ACCRUALS ACCOUNTING IN ITALIAN LOCAL GOVERNMENTS: IS … · 2015-07-29 · Accruals Accounting in...

ACCRUALS ACCOUNTING IN ITALIAN LOCAL GOVERNMENTS: IS IT WORKING? CAN IT WORK? By Eugenio Anessi Pessina and Ileana Steccolini

Working Paper N. 87/03

February 2003

ACCRUALS ACCOUNTING IN ITALIAN LOCAL

GOVERNMENTS: IS IT WORKING? CAN IT WORK?

by

Eugenio Anessi Pessina and Ileana Steccolini

Working Paper N. 87/03

February 2003

SDA Bocconi – Research Division 1

Accruals Accounting in Italian Local Governments:

Is it working? Can it work? Eugenio Anessi-Pessina,

SDA Bocconi-Bocconi University School of Management, Milan, Italy and Università Cattolica del Sacro Cuore.

Ileana Steccolini, SDA Bocconi-Bocconi University School of Management, Milan, Italy and Università

del Piemonte Orientale “A. Avogadro”, Italy.

ABSTRACT Since 1995 Italian Local Governments have been required to publish an accrual-based report. However, traditional cameralistic budgeting and reporting remain mandatory. The purpose of this paper was to study the actual implementation of accrual reporting. To this end, an analysis was carried out on a sample of LGs’ financial reports. Results were not encouraging. Although the cameralistic «bottom line» (current surplus) and its accruals counterpart (net income) were not particularly correlated, the reliability of many statements was seriously jeopardised by large errors and the difference between current surplus and net income was often largely explained by unexpected items. Moreover, “typical” accrual-accounting items were often set to nil and disclosure, if any, was usually minimal. Practical and technical problems are likely to explain some of such results. However, for the future, user needs are the crucial issue. As long as cameralistic accounting remains the LG’s main accounting system, dominates budgeting, provides the information required by the most important external users while all other potential users remain rather indifferent, accruals accounting is likely to remain marginalised and the solution of technical and practical problems to produce very little benefits. Keywords: Accruals accounting, public sector accounting, local governments, public sector reforms, local government accounting, financial reporting. JEL classification numbers: M40 – M41. Contact author: Ileana Steccolini SDA - Bocconi University Via Bocconi, 8 - 20136 MILAN - ITALY ph. +390258362087 fax +390258366832 [email protected]


Accruals Accounting in Italian Local Governments:

Is it working? Can it work?

1. Introduction

Over the last decade many countries have introduced accruals accounting at one or more

levels of government as a component of the wider public sector reforms, generally

falling under the umbrella term of NPM.

The results appear to be mixed. Accruals accounting is potentially a more powerful

information source than traditional cameralistic accounting. Its introduction, however,

has been hampered by a number of conceptual and technical issues.

Moreover, even where its introduction has been technically successful, it often

appears to have had a rather little impact on behaviour and performance.

In Italy, cameralistic accounting has traditionally dominated local government

accounting (LGA), whose main purpose was to limit spending. The adopted bases of

accounting were obligation and cash. In addition, budgeting was viewed as the only

relevant phase of the accounting cycle, while year-end financial reports were virtually

neglected. Finally, bookkeeping was based on the single-entry system, which

emphasised budgetary compliance. In this paper, traditional LGA will be referred to as

«budgetary» or «cameralistic» accounting.

In 1995, LGA was significantly reformed by legislative decreei (DLgs) 77/95. One

of the reform’s main provisions was the introduction of accruals accounting. The

purpose of this paper is to analyse the actual implementation of the new system. The

paper is organised into five Sections. Section 2 provides a short background on Italian

LGs and their accounting system. Section 3 briefly reviews the existing literature.

Section 4 focuses on materials and methods. Results are described in Section 5. Section

6, finally, draws some conclusions.


2. Local government and local government accounting in Italy

Italy has four levels of government: the central government, 20 regions, 103 provinces,

and more than 8000 municipalities. Each level is multi-functional in that it has

jurisdiction over several issues and activities. Provinces and municipalities are often

referred to as “local governments”.

