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Financial Accountability & Management, 24(3), August 2008, 0267-4424




Innovations in financial and accounting techniques are a fundamental compo-

nent of the reforms undergone by public administrations over the last decades
under the umbrella term of New Public Management (NPM) (Hood, 1991 and
1995). After a period of enthusiastic adoption of managerial and market-based
principles and techniques by public-sector organisations in Western countries,
however, an international debate on their effectiveness has sprung up among
academics and practitioners (Olson et al., 1998, p. 18; and Lapsley, 1999). The
NPM literature has generally focused on the expected effects of reforms (see Lapsley
and Pallot, 2000, p. 215), but attempts at studying the consequences of such reforms
have often found unintended results and significant gaps between expected and
actual changes (Olson et al., 1998; and ter Bogt and van Helden, 2000).
A cornerstone of the reforms has been the adoption of accruals accounting. In
the literature, the introduction of accruals accounting in the public sector has
been controversial. Supporters have emphasised its ability to better meet user
needs and its consistency with the overall shift from ex-ante constraints to ex-post
accountability. Critics have raised both theoretical and practical objections.
In this regard, it is important to underline that accruals accounting is not
a clearly defined and unequivocal concept. Rather, it is itself an umbrella
term designating a wide range of solutions. In some countries and levels of
government, accruals accounting replaces traditional budgetary accounting,
while elsewhere the latter remains firmly in place. In between, a large variety
of approaches can be found, ranging from the adoption of accruals reporting in
conjunction with cash or commitment-based budgeting, to the use of accruals
data only for management-control purposes, to the introduction of some sort
of accrual-based management accounting for specific classes of inputs (e.g.,
supplies) within an otherwise traditional budgetary-accounting system.
The Italian flavour of accruals accounting for Local Governments (LGs)
would more precisely be labelled as accrual-based reporting, since the budget

The authors are respectively Professor, Universita Cattolica del Sacro Cuore; Assistant
Professor, Bocconi University and Lecturer, SDA Bocconi; and Associate Professor, Bocconi
University and Director, Public Management and Policy Department, SDA Bocconi, Italy.
Address for correspondence: Ileana Steccolini, Bocconi University, Via Bocconi 8, 20136
Milan, Italy.

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Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 321

is still structured according to the commitment basis of accounting, financial

reports are similarly cash- and commitment-based, but they are also expected to
include a balance sheet and an operating statement. Significantly, double-entry
bookkeeping is not mandatory. Alternatively, LGs can derive their balance sheets
and operating statements from their (cash- and commitment-based) budgetary-
accounting statements through a complex system of year-end adjustments.
Within this legal framework, Italian LGs had to choose between two alterna-
tive accounting systems, which will henceforth be referred to as traditional and
integrated. Under the traditional alternative, LGs do not introduce accruals
accounting and simply derive their balance sheets and operating statements from
their cash- and commitment-based budgetary accounting statements at year-end.
Under the integrated system, on the contrary, LGs record their transactions
using both single-entry budgetary accounting and double-entry bookkeeping;
this produces two sets of financial statements (cash- and commitment-based
budgetary accounting statements on the one hand and balance sheet and
operating statement on the other), which are then reconciled through a
reconciliation statement.
The purpose of our paper is to empirically ascertain the factors that have
led some LGs to opt for an integrated system, that is, to introduce accruals
accounting even though the law does not require them to do so and does not
allow them to substitute it for traditional budgetary accounting. To this end,
we conducted a survey of all Italian LGs with a population of at least 40,000.
We thus tackled the issue of accruals accounting in the public sector from a
different angle than is commonly found in the literature. We did not assume
that a governmental accruals accounting reform is just a transition from cash
or commitment accounting to accruals accounting. Rather, we focused on the
transition itself and on the different possibilities, interpretations and difficulties
that arise during transition phases.
The paper is structured as follows. The next section summarises the
international literature on public-sector accounting reforms and provides some
background on the introduction of accruals accounting in the Italian context. The
third section formulates and explains the hypotheses. Section four specifies data
and methods and section five presents the findings. The final section discusses
the results, draws some conclusions and proposes further research avenues.



