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

• Author: Jeongyoon Lee,Young Joo Park,Xi Gong
• DOI: http://doi.org/10.1177/00953997221112824
• Published date: 01 January 2023
• Date: 01 January 2023
• Subject Matter: Articles

https://doi.org/10.1177/00953997221112824

Administration & Society

2023, Vol. 55(1) 122 –157

© The Author(s) 2022

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DOI: 10.1177/00953997221112824

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Article

How Do Government

Grants Affect Nonprofit

Financial Effectiveness?

The Mediation Role of

Process Accountability

Jeongyoon Lee1, Young Joo Park2,

and Xi Gong2

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

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.

Email: jle240@uky.edu

1112824AAS0010.1177/00953997221112824Administration & SocietyLee et al.

research-article2022

Lee et al. 123

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 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

growth.

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