The effects of not-for-profit hospital financial reporting choices on users' decisions

Date of Completion

January 1997


Business Administration, Accounting|Health Sciences, Health Care Management




This dissertation examines the relationship between financial reporting choices of not-for-profit (NFP) hospitals and bond financing and tax exemption decisions. The model empirically tested is that NFP hospital bond financing and tax exemption decisions are a function of reported earnings, which are a function of financial reporting choices. Observations from practice suggest that hospitals have adopted reporting practices for affiliated entities that affect reported profitability which may affect users' decisions.^ Fixation theory suggests that decision makers may be influenced by the form of financial reporting rather than its economic substance. Based on fixation theory, two sets of NFP hospital financial statements (based on actual data) were prepared that changed the form of reporting for affiliated entities, but not the economic substance (i.e., profitability and cash flows).^ Using a between-subject design, members of quasi-governmental bond financing authorities made decisions about whether the NFP hospital should be granted preliminary approval to proceed with bond financing. Findings revealed that the form of disclosure did not appear to influence bond authority members' decisions.^ Tax practitioners from public accounting firms made decisions about whether the NFP hospital should maintain federal and state income tax, and local property tax exemptions. A between-subject design was used with cases at two dimensions; i.e., report form as in the bond financing task, and level of charitable care (high or low). Findings revealed that the main effects of report form and charitable care do not independently appear to affect tax exemption decisions.^ However, a significant interaction between report form and charitable care was found for all three types of tax. This finding suggests that fixation on reported profitability is mediated by the level of charitable care. Low amounts of charitable care coupled with high reported earnings may trigger a challenge to a hospital's tax-exempt status. Thus, users' decisions appear to be affected by the form of reporting rather than its economic substance. This finding has implications for accounting standard setting bodies that have been working to develop better criteria and disclosure practices for consolidation that includes NFP organizations. ^