Since the 1980s, the implementation of various public-sector reform initiatives,

generally grouped under the umbrella term of New Public Management (Hood,
1991 and 1995) and inspired by marketisation and managerialism principles, has
significantly affected public organisations in many countries.

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Innovations in financial and accounting techniques are a fundamental com-
ponent of these reforms, providing the technical lifeblood of NPM (Olson
et al., 1998, p. 18). Their common orientation has been towards the introduction
of accruals accounting, management control, and performance measurement,
with an increasing emphasis on external reporting (Hood, 1995 and Guthrie,
Initially, public-sector reforms were trustily welcomed by academics and
practitioners. Potential benefits were claimed for and promised. While the NPM
literature has generally focused on the expected effects of reforms (see Lapsley
and Pallot, 2000, p. 215), however, attempts at studying their actual consequences
show that reforms can run slowly, do not always produce the expected benefits,
and often originate undesired results. Gaps between intended and actual effects
of the reforms often emerge as the result of both (i) gaps between the formal
design of change and its actual development and (ii) gaps between the expected
and the actual uses of managerial tools (see for example, Olson et al., 1998; and
ter Bogt and van Helden, 2000).
A central feature of public-sector and, specifically, accounting reforms has
been the introduction of accruals accounting. Many countries worldwide have
been experimenting with accruals accounting for all or some tiers of government
(International Federation of Accountants - Public Sector Committee, 1997 and
OECD, 2002): among them New Zealand, Australia, the United Kingdom, Spain,
Sweden, Canada, France, Belgium, Ireland, and Finland. The European Union
and the United Nations have recently chosen to adopt IPSASs. Official discourse
on public-sector reforms praises the benefits deriving from accruals accounting.
In the international literature, the new basis of accounting is claimed to have
a number of advantages (Barrett, 1993; Evans, 1995; Mellor, 1996; Funnel
and Cooper, 1998 and International Federation of Accountants - Public Sector
Committee, 2002, pp. 710). Nevertheless, an increasing body of literature has
criticised the adoption of accruals accounting by public organisations on both
theoretical grounds (Oettle, 1990; Ma and Matthews, 1993; McRae and Aiken,
1994; Guthrie and Johnson, 1994; Carnegie and Wolnizer, 1995; Lewis, 1995;
Montesinos et al., 1995; Stanton and Stanton, 1998; Guthrie, 1998; Monsen
and Nasi, 1998, 1999 and 2000; Christiaens, 1999; Ellwood, 1999; and Monsen,
2002) and practical considerations (Guthrie, 1998; Stanton and Stanton, 1998;
Newberry, 2002; Carlin and Guthrie, 2003; and Hodges and Mellett, 2003).
In principle, an appealing compromise could be for budgetary and accruals
accounting to coexist, letting governments combine the benefits of both worlds.
Thus, some authors have contended that accruals and budgetary accounting
can be usefully integrated, as in the case of enterprise cameralistics (Monsen,
2002) or the Mega General Ledger (Christiaens and Vanhee, 2002), which
can facilitate the production of data for both accounting systems. At the same
time, however, such coexistence may cause confusion in managers, who receive
conflicting signals by the two sets of parallel accounting numbers (Guthrie, 1998)
and usually end up disregarding accruals data (Anthony, 2000).

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Where adopted, the coexistence of budgetary and accruals accounting has

taken different forms for different countries and levels of government. The
Italian version of such coexistence for LGs was introduced by legislative decree
(D.lgs.) 77/95. One of the reforms main provisions was the introduction
of accruals accounting or, better, accrual-based reporting. Traditionally, LG
accounting (LGA) was dominated by a form of budgetary accounting, whose
main purpose was to limit spending. The adopted bases of accounting were
commitment and cash. Budgeting was viewed as the only relevant phase of
the accounting cycle, while year-end financial reports were virtually neglected.
Bookkeeping was based on the single-entry system, which emphasised budgetary
compliance. The 1995 decree introduced the following innovations:

