ACCRUALS ACCOUNTING IN ITALIAN LOCAL GOVERNMENTS:
IS IT WORKING? CAN IT WORK?

Eugenio Anessi-Pessina and Ileana Steccolini

Bocconi University, Milan, Italy

Abstract

Italian Local Governments (LGs) have recently introduced accruals accounting. The purpose of our paper is to analyse the actual implementation of this new system. The paper will be organised into four Sections: (i) a short background on Italian LGs and their accounting system, (ii) the materials and methods used for our research, (iii) our results and (iv) conclusions. Each of these Sections is briefly discussed below.

Background. Italy has four levels of government: the central government, 20 regions, 100 provinces, and more than 8000 municipalities. Each level has jurisdiction over several issues and activities. Provinces and municipalities are often referred to as “local governments”.

The main purpose of Italian local government accounting (LGA) has traditionally been to limit spending. As a consequence, the adopted bases of accounting were obligation and cash. Budgeting was viewed as the only relevant phase of the accounting cycle, while financial reports were virtually neglected. Bookkeeping was based on the single-entry system, which emphasised budgetary compliance.

In 1995, LGA was significantly reformed. One of the reform’s main provisions is the introduction of accruals accounting or, rather, accrual-based reporting. More specifically:

· the traditional cash- and obligation-based system remains in force. Budgeting, accounting and reporting will continue to use such bases of accounting;

· in addition, however, LGs are also expected to publish an accrual-based financial statement composed of a balance sheet and an operating statement. The formats of these statements are similar to those mandated on Italian private companies following the 4th EU Directive;

· interestingly, however, the introduction of double-entry bookkeeping is not mandatory. Alternatively, a LG can derive its balance sheet and operating statement from its cash and obligation-based statements through a complex system of year-end adjustments;

· a specific reconciliation statement must be included in the overall year-end financial report to reconcile the cash- and obligation-based statements with the balance sheet and the operating statement.

Purpose, materials and methods. As mentioned, the purpose of our paper is to analyse the actual implementation of LGs’ new accounting system. More specifically, we will try to assess the reliability of LGs’ accrual-based statements. To this end, we will:

· identify a sample of about 30 LGs and analyse their 1997 or 1998 year-end financial statements. The sample will be drawn from LGs with a population of at least 40.000, because smaller LGs were granted an extension and have not yet produced any accrual-based statements;

· test the correlation between each LG’s monetary surplus / deficit (i.e. the traditional cash and obligation-based “bottom line”) and its profit / loss (i.e. the accrual-based “bottom line”);

· repeat this test for individual revenue and expenditure items - especially the items whose values are more likely to be affected by the chosen basis of accounting (e.g. supplies);

· verify the extent to which accrual-based statements comply with accounting standards;

· analyse the amount of information disclosed in the notes to the financial report and/or the statement of accounting policies (if any: neither is mandatory).

Results. Preliminary results are not encouraging:

· the correlation between accrual-based values and their cash- and obligation-based counterparts is very strong. The likeliest explanation, supported by anecdotal evidence, is as follows. Most LGs view accrual-based reporting as an unnecessary nuisance. As a consequence, they have chosen not to introduce double-entry bookkeeping, to derive their accrual-based statements from traditional ones, and to do so rather crudely.

· accounting standards have often been violated, also because few LG accountants have been trained in and have a working knowledge of accruals accounting.

· the information disclosed in the notes to the financial report and the statement of accounting policies is usually extremely scarce, if any.

Conclusions. Should our preliminary results be confirmed, our conclusions would be as follows:

· the implementation of the new system has so far been very dissatisfactory;

· the situation will probably improve over time, especially if LG accountants receive some training and some more technical guidelines.

nevertheless, two major questions remain. First, will accrual-based reporting ever be taken seriously, especially if it continues to co-exist with traditional cash- and obligation-based reports? Second, is accrual-based reporting necessary, considering that LGs are often very small (92% with populations below 15000) and are currently being encouraged or even forced to spin off their activities to separate government entities, joint-stock corporations with private and public stockholders, or even private firms?