Developments in Financial Information by Local Entities in Europe
Brusca, Isabel, Montesinos, Vicente, Journal of Public Budgeting, Accounting & Financial Management
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. Most managers and politicians consider budgetary reports more useful than financial statements prepared according to the principles and methodology resulting from accounting reform; and (c) accounting systems with financial and budgetary reports prepared on the basis of common criteria, either modified accrual or accrual basis. Generally, consolidated statements are also presented.
Therefore, it is clear that there is accounting diversity in the systems of local entities, diversity which is also visible if we carry out a classification of accounting systems according to more specific criteria, such as the regulatory framework and objectives of the systems, the recognition criteria and disclosure policies of budgetary reporting, the valuation rules of the elements in financial statements and the presentation of financial reporting. Nevertheless, an evolution from cash basis to accrual basis can be found as a general trend of local entities in Europe.
If we compare the results of our study with those obtained by previous studies such as Lüder (1989, 1992) or Montesinos, Pina and Vela (1995), we realise that an important increase exists in the number of countries applying an accrual basis for accounting recognition in financial reporting, and even for budget execution in some of the countries. …