An Investigation of Discretionary Accruals and Surplus‐deficit Management: Evidence From Swedish Municipalities

Abstract

This article presents evidence suggesting that Swedish municipalities use discretion associated with the accounting for depreciation and asset write‐offs to manage externally reported financial performance. The general hypothesis that is proposed and tested is that they use this discretion for purposes of reporting small surpluses across accounting periods (i.e., smoothing). The article identifies two strategies for achieving this reporting objective, including the use of the discretion to (1) systematically increase expenses during reporting years when these can be absorbed by surpluses; and (2) to systematically increase them during periods when large deficits are reported. The latter strategy is referred to as the ‘big‐bath strategy’ and involves systematic ‘dumping’ of expenses on already poor results. Both strategies support the above reporting objective, by setting the stage for the reporting entity to more effectively reach the reporting objective in future accounting periods. Given the findings that are presented, it is recommended that accounting standard setters ought to consider a review of standards guiding the level of discretion and accompanying disclosure requirements.

Inconsistent Depreciation Practice and Public Policymaking: Local Government Reform in New South Wales

“…This evidence is consistent with previous empirical studies in NSW (Pilcher , , ), the UK (Pina et al ), the US (Stalebrink and Sacco ) and Sweden (Stalebrink ) suggesting that a significant problem exists in the way in which depreciation is recorded in local government. However, to date, no specific analysis has been made of how such practice might affect public policymaking in a post‐NPM environment.…”

“…Moreover, different recognition thresholds and initial valuations or re-valuations of assets may exacerbate comparability concerns: for instance, 'any revaluation of assets above historical cost would result in increased depreciation charges, which once again could have a material impact on the apparent cost of government services' (Carlin 2000: 68). This evidence is consistent with previous empirical studies in NSW (Pilcher 2002(Pilcher , 2006(Pilcher , 2009, the UK (Pina et al 2012), the US (Stalebrink and Sacco 2007) and Sweden (Stalebrink 2007) suggesting that a significant problem exists in the way in which depreciation is recorded in local government. However, to date, no specific analysis has been made of how such practice might affect public policymaking in a post-NPM environment.…”

“…Alternatively, inconsistencies may occur as a result of a poor understanding of the purposes of depreciation, the probable life of public assets or regulatory guidelines 'which are at best ambiguous and, at worst, misleading' (Pilcher 2006: 76). However, some evidence from Australia (Pilcher 2002(Pilcher , 2006(Pilcher , 2009, the United Kingdom (UK) (Pina et al 2012), the United States (US) (Stalebrink and Sacco 2007) and Sweden (Stalebrink 2007) suggests gaming/fraud by municipal officials.…”

Budgetary Balances Adjustments From Governmental Accounting to National Accounts in EU Countries: Can Deficits Be Prone to Management?

“…At the country level, the budgetary balance might approximate to “earnings.” Therefore, literature on earnings management and on economic and political incentives to falsify financial statements to achieve specific stakeholders’ requirements (e.g., Anessi‐Pessina and Steccolini , ; Christensen and Mohr ; Eisner ; Petersen ; Stalebrink ; Stalebrink and Sacco ) was used to inform the conceptual framework of this study.…”

“…Within the framework of earnings management, accounting discretion has been widely analyzed in finance and accounting literature on the private or business sector context. However, studies on the public sector are still rare and mostly focused at the organizational level (Anessi‐Pessina and Steccolini , ; Christensen and Mohr ; Stalebrink ), although they are increasing, namely due to the approximation between business and public sector accounting (Pilcher and Van der Zahn ).…”