Each municipality has a mayor, a cabinet, a city council, and a professional

bureaucracy. The mayor is the head of the executive, is elected directly by the

population, and appoints the members of the cabinet. The city council is the LG’s

«legislature» and is also elected directly by the population. Municipalities are allowed

to raise local taxes and charge tariffs for the services they provide, but a large

percentage of their inflows is still accounted for by transfers from higher levels of

government. Transfers are classified as either «current» or «capital» according to

whether they are intended to cover operating expenditures or to fund investments.

Provinces have a similar system, although their taxing authority is much more limited.

Since 1990, LGs have been encouraged to spin off their activities to (i) separate

entities without legal autonomy, (ii) separate legal entities with budgetary autonomy,

(iii) consortia of LGs, or (iv) joint-stock corporations with private and public

stockholders. Alternatively, LGs can also franchise private firms to provide services.

In Italy the requirements for government accounting, reporting and auditing are set

by national legislation. Applicable laws are different for the central government, the

regions, and LGs, but the basic requirements have traditionally been similar for all

levels.

At least to some extent, however, the 1995 Decree broke away from this tradition

and made LGA rather different from its central and regional counterparts. One of the

reform’s main provisions was the introduction of accruals accounting or, rather, accrual-

based reporting. More specifically:

• The traditional cash- and obligation-based system remains in force. Budgeting,

accounting and reporting will continue to use such bases of accounting.


• More specifically, the budget will be structured according to the obligation basis of

accounting. It will consequently show the LG’s estimated accounts receivable (on

the revenues side) and its commitment appropriations (on the expenditures side).ii

• Accounting will recognise revenues and expenditures according to both the

obligation basis (that is, in terms of establishments of amounts receivable and

commitments) and the cash basis (that is, in terms of recoveries and payments).

• Financial reports will similarly show actual revenues in terms of both establishments

of amounts receivable and recoveries, and actual expenditures in terms of both

commitments and payments.

• In addition financial reports are also expected to include an accrual-based statement

composed of a balance sheet and an operating statement. The formats of these

statements are similar to those mandated on Italian private companies following the

EU’s 4th Directive.

• Interestingly, however, the introduction of double-entry bookkeeping is not

mandatory. Alternatively, LGs can derive their balance sheets and operating

statements from their cameralistic accounting statements through a complex system

of year-end adjustments.

• A specific reconciliation statement must be included in the overall year-end

financial report to reconcile the cameralistic accounting statement (showing

establishments of amounts receivable and recoveries, commitments and payments)

with the balance sheet and the operating statement.

The reform was phased in gradually, according to the timetable presented in Table 1.


Table 1. Timetable for the introduction of accrual accounting in Italian LGs

For LGs with populations: The first accrual-based statement was due as at 31

Dec > 100000 (except seats of metropolitan areas) [40000; 100000) (and seats of metropolitan areas) [5000; 40000) [3000; 5000) < 3000

1997 1998 1999 2000 2001

3. Literature review

The introduction of accruals accounting in government and nonprofit entities is a long

and widely debated issue (cf. for instance Anthony, 1980; Herzlinger and Sherman,

1980; Anthony, 1989). A detailed review of the relevant literature is well beyond the

scope of this paper.

Conceptual studies favouring accruals accounting include Anthony (1989) and Jones

(1995). These studies emphasise the similarities between firms and government entities,

as well as the shortcomings of cameralistic accounting. Many governments worldwide,

in fact, are currently experimenting with accruals accounting (IFAC-PSC 1997). The

IFAC itself openly supports the supremacy of accruals accounting, although it still

allows for other accounting systems (IFAC-PSC, 2000, 2002).

At the same time, however, the introduction of accruals accounting has been

criticised on both theoretical and practical grounds (see also Guthrie, 1998). From a

theoretical viewpoint, Montesinos et al. (1995), Monsen and Näsi (1998; 1999; 2000)

and Monsen (2002) argue that cameralistic accounting is more consistent with the

intrinsic nature of government entities. Similarly, Christiaens (1999a, 1999b) and

Ellwood (1999) emphasise that current accrual-accounting experiments lack a

conceptual framework and tend to acritically transfer business accounting concepts and

techniques to non-business settings. From a practical viewpoint, the introduction of

accruals accounting has raised significant implementation problems (for example, see

Guthrie, 1998 for the Australian public sector). In addition, in many cases it has

produced very limited improvements in the quality of information provided to managers


and other stakeholders, often due to its failure to replace traditional government

accounting as the entity’s main accounting system (cf. for instance Christiaens, 1999b

for Belgium, Mauland and Mellemvik, 1999 for Norway, Caperchione and Steccolini,

2000 for France and Belgium, Anthony, 2001 for the US Federal accounting system).