The accounting system remains homogeneous across all the LGs organisa-
tional units and activities. In other words, there is nothing comparable to
the GASBs distinction between the rules for governmental and proprietary
The budget is still structured according to the commitment basis of ac-
counting. It consequently shows the LGs estimated accounts receivable on
the revenues side and its commitment appropriations on the expenditures
Accounting recognises revenues and expenditures according to both the
commitment basis (that is, in terms of establishments of amounts receiv-
able and commitments) and the cash basis (that is, in terms of recoveries
and payments).
Financial reports similarly show actual revenues in terms of both estab-
lishments of amounts receivable and recoveries, and actual expenditures
in terms of both commitments and payments.
In addition, however, financial reports are also expected to include an
accrual-based 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 EUs 4th Directive.
Double-entry bookkeeping is not mandatory. Alternatively, LGs can derive
their balance sheets and operating statements from their budgetary-
accounting statements through a complex system of year-end adjustments.
LGs can thus choose between a traditional and an integrated accounting
system. The former emphasises budgetary accounting and relies on year-
end adjustments to produce a balance sheet and an operating statement.
The latter records transactions according to both budgetary and accruals
accounting rules and has consequently no need to translate cash and
commitment-based data into accruals at year-end.

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A specific reconciliation statement must be included in the overall year-end
financial report to reconcile the budgetary-accounting statement (showing
establishments of amounts receivable and recoveries, commitments and
payments) with the balance sheet and the operating statement.
Accounting standards for both budgetary and accruals accounting have
only recently started to be developed. D.lgs. 77/95 did provide some
guidance, but only in very general terms, especially with respect to accruals
accounting. LGs have consequently been free to draw from other sets
of standards (e.g., IFRSs, IPSASs, Italian national standards for private
firms), if any.
Audit committees must now include professional auditors. Nevertheless,
auditing has remained weak and often unable to significantly affect
budgeting, accounting and reporting practices, as recently emphasised by
the National Court of Auditors (Corte dei Conti, 2004) and acknowledged
by the association of LG auditors itself on its website (see http://ancrel.

Empirical research on the implementation and the effects of the new legis-
lation is still scant, as the debate has mostly swung between purely theoretical
considerations and anecdotal evidence. According to this research (Caperchione,
2003; Steccolini, 2004; Caccia and Steccolini, 2005; Nasi and Steccolini, 2008; and
Anessi-Pessina and Steccolini, 2007), however, significant variations exist across
LGs in terms of implementation choices and effects.1


In developing the hypotheses, we drew from both rational and institutional

theories. Rational arguments have been widely used to explain organisational
innovations (for instance, Budros, 1999; and Palmer and Dunford, 2001). Under
these approaches, the use of organisational practices is assumed to stem from a
rational assessment of their benefits to the organisation, primarily in terms of
efficiency and effectiveness.
Among rational/technical/economic arguments, contingency theory
(Lawrence and Lorsch, 1967; Thompson, 1967; and Perrow, 1967) is the
most commonly used to explain the features of the accounting system(s) to be
adopted by an organisation. Its underlying assumption is that the performance
of an organisation depends on the consistency of its structures and systems with
internal and external factors and circumstances. Thus, there is no universally
appropriate accounting and reporting system that is equally applicable to
all organisations under all circumstances (Gordon and Miller, 1976; Hayes,
1977; Waterhouse and Tiessen, 1978; and Emmanuel et al., 1990). Rather,

