Francesco Capalbo

Accrual-based earnings management in state owned companies: Implications for transnational accounting regulation

Purpose - – Opposition to transnational calls for the adoption of accrual-based accounting in the public sector may stem from arguments that it is associated with poor earnings quality. The purpose of this paper is to determine whether state owned enterprises (SOEs) operating under accrual-based accounting manage their earnings, whether it is more prevalent Design/methodology/approach - – This paper measures earnings management for a large sample of unlisted Italian SOEs and POEs using a framework developed by Stubben (2010). The authors use regression analysis to estimate the variables which predict abnormal accruals including firm size, leverage and profitability. Findings - – The authors find no evidence that the level of state ownership (SO) is positively correlated with accrual-based earnings management. The authors also provide evidence that earnings management by SOEs decreases with firm size and increases with profitability. Research limitations/implications - – While the study is the first to examine earnings management in a public sector accrual accounting environment for a sample of European firms, namely Italian firms, the authors call for more research into this issue examining public entities in other European Union (EU) member states or public entities other than SOEs. Practical implications - – The EU recently introduced a new transnational accounting directive in which it prescribes the preparation of financial statements based on accrual accounting for all European public sector entities, arguing that it reduces the window dressing that is allowed by cash accounting. Since Italian SOEs already prepare their accounts on an accruals-basis, by analysing their accounting behaviour the authors are able to determine the variables which predict when earning management is more likely to occur in a public sector accrual accounting environment, and therefore the authors provide guidance which may be useful in shaping the transition process from cash accounting to accrual accounting by identifying the types of entities whose accounts should be subject to greater regulatory scrutiny. A better understanding of the relation between SO and earnings management will provide insight into public sector corporate governance and aid in the acceptance of transnational regulation that would otherwise significantly alter current accounting practices and possibly be opposed at a national level. Originality/value - – Earnings management in a public sector accrual accounting environment had been analysed only for Chinese listed companies. The authors extend previous analysis to a sample of European (Italian) SOEs which are unlisted. The authors also extend previous work by determining the characteristics of firms which manage their earnings.

Pacioli's double entry -- part of an intellectual and social movement

ABSTRACT Our research contains unashamedly speculations about Pacioli, and his Renaissance heroes. It seeks to codify prior research which has speculated on many aspects of Fra Luca Paciolis (1445–c.1517) life. Regarding teaching, not surprisingly, most students are less than enthused by the experience of being taught double-entry bookkeeping (DEB) as a mechanical exercise. The focus on control in many research papers has misplaced emphasis on the origins of DEB, generally ignoring the socio-economic and intellectual contexts in which it was forged. This study speculates on DEBs intellectual foundations, namely perspective, proportionality, harmony, order and balance captured in the Venetian form of DEB. By emphasising DEBs recourse to these aspects, it is placed in Renaissance Italys fifteenth- and sixteenth-century intellectual and social movement. Academics including Bryer have suggested that a broader notion of financial accountability is appropriate. We concur. Accountability is generally a missing dimension in DEB teaching and related research. A major complaint in the aftermath of the Global Financial Crisis (GFC) levelled at the banks, and their shadow banking arms in particular, is that their group accounting failed ‘to tell it how it actually was’ – that is, it failed to truly account. Companies were unaccountable. The ‘morality’ of audited accounting with a lack of corporate accountability, namely its recourse to truth, balance, proportionality of the kind the Renaissance players sought, was certainly absent during the GFC.

Response to Toms and Bryer

We are delighted to publish speculations on Pacioli’s double-entry bookkeeping (DEB), proportion and perspective. Also, in the spirit of stimulating debate, we welcome the Editor’s decision to publish the reviewers’ commentaries (hereafter Toms and Bryer) coupled to the opportunity for us to respond, ‘albeit briefly’, to concerns raised in them. The issue of speculation is critical to our article and the commentaries. To begin, consider Yamey’s (1947, 272) thoughts about speculations and the origins of DEB: ‘And so the probings into the origin of DEB lead from one speculation to another. The true story is likely to remain as much a mystery as double-entry itself must be to the uninitiated’. No doubt he would have similar thoughts regarding our speculations about ‘Pacioli, DEB, proportionality and perspective’. Speculation is inherent in all historical analysis. Toms (2016, 25) suggests that we offer ‘a thought-provoking interpretation of the relationship between innovation in art and accounting, and its historical consequences. In doing so, [the authors] illustrate the importance of researching and teaching the context of double-entry bookkeeping (DEB)’. Toms notes several points of agreement, namely (1) that researching and teaching the context of DEB is important; (2) the association between algebra and DEB is plausible, as is the speculation that the intellectual environment in art influenced the development of DEB; and (3) DEB promotes good management and assists decision making. In these respects, he suggests the article offers ‘a potentially important interpretation of the origins of DEB and its subsequent history’ (Toms 2016, 25). However, several points of disagreement are also noted including: (i) that the sense of proportion that inspired the discovery and adoption of DEB somehow disappeared in the Global Financial Crisis (GFC); (ii) concerns regarding claims about the derivation of DEB from the use of algebraic solutions to bartering problems; and (iii) concerns about the origins of DEB and its relationship to the rise of capitalism. Our observations are provided seriatim on those matters of disagreement.