Earnings management in local governments: the role of political factors

2019 ◽  
Vol 20 (3) ◽  
pp. 331-348 ◽  
Author(s):  
Sandra Cohen ◽  
Marco Bisogno ◽  
Ioanna Malkogianni
Keyword(s):  
Public Sector ◽  
Earnings Management ◽  
Local Governments ◽  
Management Practices ◽  
Choice Theory ◽  
Central Government ◽  
Accrual Accounting ◽  
Political Factors ◽  
Content Type ◽  
Management Behaviour

Purpose The purpose of this paper is to examine earnings management practices in local governments (LGs). The implementation of accrual accounting in LGs opens the way for empirical research on the topic, as reporting high surpluses or high deficits can be negatively interpreted by the central government, monitoring authorities, citizens and political opponents. According to public choice theory, the conflicting interests between politicians, who pursue re-election, and voters, who observe politicians’ actions to assess their alignment with social welfare, create fertile ground for earnings management practices. Design/methodology/approach The study calculates discretionary accruals, by using the Jones (1991) model, and relates them to several political variables. It employs a large sample of Greek and Italian LGs. The Greek database covers the period from 2002 to 2015 with about 4,300 observations, and the Italian database includes the period from 2008 to 2015 with about 1,130 observations. Findings The findings from the analysis give evidence that LGs engage in earnings management. The principal factor is the electoral cycle, as earnings management seems to be greater when the mayor is re-elected than when the mayor is elected for the first time. Furthermore, the period before elections create conditions that cultivate earnings management attitudes. Research limitations/implications Previous studies have principally investigated earnings management in the private sector. Considering that many public-sector entities have implemented accrual accounting systems, this study intends to examine earnings management behaviour at the LG level, providing interesting findings for researchers and policy makers. Practical implications A better understanding of the political factors and the financial conditions, which act as obstacles or facilitators, should work hand in hand with the accounting reforms. The usefulness of financial statements for decision making and control presupposes that they are of high quality, an attribute that can be impaired by earnings management. Originality/value This study investigates the influence of political factors on earnings management behaviour in public-sector contexts where self-interest and accountability pressures coexist.

Understanding the impact of mandatory accrual accounting on management practices: interpretation of Japanese local governments’ behavior

2021 ◽  
pp. 002085232198895
Author(s):  
Makoto Kuroki ◽  
Keiko Ishikawa ◽  
Kiyoshi Yamamoto
Keyword(s):  
Internal Control ◽  
Local Governments ◽  
Public Management ◽  
Management Practices ◽  
New Public Management ◽  
Central Government ◽  
Institutional Pressures ◽  
Accrual Accounting ◽  
Logistic Analysis ◽  
The Impact

Accompanying the spread of “new public management” since the 1980s, accrual accounting and results-based management has become a global standard. However, whether accrual accounting results in successful outcomes and which drivers lead to the intended impacts of the reform have been contested. Given the mixed arguments in the literature, we set out two research questions: (1) “Have public sector organizations realized any positive impacts on management practices by adopting mandatory accrual accounting?”; and (2) “What are the primary drivers of such impacts?” To answer these questions, we examine the impact on management practices by analyzing a survey to ascertain how financial department officers in Japanese local governments perceive the benefits of adopting mandatory accrual accounting on management practices. The results indicate that they have so far not recognized the intended benefits, though they had expected higher benefits in internal control. Then, we use technical-rational, socio-political, and institutional isomorphic perspectives in a comprehensive approach to understand the impacts on management practices. The logistic analysis shows that financial managers in local governments that do not have a majority party in the assembly, but consist of several parties in power, as well as in those with greater financial dependence on the central government, perceive higher benefits. Further, we find that financial managers that imitate other local governments as a form of mimetic pressure perceive fewer benefits. The results show that some technical-rational tools, socio-political conditions, and institutional pressures change the perceived benefits for public managers of adopting mandatory accrual accounting. Points for practitioners We find that some technical-rational, socio-political, and institutional factors explain the intended internal benefits of the mandatory adoption of accrual accounting. In practice, financial managers in local government feel the merits of accrual accounting in less autonomy in not only politics, but also finance, and few mimetic conditions. It might be understood that difficult situations would drive practitioners to use mandatory information.

