In this study, we examine the impact of donor sophistication and low donor-beneficiary separation (service-orientation) on earnings management behaviour in large UK charities. Using a sample of charities that report to the Charity Commission for England and Wales over the period 2007 to 2018, we first show that charities manipulate their bottom-line income using both accrual and real-based manipulation techniques to achieve a target benchmark of a small surplus. Furthermore, we find that the sophistication of funders and larger endowment funds are positively associated with financial reporting quality, moderating the effect of manipulation. We also find that lower donor-beneficiary separation (more service-oriented charity) deters real earnings management behaviour.  Instead, where the funders are also the users of a charity’s services, i.e. when the donor-beneficiary separation is low, managers are more likely to resort to accruals-based earnings management. Overall, we provide empirical evidence on earnings management in a little-researched sector that need not be beyond reproach, especially in the times of depleting public confidence in the sector.

A quest for a small surplus: Accrual and real-based earnings management by UK nonprofits

[Annual Meeting Website](https://aaahq.org/Meetings/2020/Annual-Meeting)

[Benefits for Presenters](https://aaahq.org/Meetings/2020/Annual-Meeting/Presenter-Benefits)

 AAA 2020 Virtual Annual Meeting and Conference on Teaching and Learning

The American Accounting Association is the largest community of accountants in academia. Founded in 1916, we have a rich and reputable history built on leading-edge research and publications. The diversity of our membership creates a fertile environment for collaboration and innovation. Collectively, we shape the future of accounting through teaching, research and a powerful network, ensuring our position as thought leaders in accounting.