The Annual Report as a Tool for Financial Disclosure in Local Governments

Article excerpt

This paper analyses the role conferred to the communication of financial information in local governments. An effective disclosure of this information would satisfy the demands posed by many segments of society. We first examine the objectives that information disclosure pursues and its main addresses. Then, we describe the annual report as one of the main communication tools towards the achievement of those objectives. The analysis of current practices suggests a series of recommendations that Spanish local governments could implement in the elaboration and diffusion of the annual report. The development of these guidelines constitute the central goal of this paper


Almost on a daily frequency, the media report news concerning the "deficient management" of our municipalities and, as a consequence, their delicate financial situation. Local newspapers pages comment on the quality and quantity of the services provided, the excess indebtedness ratios, the shortage of liquid resources or the strong dependence on current grants. Some columns try to justify the practices undertaken by the local government, some other try to support the criticisms arising from the Opposition. However, despite the political use that is frequently given to this information, the large space devoted by the media to local management and finance reflects the growing interest of the people in the economic and financial health of the level of the Administration that is nearest to them.

Users of public accounting information, specially the citizens, demand access to data that allows evaluating the performance and financial condition of local governments, as a means to estimate the capacity of these entities to guarantee the feasibility of their financial and non-financial commitments, related to the provision of services. Public entities cannot refuse to assisting such demands, as politicians and public management must be accountable to those that have delegated on them.

In this context, the effective disclosure of financial information by local governments is seen as a basic requirement for accountability. The usefulness of the financial information elaborated by the local entities depends to a large extent on its availability.

Even if accounting statements are correctly elaborated, their utility would be scant if access to potential users is not granted. Appropriate diffusion of the financial information allows the government to keep publicly accountable, and can be interpreted as a bonding cost incurred to create an image of transparency, a reputation, that helps justifying past decisions and basing policies for the future.

This paper analyses the role of financial communication in local public entities. The first section examines the objectives pursued by information disclosure and its main addresses. The second section describes the annual report as one or main communication tools that are currently being employed. The analysis of current practices suggests a series of recommendations that Spanish local governments could implement in the elaboration and diffusion of the annual report. Those guidelines are provided in the last section of the paper.

Basic Issues, Objectives and Addressees of Financial Disclosure Financial disclosure and public accountability

In the public sector, as well as in the private sector, the objectives of financial reporting are determined by the needs of its users, which are typically summarised in two categories: 1) a means to effectively control the manner in which resources are administered and legal obligations are accomplished, and 2) a supporting tool for decision making. Thus, expressions as "accountability" and "decision making" are usually employed to frame the basic objectives of accounting reporting (IFAC, 1991, par. 62). The relative importance of each objectives is deemed differently by different types of users. However, in the public arena, it is widely accepted that users are more interested in the accountability purpose. …


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