Developments in Financial Information by Local Entities in Europe

Article excerpt

ABSTRACT. In recent years, most Organisation for Economic and Cooperation Development (OECD) countries have brought in important reforms into their public accounting systems with the objective of both improving public service management and increasing the transparency and accountability of governments. Reforms of government accounting share a common direction towards the implementation of accrual-based accounting systems. In this context, this paper presents the situation of local government accounting systems in European countries with the aim of showing the degree of uniformity/ heterogeneity that currently exists among the countries considered and why differences persist nowadays, trying to classify countries into groups according to accounting practice. Results show that three groups of countries can be identified: the first continues using the cash basis; in the second, an accrual or modified accrual basis is used for financial accounting but the cash basis still persists in the budgetary system; in the third, an accrual or modified accrual basis is used both in budget and in financial accounting.


In the last few decades, there have been deep cultural changes in public entities. They have taken place in two fields: the theory of New Public Management (NPM) and the principles of good governance (see International Monetary Fund, 2001; Organisation for Economic and Cooperation Development, OECD, 2001). This has led to a consensus on the necessity of extending the accountability of public entities and reforming the financial information systems. As Hopwood (2000) states, financial accounting is not only a functional artifact but also in many contexts a cultural symbol of modernity and marketization and thereby subject to cultural, economic and institutional pressures and influences. Hopwood also asks how change can seemingly emanate so rapidly from what were perceived as such stable structures.

In local governments, financial reporting is used to make economic, social and political decisions and to assess accountability primarily by (1) comparing actual financial results with legally adopted budget; (2) assessing financial condition and results of operations; (3) assisting in determining compliance with finance-related laws, rules, and regulations; and (4) assisting in evaluating efficiency and effectiveness. Moreover, the budget is an expression of the public policy and financial intent as well as a management tool and a method of providing control over operations.

As a consequence, the adoption of rational budgets and the application of modern accounting methods can have important benefits both for politicians and for citizens. Moreover, in democracy a good accounting system is a very useful instrument for the electorate to hold their politicians and administration accountable. Control of local governments must be based on modern accounting systems. A common element of these reforms is the implementation of accrual-based accounting systems, in most cases set up according to principles and methodology of the business accounting model.

This paper studies the state of the art in local government accounting models in European countries. We compare and classify the different types of systems used by local governments. We use the data from a survey undertaken by the Council of Europe (2007) as our source of information.

Our results show that there are three different groups of accounting systems: (a) accounting systems in which a cash or modified cash criterion is used both for accounting and for budgeting. Priority is given to budgetary information and the financial statements consist basically of a budgetary statement; (b) systems based on an accrual or a modified accrual basis in their financial accounting but whose budget is elaborated according to modified cash or cash basis.

The budgetary system is still of considerable importance and is linked to the accounting system. …