Knowledge risk management in the public sector: insights into a Swedish municipality

2018 ◽  
Vol 24 (4) ◽  
pp. 717-735 ◽  
Author(s):  
Susanne Durst ◽  
Birgitta Lindvall ◽  
Guido Bruns
Keyword(s):  
Risk Management ◽  
Public Sector ◽  
Local Governments ◽  
Management Practices ◽  
Single Case ◽  
Future Research ◽  
Single Case Study ◽  
Content Type ◽  
The Public

Purpose This study aims to contribute to the understanding of knowledge risk management (KRM) and a range of related knowledge management practices in the public sector through a case study conducted in a Swedish municipality. Design/methodology/approach A single case study was conducted in a Swedish municipality involving two offices. Data were collected through an online survey, group interviews and group exercises involving members of the offices who represented different functions, roles and age groups. Findings The findings underline the need for a systematic approach to KRM for being in a position to continuously deliver the municipality’s products and services, specifically against the knowledge challenges ahead. In addition, the authors identified a number of internal and external factors that are challenging KRM. Research limitations/implications Data were collected from a single case study, to generalize the findings future research should study additional local governments. Practical implications A holistic KRM framework is proposed intended to help managers tackle present and future challenges in the public sector. Originality/value The study contributes to the underdeveloped field of KRM by providing insights into KRM and KRM-related activities found in a Swedish municipality.

Managing for performance in New Zealand's public service – a loosely coupled framework?

2010 ◽  
Vol 14 (1) ◽  
pp. 43-59 ◽  
Author(s):  
Rodney Dormer ◽  
Derek Gill
Keyword(s):  
Public Sector ◽  
Performance Management ◽  
Public Service ◽  
Management Practices ◽  
Central Government ◽  
Formal Model ◽  
Institutional Arrangements ◽  
Structured Interviews ◽  
Tight Coupling ◽  
Content Type

PurposeThe purpose of this paper is to examine the institutional factors that impact on the integration of the formal model of performance management in New Zealand's public service and the model, or models, in use within different agencies and at different levels within those agencies.Design/methodology/approachThe research involved semi‐structured interviews with managers within three agencies of New Zealand's central government as well as a review of their external accountability documents and internal management reports. These data were then interpreted in the context of new institutional sociology. In particular, the institutional carriers identified by Scott (2001) Scott were used to map the characteristics within each agency that support more or less integration, and common use, of performance measures.FindingsIt is concluded that an integrated framework of performance objectives, that drops down from the Government's priorities, to Ministers' purchase of goods and services, to managers' objectives at each layer of the agency, does not always exist. Institutional arrangements that emphasise regulative controls are more likely to result in the decoupling of nationally defined frameworks from those used locally by operational managers. Conversely, institutional arrangements that emphasise culturally and cognitively based controls are more likely to support tight coupling of performance management frameworks and practices.Originality/valueWhile much has been written about public sector management and what has been referred to as “the New Zealand model”, this has largely been concerned with the management of the public sector as a whole. This research provides an empirical insight on management practices within individual public sector agencies.

scholarly journals Political competition and debt: evidence from New Zealand local governments

2019 ◽  
Vol 32 (3) ◽  
pp. 344-361
Author(s):  
Bikram Chatterjee ◽  
Sukanto Bhattacharya ◽  
Grantley Taylor ◽  
Brian West
Keyword(s):  
Public Sector ◽  
Political Ideology ◽  
Local Governments ◽  
Choice Theory ◽  
Political Competition ◽  
Content Type ◽  
Debt Level ◽  
Out Of Sample ◽  
The Common ◽  
Artificial Neural Network Ann

Purpose This paper aims to investigate whether the amount of local governments’ debt can be predicted by the level of political competition. Design/methodology/approach The study uses the artificial neural network (ANN) to test whether ANN can “learn” from the observed data and make reliable out-of-sample predictions of the target variable value (i.e. a local government’s debt level) for given values of the predictor variables. An ANN is a non-parametric prediction tool, that is, not susceptible to the common limitations of regression-based parametric forecasting models, e.g. multi-collinearity and latent non-linear relations. Findings The study finds that “political competition” is a useful predictor of a local government’s debt level. Moreover, a positive relationship between political competition and debt level is indicated, i.e. increases in political competition typically leads to increases in a local government’s level of debt. Originality/value The study contributes to public sector reporting literature by investigating whether public debt levels can be predicted on the basis of political competition while discounting factors such as “political ideology” and “fragmentation”. The findings of the study are consistent with the expectations posited by public choice theory and have implications for public sector auditing, policy and reporting standards, particularly in terms of minimising potential political opportunism.

Public interest and accrual accounting: are they aligned?

