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

AuthorJeongyoon Lee,Young Joo Park,Xi Gong
Published date01 January 2023
Date01 January 2023
Subject MatterArticles
Administration & Society
2023, Vol. 55(1) 122 –157
© The Author(s) 2022
Article reuse guidelines:
DOI: 10.1177/00953997221112824
How Do Government
Grants Affect Nonprofit
Financial Effectiveness?
The Mediation Role of
Process Accountability
Jeongyoon Lee1, Young Joo Park2,
and Xi Gong2
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.
process accountability, financial effectiveness, government grants, nonprofit-
government relationship
1University of Kentucky, Lexington, USA
2University of New Mexico, Albuquerque, USA
Corresponding Author:
Jeongyoon Lee, Martin School of Public Policy and Administration, University of Kentucky,
425 Patterson Office Tower, Lexington, KY 40506-0027, USA.
1112824AAS0010.1177/00953997221112824Administration & SocietyLee et al.
Lee et al. 123
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 particu-
lar, 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 gov-
ernments and nonprofits (Cheng, 2019). Such a growing financial relation-
ship 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 effective-
ness provides valuable information on how government grants work or fail
to change nonprofit effectiveness critical for organizational survival or
Process accountability monitors whether particular processes have been
deployed by nonprofits (i.e., accountability how) to make nonprofits responsi-
ble to their stakeholders and themselves (i.e., accountability for what) (Sinclair,
1995). From the government’s (grantor’s) perspective, having process account-
ability within nonprofits is essential because specifying service quality stan-
dards is complex, and multiple players are involved in the provision of public
service (Blomqvist & Winblad, 2022). As the largest grantors for most non-
profits 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’ finan-
cial 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 infor-
mation asymmetry problems driven by incomplete contracts between the
governments and nonprofits (Blomqvist & Winblad, 2022; Van Slyke, 2007).
124 Administration & Society 55(1)
These processes contribute to overcoming insufficient or even lacking trans-
parency 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 non-
profits’ 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 gov-
ernment 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 informa-
tion 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 responsibil-
ity 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 non-
profits 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 con-
tribution to the current scholarly literature on nonprofits’ accountability in
government-nonprofit relationships and suggests that too much emphasis

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