don’t know if they’re being effective. So governance kind of ties into that effectiveness.
Byrne: So that’s how your research evolved into the governance of these organizations?
Yetman: Right. After I did the study on misreporting, I lucked my way into an area less explored. There were a lot of big questions on the table that hadn’t been answered. I was able to be one of the first academics to answer some of these questions. One question was how does governance play into the cross-sectional differences in reporting quality? What types of governance work? What types of governance don’t work? These questions have policy implications too. Do audit committees and board independence help to feed into positive and quality financial reporting?
Byrne: Does your study of non-profits throughout your career give you a positive view of the sector? Or does it give you a more skeptical perspective of how it operates and is managed?
Yetman: It varies greatly. The Girl Scouts of America and the Salvation Army are run well. But my research is large-scale, empirical research, so I’m not pointing my finger at any particular non-profit. It’s not case-based. Many non-profits are very well-governed and have what appears to be high-quality reporting. Then there’s a lot that just don’t even seem to know what they’re doing. Many non-profits are small organizations that don’t have any idea of how to fill out a 990. My most recent study, for example, looks at asset diversions. Asset misappropriation is like theft, either within the organization or by an outsider stealing from the organization. So starting in 2008, non-profits had to check a box on the main form of the 990 indicating whether they had an asset misappropriation.
If they did, they’re supposed to fill out a Schedule O. The instructions are very clear on what an asset misappropriation is and what information they need to supply. So my co-authors and I collected a lot of these asset diversions because we wanted to try to better understand whether donors use these disclosures or not and whether donors punished organizations with asset diversions.
We found that 5% of the organizations would check a box that they had an asset diversion. But when you read their descriptions of that diversion, you found that it wasn’t an asset diversion at all. They would say, ‘We sold a building.’ That’s not an asset diversion. That would be a sale of a building. An asset diversion is a theft. So that’s 5% of our sample. And these are the larger non-profits we looked at with at least $10,000 in annual donations. Some 20% of them didn’t even fill out Schedule O. So they didn’t follow the instructions and then another half didn’t follow the instructions and provide the pertinent information.
When the IRS was revising Form 990, many non-profits argued that we don’t need more disclosure. They said donors aren’t going to use the information and that they’re not going to dig back into a Schedule O. My research finds that they do. We found that organizations that were more transparent about their asset diversions were punished less by donors than those that weren’t transparent. So transparency is important. If you don’t disclose, donors are going to assume the worst and you’re going to get punished more. So that was that was a pretty cool study. We haven’t published it yet, but it’s very close.
Byrne: Now I know that you teach the core course in financial accounting for MBA students, and more recently you’ve had an administrative role here as a senior associate dean for academic affairs. So I wonder if that has made it more difficult to pursue your research.
Yetman: Absolutely, yes. But I’ve enjoyed being in the dean’s office but I’ve said I have to get back out because I got to get back to my research.
Byrne: Is there a burning issue you’d love to explore once you leave your administrative post?
Yetman: We need to understand the effectiveness of a non-profit. So the question is how do we measure effectiveness? Just because you spend on your programs doesn’t mean that you’re effective. A food bank could buy a bunch Of food, but if it doesn’t get it to the hungry, it’s not very effective. That is going to be hard to measure because non-profits are so different from each other. I’d have to start with a sub-industry, but it would be useful to try to figure that out.
I do have another study where we’re looking at volunteers as a measure of non-profit effectiveness. People are not going to volunteer for an organization that’s not effective. And so we’re trying to measure what volunteers can tell us about effectiveness in an organization. That research is in its early stages, but the idea is, why would you volunteer for an organization if you didn’t believe in it? That’s different than donating because as a donor you’re on the outside. You can’t see what’s going on as much on the inside. Volunteers can see more.
Byrne: You’ve chosen a life where intellectual curiosity is at the center of your life.
Yetman: I do find myself at this point in my life a lot more interested in personal growth and development. I think I have more space for that now than I did when I was a junior faculty member. That also might be a function of my age. We have it good. We get to study, think, and teach for a living. If I don’t like a project, I drop it. I feel that teaching keeps me young. We get to travel and present papers. We get paid to talk, listen to other people’s ideas, and give them feedback if we want. So it’s a great career. I feel very lucky that I somehow stumbled upon this career.
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