In Italy, the debate has similarly focused on three kinds of issues (Anessi Pessina

and Steccolini, 2001):

• theoretical issues. The new legislation has been praised because it does not impose

the adoption of double-entry bookkeeping and supposedly allows a painless

transition to accruals accounting (cf. for instance Farneti 1997, 1998). At the same

time, it has been sharply criticised. According to most critics (cf. for instance

Borgonovi 1996, 1997, Pezzani 1997), it ignores the profound differences between

cameralistic and accruals accounting in terms of goals and methods, and forces the

two systems to coexist. In addition, it implicitly assumes that cameralistic

accounting will remain the entity’s main accounting system, with accrual-based

reporting likely to become a meaningless formality.

• technical issues. As already emphasised, accrual-based reporting is mandatory but

accruals accounting is not. As a consequence, LGs can organise their accounting

systems according to at least three alternative models. Under the traditional

alternative, LGs do not introduce accruals accounting and simply derive their

balance sheets and operating statements from their budgetary accounting statements

at year-end. Under the parallel-systems alternative, LGs introduce accruals

accounting but keep it completely independent from budgetary accounting to

safeguard its specific goals and techniques. Under the integrated-system approach,

finally, LGs set up an integrated accounting system including both budgetary and

accruals accounting.

• practical issues. Accruals accounting, or even mere accrual-based reporting, requires

significant investments to prepare an initial balance sheet, acquire adequate software

packages, acquire or develop professional skills, review organisational structures

and procedures.

So far, however, the debate has swung between two extremes. Some positions are based

on purely theoretical considerations while others rely on anectodal evidence. The


purpose of this paper is to empirically assess the implementation of LGs’ new

accounting system and the current reliability of LGs’ accrual-based statements.

4. Materials and methods

The analysis was conducted on a stratified random sample of 30 LGs and focused on

their 1998 financial statements. The sample was drawn from all LGs with a population

of at least 40,000, totalling 280 entities (187 municipalities and 93 provinces). Smaller

LGs were excluded because they were not yet required to produce accrual-based

financial statements.

The sample was stratified according to three criteria:

• type of LG (20 municipalities and 10 provinces);

• geographical area (11 from Northern, 6 from Central, and 13 from Southern Italy);

• population (8 above 100,000 and 22 below).

In principle, it would have been interesting to further stratify the sample according to

the technical model chosen (traditional v. parallel systems v. integrated system: see

Section 3). This information, however, cannot be known a priori and is hard to

determine objectively even after the sample has been chosen and their reports reviewed.

The sample is presented in Table 2.

In theory, LG financial statements are a matter of public record. In practice, they

must be obtained directly from the relevant LGs, which may prove uncooperative. In

our sample, a municipality did not provide its statement and another had unilaterally

decided not to prepare an accrual-based statement. As a consequence, the analysis was

necessarily limited to the remaining 28 LGs.


Table 2. Sample

TYPE OF LG GEOGRAPHICAL AREA

POPULATION (1998)

NUMBER IN THE SAMPLE

> 100,000 2 North

< 100,000 5 (*)

> 100,000 1 Centre

< 100,000 3

> 100,000 1

Municipalities

South

< 100,000 8

> 100,000 2 North

< 100,000 2

> 100,000 0 Centre

< 100,000 2

> 100,000 2

Provinces

South

< 100,000 2 (*) Of which one did not provide its statement and one had not prepared an accrual-based statement.

The sample was then used to:

1. test the formal correctness of accrual-based statements, cross-checking the data

contained in the operating statement, balance sheet and reconciliation statement and

verifying their consistency.

