How does depreciations management affect subsequent fiscal performance? The case of the Swiss cantons

Abstract

Creative accounting allows governments and, more particularly, finance ministers to somehow manage financial reports to achieve specific and possibly self-interested goals. It is usually used to hide deficits. It sometimes also helps to present financial performance as being more worrisome than it actually is. In that case, ministers press more than needed for lower expenses and a higher tax burden. This pressure is expected to tame deficits or increase surpluses over time. Using panel data relative to the 26 Swiss cantons over the period 1980–2013, we estimate econometrically how a political finessing technique like ‘depreciations management’ affects subsequent government expenses and revenues and thus subsequent financial performance.

What Factors Drive Faithful Financial Reporting by Subnational Governments? Insights from Switzerland

“…Cantonal governments may seek instead for collegial consensus on how financial information should be delivered, since their chances to remain in office could directly depend on their financial accountability. This agrees with Clémenceau and Soguel (2018) who found that political competition has no significant influence on the propensity of cantonal governments-mainly finance ministers-to manage financial statements (i.e., reduce financial faithfulness) for specific and possibly self-interested goals. Therefore, H2 cannot be verified.…”

“…Indeed, transparency contributes to mitigating information asymmetry and risk perception upon voters or lenders on capital markets (Bastida et al, 2017). However, when efficiency is recurrently unmet because of blatant financial mismanagement, governments may seek to 'manage' financial information by hiding or arranging the reported information, notably to safeguard their political or electoral interests (Clémenceau and Soguel, 2018;Cohen et al, 2019). Therefore, the third hypothesis is:…”

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

“…Four articles investigated EM from a macro-economic perspective, mainly examining fiscal deficits in the EU context (Dafflon and Rossi, 1999; von Hagen and Wolff, 2006; Rauch et al , 2011; Maltritz and Wüste, 2020). Two articles concentrated on state/regional governments (Clémenceau and Soguel, 2017, 2018), and ten articles either concentrated on the local governments of a single country – including English local governments (Arcas and Marti, 2016), Greek municipalities (Cohen and Malkogianni, 2021a, b), Italian municipalities (Anessi-Pessina and Sicilia, 2020), Portuguese municipalities (Ferreira et al , 2013, 2020) and Swedish municipalities (Stalebrink, 2007; Donatella et al , 2019; Donatella, 2020; Donatella and Tagesson, 2021) – or took a comparative approach (Cohen et al , 2019, compared Greece and Italy). In addition to this, there is one case study analyzing one Finnish municipality (Vinnari and Näsi, 2008).…”

Swiss Public Administration

“…It also involves some book entries that satisfy secondary interests rather than present the financial situation as it is. Insofar as these entries are within the limits of the FMAP, the literature calls them creative accounting or political finessing techniques (Clémenceau and Soguel 2018) 3 . Indeed, the finance ministers have incentives to exploit the opportunities for political finessing provided by the FMAP.…”

“…Depending on the canton and year, such 'additional depreciation charges' can amount to more than 2% of 'true' expenses. Managing depreciations seems to produce a significant and positive impact on a cantons' future financial performance (Clémenceau and Soguel 2018). Political finessing fosters the flexibility to ensure structural surpluses, prevent structural deficits, and facilitate meeting fiscal rule requirements.…”