AuthorJorge, Susana Margarida
  1. Introduction

    The Maastricht convergence criteria for EU member-States are assessed on the basis of a harmonized reporting system of National Accounts (NA) supported by the European System of National and Regional Accounts (ESA). ESA offers guidance, tables and procedures for countries to report to Eurostat, namely within the scope of Excessive Deficits Procedure (EDP). A 'full accruals basis' of accounting is implicitly used for the recognition of most financial flows.

    Nevertheless, public sector data reported for the convergence criteria are derived from (micro) Governmental Accounting (GA) systems, according to the rules in practice for each country. Despite all having some kind of accrual accounting, this is not yet harmonized between countries, and in some cases, not even within a given country. Additionally, in many countries, budgets and budgetary accounting are still cash-based (Luder and Jones, 2003; Blondal, 2003; van der Hoek, 2005; Anessi-Pessina, Nasi and Steccolini, 2008).

    Therefore, when reporting to Eurostat for the purpose of deficit assessment, countries start from the so-called 'working balance' (deficit/surplus) in GA and make adjustments to obtain the final deficit/surplus in NA for convergence evaluation. These adjustments result from conceptual differences between the two accounting systems (GA and NA), among which some concern accounting principles, such as recognition criteria--cash versus accrual basis (Keuning and van Tongeren, 2004).

    In spite of recent GA reform trends in EU member states, moving from cash to accruals, differences still remain due to the existence, in some countries, of two different accounting bases in GA--accrual basis for financial accounting and modified cash basis for budgetary accounting. This is particularly relevant since the data from GA to NA are based on budgetary reporting (van der Hoek, 2005; Marti, 2006; Barton, 2007). Since in some countries the GA 'working balance' is already accrual-based while in others it is still cash-based, the adjustments to be made range from highly diverse and material, to a reduced number and of low magnitude (Jesus and Jorge, 2015).

    The literature review (Keuning and van Tongeren, 2004; Marti, 2006; Sterck, 2007) and documental sources (IPSASB, 2005; 2012) additionally identify other specific issues concerning differences between GA and NA that raise the need for adjustments when translating data from one system into the other. Particularly interesting are the findings of an exploratory study pointing out the materiality of those adjustments as well as their diversity, questioning the reliability and comparability of the final budgetary balances reported by EU member-States within the EDP requirements, hence raising doubts about NA data accuracy and reliability to assess the Maastricht Treaty convergence criteria (Jesus and Jorge, 2014; 2015).

    Following this line of investigation, this paper addresses the relationship between budgetary balances (after budget accomplishment) according to both GA and NA, namely assessing whether there are sufficiently significant differences and exploring what may explain those differences. Accordingly, it aims to achieve the following general objectives:

    * To analyze whether both materiality and diversity of GA-NA budgetary balance adjustments reflect the conceptual differences between the two systems, considering the adjustments' magnitude and categories reported by EU member states;

    * To identify potential factors that might explain the adjustments' (i.e. GA-NA budgetary balance differences) materiality and diversity.

    The assumption underlying this research is that since, in principle, EU member states have to comply with deficit limits and other restrictions concerning the Stability and Growth Pact, accounting management discretion might be used to manage the reported deficit by means of managing GA-NA budgetary balance adjustments. Therefore, some literature on earnings management, particularly by public sector organizations (Eisner, 1984; Christensen and Mohr, 1995; Petersen, 2003; Stalebrink, 2007; Anessi-Pessina and Steccolini, 2009a, 2009b) seems to be useful as a conceptual framework for this study. In fact, if the main issue to be analyzed concerns what leads EU member-States to report more or less material and more or less diverse GA-NA adjustments in their budgetary balances, factors pointed out as a possible explanation of variability across countries might be seen as 'incentives' to use some accounting creativity in order to report a more convenient position in terms of EDP.