2. test the correlation between each LG’s current surplus / deficit (that is, the

traditional obligation-based «bottom line»)iii and its net income (that is, the accrual-

based «bottom line»).

3. compute the difference between the two «bottom lines» and identify the main

revenue and expenditure items accounting for this difference.

4. analyse the amount of information disclosed in the notes on the accounts and/or the

statement of accounting policies (if any: neither is mandatory).

5. verify the extent to which accrual-based statements comply with accounting

standards.


6. analyse LG choices as to the structure of their accounting systems, with specific

reference to the models described in Section II.

The first test was carried out in order to ascertain whether LGs were complying by

double-entry rules in their bookkeeping and/or in their “transformation” of cash and

obligation-based data into accrual-based statements.

The second test was carried out to verify whether, as often claimed, LGs’ current

surplus (deficit) provides a reasonable proxy for their net income. To control for LG

size – populations ranged from 40,379 to 909,717; some LGs provided most services

directly while others had spun them off: see Section 2) – surpluses and net incomes

were normalised for current revenues.

The third test needs some words of comment. The difference between current

surplus and net income has four potential legitimate explanations.

• Timing of recognition. Cameralistic accounting records commitments when

obligations are incurred, while accruals accounting records expenses when goods

and services are received. Undelivered orders, for instance, will be recorded as

commitments under cameralistic accounting but not as expenses under accrual

accounting. Consequently, they will affect the LG’s current surplus but not its net

income.

• The matching concept, which accrual accounting applies while cameralistic

accounting does not. Depreciation; variations in stocks of finished goods, work in

progress, raw materials, accrued and deferred revenues, accrued and prepaid

expenses, provisions, and capitalisations will consequently affect the LG’s net

income but not its current surplus.

• Profits and losses on disposal of fixed assets, which are recognised as revenues and

expenses by accrual accounting but not as current revenues and expenditures under

cameralistic accounting.

• Extraordinary gains and losses, whose amounts may be different in the two systems.

For instance, the «decommitment» of previous years’ commitments that have not

been executed is an extraordinary gain under cameralistic accounting but is not

recognised by accruals accounting.


For the fourth test, disclosure was assumed to depend on the presence of (i) general

comments on the LG’s financial performance, (ii) specific comments on individual

balance-sheet and operating-statement items, and (iii) explanatory tables and graphs.

Tests 5 and 6, finally, could only be carried out if the information disclosed in the

notes on the accounts and/or the statement of accounting policies (test 3) proved

satisfactory. As described in Section 5, this was seldom the case. It was consequently

extremely hard (and often impossible) to determine the LGs’ accounting policies (let

alone their consistency with accounting standards) and the structures of their accounting

systems.

5. Results

Twelve financial statements (43%) contained at least one error (immaterial errors were

disregarded). For 10 (36%), the errors were large enough to seriously jeopardise the

statement’s overall reliability. Table 3 shows the cumulated size of errors as a

percentage of current revenues, current surplus, and net income in these 10 LGs. In 3

LGs, the cumulated error was larger than net income itself.

In some cases, the amounts shown in the cameralistic statement were simply not

reconciled with those shown in the balance sheet and the operating statement. In other

cases they were reconciled, but improperly so: for example, capital expenditures under

cameralistic accounting incorrectly treated as expenses under accruals accounting.


Table 3. Errors as a percentage of current revenues, current surplus, and net income

LG (*) Errors / Current revenues

Errors / Current surplus

Errors / Net income

LG02 (M, N, >) -1% -9% -114% LG07 (M, N, <) - -4% -10% LG10 (M, C, <) 1% -11% 42% LG12 (M, C, <) -1% -4% -7% LG15 (M, S, <) 9% 318% 30% LG16 (M, S, <) - 5% 2% LG18 (M, S, <) - 7% -196% LG19 (M, S, <) -45% 966% 535% LG22 (P, N, >) - -7% 8% LG28 (P, C, <) 4% 62% 12%

(*) M: Municipality; P: Province; N: North; C: Centre; S: South; >: population > 100,000; <: population < 100,000.

To analyse the correlation between current surplus and net income, both were

normalised as a percentage of current revenues to control for LG size. In addition, net-

income figures were revised to eliminate the errors mentioned above.