2018 ◽  
Vol 14 (4) ◽  
pp. 366-380 ◽  
Author(s):  
Sylvia ◽  
Eko Ganis Sukoharsono ◽  
Yeney Widya Prihatiningtias ◽  
Roekhuddin
Keyword(s):  
Local Government ◽  
Public Interest ◽  
Local Governments ◽  
Central Government ◽  
Social Situation ◽  
Government Accountability ◽  
Accrual Accounting ◽  
Content Type ◽  
The Public ◽  
The Government

Purpose The purpose of this paper is to evaluate the merits of accrual-based accounting for the public in an Indonesian local government. It gives insights into the connection between the new practices and responses from government apparatus. Design/methodology/approach The paper applies genetic structuralism from Pierre Bourdieu to study the interrelation of habitus, field and capital in the accrual accounting implementation. Findings The result indicates a symbolic dominance of central government in the implementation of accrual-based accounting in the local government. Accrual accounting is considered to be a technique of government accountability which is independent from political and social situation. Practical implications The accrual accounting implementation preoccupies the government officials in their study of the preparation of financial statements while its utilization to increase the public welfare is still ignored. Social implications The government still prioritizes accountability and transparency for managerial and political purposes. Hence, the public interest is less superior compared with the formalities established between governments – the central government and local governments – and the regional legislator. Originality/value This paper contributes to the evaluation of the alignment of government policy with the public interest.

scholarly journals “Does your walk match your talk?” Analyzing IPSASs diffusion in developing and developed countries

2019 ◽  
Vol 33 (2/3) ◽  
pp. 117-139 ◽  
Author(s):  
Tobias Polzer ◽  
Levi Gårseth-Nesbakk ◽  
Pawan Adhikari
Keyword(s):  
Public Sector ◽  
Institutional Theory ◽  
Local Governments ◽  
Central Government ◽  
Diffusion Theory ◽  
Accounting Standards ◽  
Developed Countries ◽  
Analytical Framework ◽  
Content Type ◽  
Public Sector Accounting

Purpose The purpose of this paper is to provide a global overview of the adoption status of International Public Sector Accounting Standards (IPSASs) in the different contexts of developed and developing countries on central government level, particularly delineating key reform issues and attempts to overcome these. Design/methodology/approach Drawing on an analytical framework that combines neo-institutional theory with diffusion theory, prior research and official documents were re-analysed. Findings There are substantial differences regarding whether countries acknowledge having experienced large implementation challenges and the extent to which the reform benefits have been achieved. The study sheds light on the (institutional) underpinnings of these differences. Research limitations/implications First, the analysis could be extended to regional and local governments, as well as social funds. Both qualitative and quantitative strategies are suggested. Second, the implementation of the conceptual framework deserves further attention. Third, further research should more thoroughly scrutinise cost-benefit analyses used for justifying the (non)implementation of IPSASs, and in particular the assumptions that are being made in such analyses. Practical implications The paper informs policymakers and standard setters by delineating the areas and issues complicating the widespread adoption of IPSASs across countries, including pointing out directions to overcome these. Social implications Substantial amounts of public money are invested internationally to converge accounting standards and translate them into native languages. A close(r) monitoring is needed to ensure that these efforts obtain sufficient value for money. Originality/value This study is original as it applies an analytical framework that combines neo-institutional theory and diffusion theory to examine public sector accounting convergence issues internationally. Such an approach explicitly puts a focus on decoupling between reform “talk” (decision) and “walk” (implementation) and helps to analyse the reasons for this decoupling.

The diffusion of accounting reform in Sri Lanka: an analysis of two layers of diffusion among three levels of government

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Thusitha Dissanayake ◽  
Steven Dellaportas ◽  
Prem W.S. Yapa
Keyword(s):  
Sri Lanka ◽  
Diffusion Of Innovation ◽  
Local Governments ◽  
Central Government ◽  
Provincial Government ◽  
Accrual Accounting ◽  
Diffusion Of Innovation Theory ◽  
Content Type ◽  
True Value

PurposeThe purpose of this study is to evaluate the implementation of accrual accounting among two layers of government in Sri Lanka. This study examines the process of diffusion and application among and between provincial governments and local governments to assess the barriers and enablers on the implementation of accrual accounting.Design/methodology/approachThe study relies on data collected through interviews with 30 accounting and finance personnel from all levels of government active in the diffusion process. Interviews were conducted to gather and assess their insights and perceptions on the diffusion of accrual accounting. The data are examined initially using Rogers (1995) “diffusion of innovation” theory to explain the factors influencing the diffusion and adoption of accrual accounting at two levels of government but the analysed primarily by comparing the perspectives of respondents between the different layers of government.FindingsThe findings show that the adoption of accrual accounting was more effective among local governments compared with provincial governments. The lack of effective communication and engagement from the leaders of the innovation failed to persuade provincial government adopters of the true value of the accounting reform. This is contrasted with local governments who openly adopted accrual accounting but not in response to pressure from provincial government, who have oversight responsibility for local governments, but in response to funding protocols initiated by the central government to account for grant funding.Research limitations/implicationsThe findings of the study should be interpreted with caution as the data are obtained from the narrow cohort of accounting and finance professionals and may not reflect the views or experience of all stakeholders involved in the diffusion of accrual accounting.Originality/valueThe paper contributes to the diffusion of accounting innovation literature by examining the role of key players in different layers of government, particularly visible among provincial governments where the lack of engagement delayed its commitment to the implementation of accrual accounting.