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organisations will adopt new accounting technologies to seek a better fit

between their administrative systems and contingent factors. The actual design
of the system will thus depend on the organisations ability to recognise and
adapt to changes in external and internal factors (Haldma and Laats, 2002).
Accounting practices, forms and contents are then contingent on both internal
and external constraints, such as organisational size, environmental uncertainty,
and technology (Thomas, 1991; and Chenhall, 1994).
The main limitation of rational arguments is that they tend to ignore the
impact of social forces on the choice of organisational innovations (Palmer and
Dunford, 2001), especially when the actual impact on performance is mixed
(ONeill et al., 1998).
At the other end of the spectrum, institutional arguments emphasise the
importance of social, political, and institutional factors in shaping organisational
forms and processes (see, for example, Abrahamson, 1991; Abrahamson and
Rosenkopf, 1993; and Palmer and Dunford, 2001).
According to the neoinstitutional theory (Powell and Di Maggio, 1991), in
particular, the introduction of structural changes is the result of processes
designed to make organisations more similar, without necessarily making them
more efficient. Competitive isomorphism which involves the adoption of
practices based on a rational assessment of their contribution to efficiency and
effectiveness is thus contrasted with three forms of institutional isomorphism:
(1) coercive isomorphism, which occurs through requirements imposed by laws,
government regulations etc.; (2) mimetic isomorphism, which involves the
adoption of practices used by (supposedly) successful organisations, and is
likely to occur in contexts of ambiguity and uncertainty; and (3) normative
isomorphism, which stems from shared values and ideas about appropriate
behaviour, often circulated through professional networks and education.
Similarly, the legitimacy (Deegan et al., 2002) and the resource dependence
(Dowling and Pfeffer, 1975) literatures argue that organisations are continually
seeking to ensure that they operate within the bounds and norms of society
(Blomquist and Deegan, 2000). They see legitimacy as a resource on which
organisations depend for survival and suggest that managers will seek to ensure
the continued supply of such resource. Choices of accounting and reporting
systems may thus be part of strategies to gain, maintain, or repair legitimacy
(Lindblom, 1994; Suchman, 1995; and ODonovan, 2002). According to legitimacy
literature, some of the factors affecting accounting choices are size and visibility,
political and social issues, organisational performance, and internal processes
(Edwards, 1998; and Adams, 2002).
The reference to rational and institutional theories resulted in the following
hypotheses. In particular, hypotheses 4 and 7 stem mainly from rational
approaches. Hypotheses 2, 3 and 5, on the other hand, are more consistent
with the institutional literature. Finally, hypotheses 1 and 6 draw from both

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H 1 : (Size): Larger LGs are more likely to adopt accruals accounting.
Organisational size has been found to facilitate innovation (see Brudney and
Selden, 1995), although the literature presents positive associations as well as
evidence of no association. Size, however, may be viewed as reflecting different
determinants such as organisational complexity or visibility.
With specific respect to accounting and measurement systems, size as
organisational complexity refers to the governments information-processing
environment, i.e., to the magnitude and scope of information which must be
handled by the organisation in its ongoing activities. As organisations become
larger, they need to handle and provide greater quantities of information, which
leads to more detailed control tools (Khandwalla, 1972; Child and Mansfield,
1972; Burns and Waterhouse, 1975; Merchant, 1981; Anderson and Lanen, 1999;
and Haldma and Laats, 2002). From a contingency perspective, therefore, size
as organisational complexity may be expected to increase a LGs likelihood to
adopt accruals accounting.
Size, on the other hand, may also reflect visibility. From an institutional per-
spective, the higher an organisations visibility, the greater its attention towards
the adoption of administrative techniques which are considered desirable and
innovative. Once again, then, size can be expected to favour the introduction of
accruals accounting.
H 2 : (Geographic location): A LGs geographic location influences its likelihood
to adopt accruals accounting.
Geographic location is a proxy for the cultural, social, political, and economic
configuration of community environment and, in turn, affects public policies and
innovation decisions. Norris and Moon (2005) highlight that regional location
and urban/rural status have often been found to be associated with innovation
adoption. Bingham (1978) recalls that the socio-economic characteristics of the
communities have been studied by many economists and political scientists as
factors affecting decision making and city policies.
In Italy, significant regional differences exist across a wide range of features,
including the communities ability to react to stimuli. The country is convention-
ally divided into cultural and political areas, where people are more likely to
express certain political preferences and attitudes, mostly as a result of historical,
cultural, and socio-economic background. More specifically, from a political
viewpoint, four areas are usually identified: the white, catholic and politically
right-of-centre regions, to be found mainly in the North-East; the red, politically
left-of-centre areas, to be found mainly in the North-West and especially in the
Centre; and the Southern regions, traditionally more conservative and right-wing
(Colloca, 2003). Existing research shows that, in general, the Northern part of
Italy is more keen on innovation than the rest of the country (Putnam et al.,