After removing one major outlier, as well as another municipality whose statement

appeared totally unreliable, the correlation coefficient was positive but not as large as it

may have been expected (0.61), considering that both current surplus and net income

supposedly reflect the same underlying variable, that is, the LG’s financial performance.

Among the potential, legitimate sources of difference between current surplus and

net income (as listed in Section 4), the most obvious is depreciation. When net income

was replaced by (net income + depreciation), however, the correlation coefficient

increased only marginally (0.65). Evidently, and encouragingly, LGs did not simply

assume a perfect equivalence between cameralistic current revenues and accrual-based

revenues, cameralistic current expenditures and accrual-based expenses.

An in-depth analysis of the actual reported differences between current surplus and

net income, however, was much less encouraging (table 4). The largest items explaining

the difference between the two indicators were «other extraordinary losses on assets»

(120%), accrued revenues (89%), non-existent liabilities (85%), and depreciation


(56%).iv The last two items could be expected to play an important role: depreciation

affects net income but not current surplus; non-existent liabilities are usually related to

decommitments, which affect current surplus but not net income. The relevance of the

first two items, however, was much more surprising, and apparently stemmed from

misunderstood concepts (eg, accrued revenues interpreted as accounts receivable) or

forced reconciliations (eg, extraordinary items as residual categories where to «dump»

and «bury» all the differences the LG was unable to explain, the entries it did not know

how to treat, any revenues and expenses intended to purposely inflate or deflate net

income). The very large variances for these two items, moreover, reflect very different

behaviours across different LGs.

In terms of frequencies, the most common explanations (≥ 20 LGs) were prepaid

expenses and «other adjustments», where the latter should include undelivered orders

and other commitments for which no goods or services have yet been received. At the

same time, many items were nil in several LGs. This seemed particularly unwarranted

in the case of «other adjustments» (8 LGs); depreciation (10); variations in stocks of

finished goods, work in progress, and raw materials (16); provisionsv (25). In addition,

no LGs apparently chose to treat capital contributions from upper levels of government

as deferred revenues, credit them to revenues over the relevant assets’ useful lives, and

consequently offset the impact of depreciation on net income.


Table 4. Items explaining the difference between current surplus and net income

AVERAGE VARIANCE VALUE = 0 Errors 46% 510% 16

Deferred revenues 3% 2% 17

Accrued revenues 89% 1585% 21

Deferred expenses 7% 2% 7

Accrued expenses 42% 295% 17

«Other adjustments» (including commitments for which no goods or services have yet been received)

14% 8% 8

Depreciation 56% 57% 10

Variations in stocks of finished goods, work in progress, and raw materials

2% 0% 16

Provisions 1% 0% 25

Capitalised costs 4% 4% 27

Capital expenditures legitimately treated as expenses

13% 13% 23

Capital contributions legitimately credited to revenues

- - 28

Profits on disposal of fixed assets 4% 1% 16

Losses on disposal of fixed assets 0% 0% 21

Other extraordinary gains on assets 27% 83% 9

Non-existent liabilities 85% 1197% 15

Other extraordinary losses on assets 120% 1459% 5

These considerations could be better sup ported if the balance sheet and operating

statement were accompanied by some kind of explanatory notes. Unfortunately, only 7

LGs (25%) had prepared a set of notes on the accounts and/or a statement of accounting

policies (Table 5). In most cases, these documents provided only some general

information and comments on the entity’s financial performance and position. Four

gave some information on accounting policies. Three provided some additional

information on specific operating-statement items; four on specific balance-sheet items.

The reconciliation statement, despite its critical role in this system, was largely ignored.

Only 2 LGs used tables or graphs.


Table 5. Disclosure in Financial Statements

Number of LGs

Presence of notes on the accounts and/or a statement of accounting policies Information on accounting policies

7 4

General information and comments on the entity’s: - financial performance - financial position - reconciliation statement

7 7 3

Information on: - specific operating-statement items - specific balance-sheet items - specific reconciliation-statement items

3 4 1

Use of: - tables - graphs

2 2

Under these circumstances, the last two tests introduced in Section 4 could only be

carried out to a very limited extent. The four LGs providing information on their

accounting policies simply quoted the principles stated by the law. The seven LGs

providing information on their accounting systems had all chosen the «traditional»

alternative, that is, not to introduce a double-entry accruals accounting system and

simply to derive their balance sheets and operating statements from their cameralistic

statements at year-end.