scholarly journals Earnings management in public-sector organizations: a structured literature review

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Marco Bisogno ◽  
Pierre Donatella
Keyword(s):  
Public Sector ◽  
Literature Review ◽  
Earnings Management ◽  
Local Governments ◽  
Future Directions ◽  
Content Type ◽  
The Public ◽  
Public Sector Organizations ◽  
Micro Level ◽  
Structured Literature Review

PurposeResearch dealing with earnings management in the public-sector context is expanding. This paper aims to review the existing literature to understand how research is developing and points out gaps deserving further investigation.Design/methodology/approachThis study uses the structured literature methodology to investigate the state-of-the-art and future directions of the literature on earnings management in the public sector. In total, 78 articles were explored.FindingsThe critical analysis of the literature shows that different but related streams of literature are emerging, focused on both a macro- and a micro-level perspective (mainly local governments and state-owned enterprises).Originality/valueThis study is the first that offers a comprehensive review of the literature on the emerging topic of earnings management in the public-sector context. The structured literature review enables the identification of future directions for the literature in this field.

Sustainability measures and earnings management: evidence from Greek municipalities

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Sandra Cohen ◽  
Ioanna Malkogianni
Keyword(s):  
Earnings Management ◽  
Local Governments ◽  
Management Practices ◽  
Discretionary Accruals ◽  
Sustainability Indicators ◽  
Financial Sustainability ◽  
Content Type ◽  
Final Sample ◽  
Jones Model ◽  
Corroborative Evidence

PurposeThis study analyses the engagement of Greek municipalities in earnings management activities through the manipulation of their accrual accounts. It aims at identifying whether discretionary accruals are associated with certain financial sustainability measures calculated through financial statement numbers.Design/methodology/approachTo test the hypotheses, the annual financial data of Greek municipalities for the period 2011–2018 are used. The final sample corresponds to an unbalanced panel data sample that includes 1,565 yearly observations. Total accruals and discretionary accruals modelling are based both on the aggregate Jones model and the modified Jones model.FindingsThe findings provide evidence that Greek municipalities engage in earnings management practices through the manipulation of accruals. Moreover, there is corroborative evidence that financial sustainability indicators, such as indebtedness, liquidity and efficiency ratios, are related to the magnitude of earnings management, while earnings management behaviour during the year preceding the municipal elections is more intense.Originality/valueThe paper expands the literature in earnings management in local governments by analysing the relation of financial sustainability indicators to this behaviour.

The perception of earnings management motivations in Saudi public firms

2015 ◽  
Vol 5 (1) ◽  
pp. 122-147 ◽  
Author(s):  
Murya Habbash ◽  
Salim Alghamdi
Keyword(s):  
Qualitative Research ◽  
Saudi Arabia ◽  
Earnings Management ◽  
Management Practices ◽  
Empirical Support ◽  
Share Price ◽  
Research Approach ◽  
Governance Mechanisms ◽  
Content Type ◽  
Management Behaviour

Purpose – The primary purpose of this paper is to investigate the motivations of earnings management in less-developed economy using Saudi listed companies. Design/methodology/approach – While numerous motivations for earnings management are proposed in the literature, many of these motivations have inconsistent empirical support. A number of studies report discontinuities in the distribution of earnings around benchmarks such as the zero profit level. However, the evidence regarding whether these discontinuities are associated with earnings management behaviour is still uncertain. In addition, evidence regarding the ability of various governance mechanisms to constrain earnings management is also mixed. These issues raise the necessity to investigate managers behaviour that incentivise earnings management practices through qualitative research approach. A questionnaire survey and interviews are mainly used to explore the motivations for earnings management in Saudi Arabia in order to obtain the different perceptions of respondents. Findings – The findings reveal that the four main incentives for Saudi managers to manage earnings are “to increase the amount of remuneration”, “to report a reasonable profit and avoid loss”, “to obtain a bank loan” and “to increase share price”. Research limitations/implications – Hence, agency-institutional theory may provide a sensible explanation for earnings management practices in Saudi Arabia. Practical implications – Previous findings could be helpful for external auditors and regulators and legislators in their attempts to constrain the incidence of earnings management and enhance the quality of monitoring mechanisms. Originality/value – While numerous motivations for earnings management are proposed in the literature, many of these motivations have inconsistent empirical support. A number of studies report discontinuities in the distribution of earnings around benchmarks such as the zero profit level. However, there is no evidence that these discontinuities are associated with earnings management behaviour. In addition, evidence regarding the ability of various governance mechanisms to constrain earnings management is also mixed. These issues raise the necessity to investigate managers behaviour that incentivise earnings management practices through qualitative research approach.

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