    The use of accounting discretion has been studied within the literature on earnings management, which is particularly rich concerning the private sector, but still very scarce in the public sector (Stalebrink, 2007; Anessi-Pessina and Steccolini, 2009a). In any case, the general idea is that earnings management occurs when decision-makers within organizations resort to some creativity by means of accounting discretion to manage/change the reported financial performance/position. The main intention is to signal a certain situation to stakeholders, by not reporting the accurate picture.

    In the public sector, authors such as Eisner (1984) and Petersen (2003) addressed practices to measure, manage and report budgetary deficits which, although in the USA context, seem somehow related to some of the GA-NA budgetary balance adjustment categories analyzed in this study. Eisner (1984) refers, among others, to off-budget items and credit extension, contingent expenditure and not systematically accounting for investment assets. Petersen (2003) explains that deficit reductions tend to be achieved by practices other than raising taxes or reducing spending, namely by changing the assumptions underlying the budget, altering the timing and recognition of various flows, or even redefining what constitutes revenue and expenditure. He also refers to techniques contributing to an apparently balanced budget, such as: over-estimation of revenues, internal borrowing, assets sales, acceleration of revenue and delays in spending, and anticipated future savings. GA-NA budget balance adjustments regarding the recognition of certain operations, the concepts of budgetary revenue/expenditure and the accounting basis, might find some relation to the above-mentioned 'creative' practices.

    Stalebrink (2007) and Anessi-Pessina and Steccolini (2009a) were pioneers in developing studies that address possible determinants of earnings management in public sector organizations, using rather similar independent variables--the former in the context of Swedish municipalities and the latter in Italian public health-sector organizations. Among several determinant factors, those authors use: change of administration/CEO, organizational eligibility for bailout funds, operating revenues as a proxy for organization size, organization's operating margin, change in total debt, organization's administrative/resource capacity and changes to the organization's assets. Nevertheless, these determinants are at the organizational level and hence not applied to the context of this research.

    Therefore, it can be said that the scarce literature regarding the public sector, and particularly in the field of GA and NA, does not address the topics of this study. This might be an opportunity for this paper to be innovative, but it also creates difficulties in identifying the possible determinants of GA-NA budgetary balances differences, despite the above-mentioned framework of accounting management discretion. However, it is empirically observable that some factors are able to determine those differences and they can be classified into two groups: those related to economic policy and those regarding technical-accounting issues.

    Henceforth, this paper is organized as follows. Section 2 presents the systems of GA and NA, highlighting their purposes, main differences and how they relate. Subsequently, Section 3 addresses the main categories of adjustments needed when translating information from one into the other, in terms of EDP reporting procedures. Section 4 addresses the methodology, starting by presenting the research questions, formulated from an exploratory perspective; furthermore, the sample, variables, statistical procedures and models associated with the empirical study are described. Section 5 presents and discusses the main findings. Finally, Section 6 summarizes the main conclusions, contributions and limitations.

  2. Governmental accounting and national accounts

    In the last decades, under New Public Management (NPM) trends, GA has undergone considerable reform processes whose main common features must be underlined, as identified by authors such as Brusca and Condor (2002) and Benito, Brusca and Montesinos (2007): (i) adoption of the accrual basis with a progressive approach to business accounting; (ii) a trend towards harmonization of accounting systems between different levels of government; and (iii) a move to approach GA and NA, so that adjustments, reclassifications and eliminations are easier and safer.

    One important discussion emerging from these reforms concerns the introduction of the accrual basis in budgetary accounting systems. However, many international studies have shown that most countries adopting the accrual basis in GA have not introduced it in their budgetary systems, namely concerning budget preparation and reporting of budgetary performance (Luder and Jones, 2003; Bastida and Benito, 2007; Sterck, 2007; Benito and Bastida, 2009).

    Additionally, van der Hoek (2005) distinguishes between budgeting and reporting systems. While the former are connected to mixed cash/commitment accounting bases, reporting systems are mostly linked to modified or full accrual accounting, with different practices and degrees of implementation across countries. Consequently, the lack of harmonization is a great problem in GA systems, namely among...

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