6. Discussion and conclusions

The 1995 reform of LGA requires Italian LGs to publish an accrual-based report

composed of a balance sheet and an operating statement. However, (i) budgeting

remains exclusively based on cameralistic principles, (ii) cameralistic reporting remains

mandatory, and (iii) LGs are not required to introduce a double-entry accrual accounting

system, but can simply derive their balance sheets and operating statements from their

cameralistic statements at year-end.


The purpose of this paper was to study the actual implementation of the new system.

The analysis was carried out on a stratified random sample of 30 LGs, and specifically

on their 1998 financial reports.

Results were not encouraging. The only favourable finding is that the cameralistic

«bottom line» (current surplus) and its accruals counterpart (net income) were not

particularly correlated (ρ = 0.61), even after adding depreciation back to net income (ρ

= 0.65). In other words, LGs did not simply assume a perfect equivalence between

cameralistic current revenues and accrual-based revenues, cameralistic current

expenditures and accrual-based expenses. At the same time, however:

• the reliability of many statements was seriously jeopardised by large errors;

• the difference between current surplus and net income was often largely explained

by such unexpected items as accrued revenues and «other extraordinary losses on

assets». At the same time, typical accrual-accounting items such as depreciation,

provisions, and variations in stocks of finished goods, work in progress, and raw

materials, were often set to nil, and so were undelivered orders and other

commitments for which no goods or services were received by year-end;

• disclosure, if any, was usually minimal;

• the few LGs providing information on their accounting systems had all chosen the

«traditional» alternative, that is, not to introduce a double-entry accruals accounting

system and simply to derive their balance sheets and operating statements from their

cameralistic statements at year-end.

This situation has three likely causes.

First, practical issues. As emphasised, accruals accounting, or even mere accrual-

based reporting, requires significant investments to prepare an initial balance sheet,

acquire adequate software packages, acquire or develop professional skills, review

organisational structures and procedures. Depreciation, provisions, undelivered orders,

variations in stocks of raw materials etc., were often set to nil probably because the

relevant LGs’ information systems did not allow any reasonable estimate. Accrued

revenues were mistakenly equated to accounts receivable, and differences due to

extraordinary items were inflated, probably because LG accountants were not


sufficiently familiar with accruals accounting. From this viewpoint, however, matters

should improve rather quickly.

Second, technical issues. Part of the literature (see § 2) claims that cameralistic

accounting and accruals accounting simply cannot co-exist. The empirical analysis

presented in this paper could not test such hypothesis. However, it did show an extreme

difficulty in linking or reconciling the two systems. To some extent, this is due to the

current structure of the reconciliation statement, which itself contains a few mistakes

and is rather cumbersome and asystematic to use. Matters, therefore, can once again be

expected to improve. Accounting, however, is a purposive activity, and the cohabitation

of two systems with such different goals (authorise expenditures v. measuring financial

performance) may prove very hard.

Third, user needs. In theory, LGs have a wide range of internal and external users of

accounting information with a significant interest in accrual-based statements. In

practice, however:

• Budgeting is still exclusively based on cameralistic accounting. Internally, therefore,

LGs have little incentives to introduce accrual-based management accounting in

order to support their management control systems. Without its natural

«management» complement, accrual-based financial accounting loses much of its

significance.

• Externally, constituents as taxpayers still appear to be rather uninterested in their

LGs’ financial performance, despite the growing delegation of fiscal responsibilities

from the central to regional and local governments. One might assume that

constituents are not interested in accrual-based statements because they know that

fiscal decisions will still be based on cameralistic statements. In fact, according to

existing evidence, constituents show very little interest in any form of LGA

(Steccolini 2002).

• Constituents as users of public services, on the other hand, may be interested in the

revenues and expenses associated to specific services. This information, however,

cannot be found in an LG-wide operating statement. To some extent, on the

contrary, it is already provided by cameralistic accounting. Management accounting


would be much more useful in this regard but, as mentioned, it is not mandatory and

LGs have little incentives to introduce it.

