Philippe Van Cauwenberge

Theme: Whole of government accounting— international trends

Whole of government accounting (WGA) is an integral part of the accruals accounting and financial reporting changes accompanying public sector reforms internationally. The adoption of accruals accounting is generally rationalized for micro-economic purposes, such as economic efficiency. At this micro-economic level, WGA reflects the governance changes in the public sector involving the provision of public services through decentralized entities (public, private or public and private), and the increasing role of co-ordination and control performed by governments (Osborne and Gaebler, 1992; Christensen and Laegraid, 2007). According to the Organization for Economic Co-operation and Development (OECD, 2004, p. 4), these decentralized governance structures ‘created new challenges for governments to maintain central direction and control’. Consequently, WGA developments help governments to retain a whole of government approach towards the fulfilment of public interest, as well as to be accountable for the ‘whole basket’ of services provided (Grossi and Mussari, 2008). Macro-economic rationales support the use by governments of fiscal rules, such as commitments to balanced budgets and specified debt levels. With the introduction of such rules, rationales for WGA have been extended to include macro-economic purposes as well, and the reporting boundaries have been extended. HM Treasury in the UK has gone furthest with this, seeking to encompass the whole of the public sector, including all levels of government within one WGA. The idea of WGA is ambiguous, because it may refer to a government (central, regional or local) producing a single financial report that encompasses all government activity within its area of authority. Alternatively, it may refer to a central government’s efforts to produce a single financial report that encompasses public sector activities throughout the country. This would mean including the WGAs of all governments at lower levels, as well as the central government’s activities in its own right. Clearly WGA is a complex development that carries with it multiple tensions, both in relation to the stated aims, and in relation to the accounting rules adopted. In attempting to fulfil micro-level objectives, efforts to converge governmental accounting practices with business-style accounting—such as the International Federation of Accountants’ efforts to converge International Public Sector Accounting Standards (IPSAS) with the International Accounting Standards Board’s International Financial Reporting Standards (IFRS)—may be difficult, but they become even more complicated with efforts to fulfil macrolevel objectives at the same time by aligning the accounting requirements with macro-level statistical accounting requirements (see, for example, IPSAS 22). This themed edition of Public Money & Management contains articles based on papers initially presented last year at an international workshop in Italy on ‘Whole of government financial reporting: international trends’. The workshop, organized jointly by the University of Siena and the University of Sydney, was held at Santa Chiara College in Siena from 31 August to 2 September 2008 with the aim of creating an atmosphere in which scholars and practitioners could analyse and debate the similarities and differences among diverse WGA approaches adopted internationally. Attending the workshop were approximately 50 scholars and experts from 16 countries (Australia, Belgium, China, Estonia, Finland, Germany, Italy, The Netherlands, New Zealand, Norway, South Korea, Spain, Sweden, Switzerland, the UK and the USA), as well as representatives from extra-national organizations (the European Commission and the United Nations). The workshop commenced with guest speakers. The first, Professor Klaus Lüder of Speyer University, noted that, although the fragmentation of governmental structures as part of the public sector reforms had increased the perceived need for WGA, reform proponents, especially those from the AngloAmerican countries, had sought WGA from the beginning. Lüder observed a lack of clarity surrounding what is meant by WGA and a gradual extension of the concept of ‘whole of government’ for financial reporting purposes. While WGA may begin at the level he labelled Theme: Whole of government accounting— international trends

Financial reporting quality and the cost of debt of SMEs

This study explores a large and detailed dataset of financial statements of Belgian small and medium-sized enterprises (SMEs) over the 1997–2010 period. Using accruals quality as a proxy for the quality of SMEs’ financial reports, we find that the quality of SMEs’ financial statements is negatively related to those companies’ effective interest cost. This result is also highly economically significant. The findings in this paper are consistent with the idea that earnings are important for creditors in predicting SMEs’ reimbursement capacity (i.e., future cash flows) and that less estimation error in accruals enhances earnings’ ability to predict future cash flows. We deliver evidence of an important economic benefit of financial reporting for SMEs, to wit, the potential to reduce information asymmetry between SMEs and their creditors through higher-quality financial reporting.

