Local Government Accounting System Reform in Italy: A Critical Analysis
Caperchione, Eugenio, Journal of Public Budgeting, Accounting & Financial Management
ABSTRACT. This paper illustrates the aims and the contents of the 1995 Local Government Accounting Act, which introduced an accrual-based financial reporting for Italian municipalities and provinces. To this end, this paper focuses on a sample of 23 local governments that produced these reports for the first time in 1998, and highlights a series of problems that emerged with regard to both communicational efficacy and fair presentation. The conclusions summarize the major gaps between the reform's objectives and actual effects, and explain the reasons for these gaps and formulate some suggestions in order to re-design the system.
In 1995 the Italian Parliament passed a measure that introduced some significant innovations in the accounting system of local governments. According to their promoters, these innovations should have improved the overall quality of decisions and increased public efficiency, thanks to the availability of targeted and reliable economic information.
At the same time, municipalities and provinces should have implemented - in accordance with the trends currently emerging in the leading Western countries - an accrual-based accounting system, which should have led to assessing with fuller knowledge of the facts whether local governments are managed by considering intergenerational equity.
Today, six years after the introduction of the decree, many expectations have been disappointed, while there is no proof of significant improvement either in the quality of economic information, or in the quality of the decisions taken by local governments. This lack of achievement can be traced to a variety of factors, which are debated extensively in the paper.
LOCAL GOVERNMENT IN ITALY
There are four levels of government in Italy: central government (Parliament and the Cabinet), regional government (20 Regions), provincial government (103 Provinces), and municipal government (8102 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" (LGs).
Each municipality has a mayor, a cabinet, a city council and a professional bureaucracy. The mayor is the head of the executive branch, is elected directly by the citizens and appoints the members of the cabinet. The city council is also elected directly by the citizens. Municipalities are allowed to (1) raise local taxes and (2) charge tariffs for the services they provide, but a large percentage of their inflows (27% on average in 1998)' is still represented by transfers from higher levels of government. Transfers are classified as "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, due to the fact that provinces play a somewhat limited role in the production of services and act mainly as redistributors of resources.
On the contrary, municipalities have always played a pivotal role in the Italian administration system, both with regard to political representation and because they must produce a number of services which are of the utmost importance to the citizenry, including day nurseries, school lunches and transport, public transport, waste disposal, waterworks, the construction and management of sports centres, the management of public green areas, and the management of nursing homes for the elderly.
These services are provided partly free of charge and partly against payment of a sum, which is usually lower (at times much lower) than production cost.
REASONS BEHIND THE 1995 REFORM
There is no professional public-sector standards-setting body in Italy. The requirements for governmental accounting, reporting and auditing are set by national legislation. Applicable laws are different for central government, regions and LGs. …