• The only external user that is clearly interested in LGA is the central government,

which, however, relies only on cameralistic accounting information. According to

the existing legislation on LG bankruptcy, for instance, a LG is declared to be in

«structurally critical financial conditions» according to 8 parameters drawn from

cameralistic statements. The central government uses these parameters to identify

the LGs risking bankruptcy, keep them under close scrutiny, and constrain their

operations. Other external users (eg lenders) often view these parameters as

standardised, significant, and readily available indicators of LGs’ financial position

and performance.

• All these elements reinforce one another through a system of vicious circles. For

instance: the central government and other external users rely mainly on

cameralistic accounting statements; LG accountants focus on such statements;

accruals accounting is viewed as yet another bureaucratic nuisance; accrual-based

statements are prepared with very little care and become unreliable; the central

government and other external users ignore such statements even more.

After all, government organisations are well known for their «mimetic» behaviours

(Powell and DiMaggio 1983) and their tendency to reinterpret managerial innovations

in a bureaucratic fashion (Anselmi, 2001). Errors are frequent, disclosure is limited,

double-entry bookkeeping is rare because LG accountants are only pretending to

produce accrual-based statements or, at best, believe that such statements are not worth

much effort. Current surplus and net income are not perfectly correlated because the

pretence must be formally credible. This can also explain how statements with such

significant errors survived the examination of both the internal boards of auditors and

the external «Regional oversight committees».

For the future, user needs are clearly the crucial issue. As long as cameralistic

accounting remains the LG’s main accounting system, dominates budgeting, provides

the information required by the most important external user (ie, the central

government) while all other potential users remain rather indifferent, accruals

accounting is likely to remain marginalised, the investments on hardware and software,


training and reorganisation to produce very little benefits, the streamlining of the

reconciliation statement to similarly be of very little relevance. In this regard, a useful

benchmark is provided by Italian public health-care organisations. Here, full-fledged

accruals accounting was supposedly introduced in 1995, but really started to develop

only in 1999, when new legislation provided for it to replace (instead of merely

supplement) cameralistic accounting.

At the same time, an even more fundamental question looms large: is accrual-based

reporting really necessary, considering that LGs are often very small (92% have

populations below 15.000) and are currently being encouraged or even forced to spin off

their activities to separate government entities, joint-stock corporations with private and

public stockholders, and private firms?

Finally, a few caveats must be noted. The sample could not be stratified according

to the technical model chosen (ie, traditional, parallel, or integrated). The study

population excluded all LGs with less than 40,000 residents, which account for an

extremely large percentage of Italian LGs. For most LGs in the study population, the

1998 statement was the first to include accruals-based reports: hopefully the latter’s

quality will improve with experience. Future research should consequently extend the

analysis to smaller LGs; stratify the sample according to the technical model chosen (or

at least identify the model chosen by each LG in the sample); verify whether the

correlation between current surplus and net income varies across different strata of LGs;

verify whether these differences vary over time.


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i Under Italian Law, Parliament may delegate legislative powers to the Executive on specific matters. The laws enacted by the Executive under these circumstances are called «Legislative Decrees». D.lgs. 77/95 was recently incorporated in the Unified Body of Laws on Local Governments (D.lgs. 267/00). ii The terminology is drawn from the EU’s «Council regulation (EC, Euratom) No 1605/2002 of 25 June 2002 on the Financial Regulation applicable to the general budget of the European Communities», which provides an «official» translation of government accounting terms in all EU languages. iii More specifically, the current surplus (deficit) is the difference between current revenues established and current commitments, net of any revisions to the amounts established (committed) in previous years but still unrecovered (unpaid). iv The difference between the two indicators is explained by both revenue and expense items. As a consequence, individual items can exceed 100% of the difference they contribute to explain. Assume for example: current surplus (1000) – depreciation (100) + accrued revenues (80) = income (980). The total difference will be 20 (1000 – 980). Depreciation will account for 500% of this difference (100/20) and accrued revenues for 400 (80/20). v It should be emphasised, however, that current LG legislation does not admit any provisions other than bad-debt allowances.

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