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H 3 : (Social capital): As the level of social capital in the community increases,

LGs are more likely to adopt accruals accounting.
Social capital refers to the institutions, relationships, attitudes and values
governing the interactions within a community and contributing to the commu-
nitys economic and social development (Iyer et al., 2005). It depends upon social
and economic determinants as well as some demographic characteristics of the
community. Social and demographic factors include racial and religious hetero-
geneity, levels of education, levels of immigration, and household composition.
Economic determinants include unemployment, poverty rates, and income levels
(Putnam 2000; Norris and Moon 2005; and Alexander 2007). Many studies have
focused on the effects of social capital, sometimes questioning the assumption
that it is always beneficial and a stimulus for economic activities and democracy
(Putnam, 2000). Towards innovation, in general and with specific respect to
accounting, social capital may be expected to prove beneficial in two ways: by
demanding innovations and by supporting the development and implementation
of such innovations.
H 4 : (Access to external financial resources): Access to external financial resources
will increase LGs likelihood to adopt accruals accounting.
In the literature, accruals accounting is generally recognized to provide
better information than budgetary accounting (see 2). Among accrual-based
statements, moreover, those that stem natively from accrual-based transaction
analysis can reasonably be expected to be more reliable than those derived
from budgetary accounting through a complex system of year-end adjustments.
This is also confirmed by the perceptions of the respondents to the survey,
who declare that accruals accounting ensures higher accuracy in displaying
information in the financial statements and agree on the poor quality of financial
statements derived from traditional budgetary accounting. If, as suggested by
Stalebrink and Sacco (2003), access to capital markets depends on the quality of
accounting information, the need or desire to access such markets will increase
LGs likelihood to adopt accruals accounting.
H 5 : (Preparers perceptions). LGs whose CFOs are more convinced about the
usefulness of accruals accounting are more likely to adopt it.
The perception, by key individuals, of particular needs and potential advan-
tages is often identified as an important determinant of innovation adoption
(Nedovic-Budic and Godschalk, 1996; and Heintze and Bretschneider, 2000),
although per se insufficient to ensure the innovations actual implementation and
diffusion (Kanter, Stein et al., 1992).
With respect to the successful adoption of accruals accounting in the
public sector, the OECD (2002) emphasises the need for a culture change in
government, a closer link with wider public management reforms and, thus, a
strong support from policy makers and senior officials.

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Among senior officials, those whose commitment seems particularly important
for accounting innovation are CFOs. This is also because Italian LGs can
be viewed as silo organisations (Rebora, 1983), where individual departments
develop their own culture, goals, functions and working methods, and where
each department head (including CFOs) has his own professionalism, decides
for his own group, and defends his turf from other departments interferences.
CFOs embody the professionalism of public-sector accountants. Their com-
petencies and skills have generally been focused on (when not strictly limited
to) the traditional system of budgetary accounting. However, the public-sector
accounting profession has increasingly been subjected to calls for innovations
through the adoption of accruals accounting and managerial control systems.
To some extent, it has itself relayed such calls to its own members. CFOs may
thus want to conform to the institutional pressures coming from their profession,
showing that they adopt innovative and desirable accounting tools.
H 6 : (Slack). The presence of slack resources may affect the adoption of
accruals accounting by LGs, although the relationship cannot be signed
a priori.
Rosner (1968) views slack resources as the capacity of an organisation to
afford the purchase of costly innovations, to absorb failures, and to explore new
ideas in advance of actual needs. Slack resources thus provide the opportunity
for innovation (Rosner, 1968; and Damanpour, 1991): organisations that have
more resources than they minimally require to maintain operations are in a
better position to adopt innovations. This applies to both technological and
administrative innovations, although more strongly to the former, for the greater
initial investments they usually require (Damanpour, 1991, p. 680).
Motive, on the other hand, leaves more room for doubt. Better performing
organisations may have more incentives to produce complete and accurate
financial statements, while laggards may prefer to limit disclosure or to
selectively focus disclosure on peripheral elements in order to divert stakeholder
attention. In some cases, however, it is unsatisfactory performance that prompts
an improvement in the information provided, due to the need to justify the poor
results. Moreover, the presence of slack may improve a governments legitimacy
under some circumstances, but damage it under others; the introduction of an
accounting system that can better disclose these extra means may thus end up
being alternatively encouraged or discouraged.
Based on these considerations, the presence of slack may reasonably affect
LGs likelihood to introduce accruals accounting, but its effect cannot be signed
a priori.
H 7 : (Activities performed). LGs that focus on inherently governmental activities
are less likely to adopt accruals accounting.
Technology, including the nature of the production process, its degree of
routine and the variety of its tasks, has been said to influence accounting