Effects of local fiscal policy on firm profitability

For decades, scholars and policy-makers have been interested in how fiscal policy influences entrepreneurship. Until now, research has focused on fiscal policy at the federal or regional level and used macro-economic outcome measures. Considerably less attention was given to how municipal governments can influence economic outcomes at the micro level. The present study examines the effect of municipal taxes, spending and tax compliance costs on firm profitability within the Flemish hospitality industry. This is an interesting research setting, since Flemish municipalities have far-ranging fiscal autonomy which has resulted in a proliferation of local taxes, many of which are specific to the hospitality industry. The findings reveal that local taxes have a negative impact on firm profitability, while aggregate public spending has a positive influence. The tax effect is economically relevant and exceeds the public spending impact. Finally, we find no impact of compliance costs from local taxes.For decades, scholars and policy-makers have been interested in how fiscal policy influences entrepreneurship. Until now, research has focused on fiscal policy at the federal or regional level and used macro-economic outcome measures. Considerably less attention was given to how municipal governments can influence economic outcomes at the micro level. The present study examines the effect of municipal taxes, spending and tax compliance costs on firm profitability within the Flemish hospitality industry. This is an interesting research setting, since Flemish municipalities have far-ranging fiscal autonomy which has resulted in a proliferation of local taxes, many of which are specific to the hospitality industry. The findings reveal that local taxes have a negative impact on firm profitability, while aggregate public spending has a positive influence. The tax effect is economically relevant and exceeds the public spending impact. Finally, we find no impact of compliance costs from local taxes.

Impact of a Common Corporate Tax Base on the effective tax burden in Belgium

In March 2011, the European Commission launched a proposal for a Common Consolidated Corporate Tax Base (CCCTB). However, a Common Corporate Tax Base (CCTB), leaving consolidation and apportionment out of consideration, appears to be a more realistic proposition for corporate tax harmonization in Europe. Using the European Tax Analyzer (ETA), we simulate the impact of the CCTB on the effective tax burden in Belgium. The results show that the adoption of the CCTB increases the Belgian effective tax burden by 16%. This remarkable increase is mainly driven by the fact that national tax deductions are not allowed under CCTB. This study allows policymakers to gain insight into the size effects of certain corporate tax measures and contributes to the current discussion on corporate tax harmonization in Europe.

An empirical investigation of the influence of municipal fiscal policy on firm growth

Over the last decades, many countries experienced a trend towards fiscal decentralisation, with the result that municipal governments have a largely increased degree of autonomy with respect to their fiscal policy. This shift has not been matched however with a change in the focus of the academic research on the economic effects of public finance, which is still predominantly conducted at the national and regional level. In this paper, we study the impact of municipal government taxation and spending on the growth rate of firms. We explore a panel dataset which combines detailed information from the financial accounts of Flemish municipalities with the financial reports of the firms located in those municipalities. Our analysis of data from close to 70,000 firms in 308 municipalities for the period 2004–2013 indicates that municipal fiscal policy has a statistically significant effect on firm added value growth and employment growth. No statistically significant effect was found on asset growth. Overall, the economic significance of municipal fiscal policy turns out to be small and is, for instance, not able to outweigh the effects of the recent financial crisis.

The impact of financial reporting quality on debt maturity: the case of private firms

We examine whether the debt maturity structure of privately held firms is associated with the quality of their earnings numbers. We argue that earnings numbers that are better able to predict future cash flows lower information asymmetry between privately held firms and their creditors, improving privately held firms’ access to long-term debt. Furthermore, we examine whether the relationship between privately held firms’ earnings quality and their debt maturity differs between small and medium-sized enterprises (SMEs) and larger privately held firms. Using detailed financial statement information from a sample of privately held Belgian firms, we find that earnings quality is positively associated with the likelihood of having long-term debt and with the proportion of long-term debt in total debt. Further, we report evidence that these associations are more pronounced for SMEs than for larger privately held firms, which is consistent with smaller firms entailing more fundamental risk for creditors.We examine whether the debt maturity structure of privately held firms is associated with the quality of their earnings numbers. We argue that earnings numbers that are better able to predict future cash flows lower information asymmetry between privately held firms and their creditors, improving privately held firms’ access to long-term debt. Furthermore, we examine whether the relationship between privately held firms’ earnings quality and their debt maturity differs between small and medium-sized enterprises (SMEs) and larger privately held firms. Using detailed financial statement information from a sample of privately held Belgian firms, we find that earnings quality is positively associated with the likelihood of having long-term debt and with the proportion of long-term debt in total debt. Further, we report evidence that these associations are more pronounced for SMEs than for larger privately held firms, which is consistent with smaller firms entailing more fundamental risk for creditors.