Torbjörn Tagesson

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

What Do Auditors Do? Obviously They Do Not Scrutinise the Accounting and Reporting

Auditors and auditing firms are important actors in the process of institutionalising accounting standards. However, the formal and institutional requirements to de facto ensure professionalism and independence in the Swedish municipal sector have been strongly questioned. The aim of this paper is to investigate and explain how deviations from accounting standards are treated and reported by auditors. The results indicate deficiency in both competence and independence among the auditors. The institutional arrangements in Sweden do not seem to ensure that auditors facilitate and support the implementation of accounting standards.

Procurement of audit services in the municipal sector: the impact of competition

This paper examines the extent to which price is the determining factor in the procurement of audit services. In Sweden, 72% of municipalities chose audit firms with the lowest bid. Both political competition and competition between audit firms were found to affect whether price was the decisive criterion or not.

Compromise and avoidance: The response to new legislation

Purpose– The aim of this paper is to describe, analyze and explain the level of compliance of accounting practices with legislation and generally accepted accounting principles (GAAP) within the Swedish water and sewerage sector.Design/methodology/approach– The empirical data are based on a document study of the annual full cost accounting reports for the financial year 2010. We obtained complete data from 250 of Swedens 290 municipalities. The data are analyzed by statistical methods. The explanations are based on an institutional theory.Findings– Most of the organizations surveyed in this study had taken measures in line with the new regulations, but none of them had adapted fully to the new requirements. Thus, we suggest that the industry has responded to the new regulation by compromise and avoidance. The statistical analyses show that compliance with legislation and GAAP is associated with legal form, minority governance, fee, tax base, population growth and audit firm.Research limitations/implications– This paper provides insight into the factors that explain compliance with accounting regulation. Future research would benefit from researching the decision process when organizations choose to comply or not to comply with specific accounting regulations in the public sector.Originality/value– Few prior studies focus on the actual compliance of accounting practices at the municipal level in relation to accounting regulation and the factors that explain the level of compliance. Knowledge of the factors that explain compliance to accounting regulation will benefit from future policy decisions on regulation and auditing of public sector accounting

The materiality of consolidated financial reporting - an alternative approach to IPSASB

Today, municipalities can make use of different organisational models and legal entities in order to perform their duties and services towards their citizens. Several scholars and standard setters, e.g., IPSASB, argue that the picture of a municipality’s financial position and performance is affected by the definition of the reporting entity and that there is a need for consolidated financial reporting in order to give the whole-of-government picture. Sweden is one of the few countries that actually have introduced consolidated financial reporting. By using data from annual reports, we analyse how consolidated reporting affects the financial picture and the comparability of financial data between different municipalities.

Public Sector Accounting and Auditing in Sweden

Swedish public administration is organized on two levels: national and local. However, the local government sector is divided into two administrative systems: county councils (21) and municipalities (289). Gotland is a hybrid of a county council and a municipality, with responsibilities covering the duties of both. National and local government levels have different regulations and legislation regarding budgeting, accounting and auditing.

To be or not to be – auditors’ ability to signal going concern problems

Purpose – This paper aims to chart Swedish auditors’ likelihood of issuing going concern warnings (GCWs), and to investigate the relationship between formal auditor competence, audit fees and audit firm, respectively, and the likelihood of issuing GCWs. Design/methodology/approach – The empirical data are based on annual reports and audit reports for 2,547 limited companies that went bankrupt in 2010 in the wake of the financial crisis and had filed a financial statement in the year before the bankruptcy. Findings – The findings indicate that Swedish auditors seldom issue GCWs. Moreover, there is a positive relationship between audit fee level and the likelihood of issuing GCWs, and Big 4 auditors being more likely to issue such warnings than other auditors. However, the analyses identify differences between audit firms (within the group of Big 4 firms and within the group of other audit firms) in terms of their predictions of client bankruptcies. This suggests a need for further investigation of firm-spe...

Mechanisms of corporate governance going international : testing its performance effects in the Swedish economy, 2004

Purpose – The purpose of this paper is to investigate how internationalisation of corporate governance mechanisms influences firm performance.Design/methodology/approach – The paper is based on the ...

Why reduce profit? Accounting choice of impairments in Swedish listed corporations

Positive accounting theory and institutional theory are used in conjunction in order to explain accounting choice. The theory is applied on IAS 36 (impairment of assets), and tested on a sample of listed Swedish corporations. We find that the choice is mainly induced by agency and general business factors and to a slighter degree by institutional factors. Especially, we find that institutional influence will be stronger when it is in the interest of important stakeholders; that impairments can be used as a mean of signalling trust to absent owners and that the institutional element of tradition cannot be tested separately from the agency element of opportunism.

Do audit firm and audit costs/fees influence earnings management in Swedish municipalities?

Previous research on the private sector shows that auditors and auditing firms are important actors in ensuring high-quality reporting based on accrual accounting. The aim of this study is to explore whether audit firms and audit costs/fees influence municipalities’ probability of applying earnings management in their annual accounts. The empirical data, which covered the financial years 2011–13, were handpicked from annual reports or retrieved from other sources. In general, our study shows that the probability of earnings management increased if audit costs/fees increased. However, there were differences regarding the probability of earnings management relating to which audit firm was engaged. This implies that audit quality is a factor that affects the probability of earnings management in Swedish municipalities. The study also indicates that different audit firms make different trade-offs between professional versus commercial logics, and that this is reflected in the clients’ propensity to engage in earnings management. Points for practitioners Today a majority of developed countries have adopted accrual-based accounting for municipalities. Along with accrual-based accounting follows the risk of earnings management. Problems regarding accounting quality imply an increased importance of the financial audit. However, our study shows that there is no obvious positive relationship between audit cost/fees and audit quality. The ability to constrain earnings management seems to vary between audit firms. The important implication for practitioners is that auditing must have quality standards that are subject to follow-up and control, which applies both on a system level and also when municipalities procure and contract audit firms for audit assignments.