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information (Emmanuel et al., 1990; and Haldma and Laats, 2002). In this
regard, the public sector carries out three main types of activities, which
require largely different competencies, task organisation, and routines (Anessi-
Pessina, 2002; and Borgonovi, 2004): (a) regulation; (b) income redistribution;
and (c) direct provision of goods and services. Budgetary accounting is more
consistent with the first two types of activities, which can be viewed as inherently
governmental. The comparative benefits of accruals accounting, on the contrary,
emerge when governments engage in complex economic activities aimed at the
direct provision of goods and services, where cash inflows and outflows no longer
provide an acceptable approximation for revenues and expenses (Anessi-Pessina,
2002). In Italian LGs, where the accounting system may not be differentiated
across types of activities or organisational units, the incentives to adopt accruals
accounting can thus be expected to be comparatively weaker for governments
that focus on inherently governmental activities.


To test the hypotheses, we conducted a survey of all LGs with populations above
40,000 (184 Municipalities and 103 Provinces as of January 1, 2004, for a total
of 287 LGs). The exclusion of smaller LGs has two main motivations. On the
one hand, large LGs have had a longer experience with the accounting reform,
since they were required to implement it in 1997 (for LGs with populations
above 100,000) or 1998 (for LGs with populations of at least 40,000). On the
other hand, small LGs are less likely to have the resources (human, financial
and organisational capital) to fully take advantage of the reforms, also because
their processes, activities, and volumes of transactions do not justify complex
The survey was conducted through phone interviews to Chief Financial
Officers (CFOs). Phone interviews were preferred to personal interviews due
to the large number and wide geographical dispersion of the interviewees.
They were also preferred to mail surveys because the latter seldom achieve
adequate response rates: LGs CFOs are continuously asked to fill out forms and
questionnaires for official purposes and are thus reluctant to respond to academic
surveys. To reduce potential bias, the interviews were based on a structured
questionnaire designed by the researchers.
The questionnaire was divided into three sections that were respectively aimed
at: (i) discovering the current configuration of the LGs accounting system
(traditional vs. integrated); (ii) investigating the CFOs perceptions and beliefs
about the current accounting system, the system that would in principle be
most desirable, the strengths and weaknesses of accruals accounting; and (iii)
identifying who within the LGs had chosen the current configuration of the
accounting system, and why.
The final return rate was 82%, although some interviews failed to collect the
entire information set. Further data on LGs organisational and environmental

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features were drawn from a variety of public data bases, details of which are
provided below. Table 1 summarises the model for this study.
The hypotheses were tested using logistic regressions. The dependent variable
(CONFIG) was defined as a dummy for whether the LG adopted a traditional
or an integrated accounting system. The relevant information was drawn from
the survey.
To test hypothesis 1, size was considered as both an organisational factor
reflecting complexity and an environmental factor reflecting visibility. In
organisational terms, it was measured by the LGs number of employees
(EMPLOYEES) as reported in the survey. In environmental terms, it was defined
as the LGs population (POPULATION), as reported in the 2001 census of the
National Statistical Institute (ISTAT). The expected sign was positive for both
For hypothesis 2, Italy was divided into the four areas identified by ISTAT
(North-West, North-East, Centre and South), producing three dummy variables
(NE, CTR, STH). The expected sign was negative at least for variable STH.
For hypothesis 3, the amount of social capital was measured by a dummy
variable (UNI) for the presence of universities in the LGs territory. This is
an admittedly gross proxy, but the economic and social determinants that
are commonly discussed in the literature are not adequately measured in the
Italian context, at least at such a detailed level as individual municipalities and
provinces. The expected sign was positive.
For hypothesis 4, access to capital markets was measured by two dummy
variables: one (RATING) for whether the LG has been rated by at least one
major rating agency (Moodys, S&P, Fitch), as reported in the agencies websites;
the other (BONDS) for whether the LG has issued bonds, as reported by the
Department of the Interior. The expected sign was positive for both variables.
For hypothesis 5, CFOs perceptions were summarised by the answer to one
of the surveys questions, i.e., what accounting system they would prescribe if
they could affect legislation. More specifically, the dummy variable MYCONFIG
was set to one if the responding CFO supported the replacement of budgetary
accounting with accruals accounting. The expected sign was positive.
Hypothesis 6 was tested using the LGs 2004 per-capita cumulated surpluses
(CUMSURPLUS), as measured by traditional budgetary accounting (risultato di
amministrazione) and reported by the Department of the Interior. The variable
could not be signed a priori.
For hypothesis 7, the relative weight of non-inherently governmental activities
performed by each LG (e.g., water provision, waste disposal, pharmacies) was
measured by the percentage of personnel expenditures devoted to such activities
in 2003 (PCTNIG), as computed from the budgetary-accounting statements
collected by the Department of the Interior. The expected sign was again positive.
Finally, a control dummy (GOVTYPE) was introduced to distinguish between
the two types of LGs: provinces (0) and municipalities (1). Italian Provinces are
intermediate level local authorities whose main functions relate to regulation

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Table 1
Model of the Study

HP Variable References Measure Source of Data Expected Sign

DEPENDENT VARIABLE: Dummy for budgetary v. Survey
Current configuration of integrated (CONFIG)
the accounting system
1 Size Adams (2002) Complexity: Number of Survey Positive
Brudney and Selden (1995) employees (EMPLOYEES)
Burns and Waterhouse (1975)
Child and Mansfield (1972) Visibility: population National Statistical Positive
Damanpour (1996) (POPULATION) Institute (ISTAT), 2001
Khandwalla (1972) Census
2 Geographical area Norris and Moon (2005) Dummies for four areas: National Statistical Negative
North-West (baseline); Institute (ISTAT), 2001 for STH
North-East (NE); Center Census

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(CTR); South (STH)

3 Social capital Alexander (2007) Dummy for presence of Survey Positive

Norris and Moon (2005) Universities (UNI)

Putnam (2000)

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4 Access to capital markets Stalebrink and Sacco (2003) Dummy for rating Rating agencies: Moodys; Positive
(RATING) S&P; Fitch
Dummy for bond issues Department of the Positive
(BONDS) Interior
5 CFOs perceptions Damanpour (1996) Dummy for preferred Survey Positive
accounting system

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6 Slack resources Damanpour (1991) 2004 per-capita cumulated Department of the ?
Rosner (1968) surpluses (CUMSURPLUS) Interior
7 Types of activity Anessi Pessina (2002) Percentage of 2003 Department of the Positive
personnel expenditures Interior
devoted to non-inherently
governmental activities
CONTROL VARIABLE: Norris and Moon (2005) Dummy for municipality v.
Type of LG province (GOVTYPE)

of economic activities (including agriculture, hunting, and fishing), highways

and transport infrastructures, protection of the environment, and education and
cultural activities. They do not generally provide direct services to constituents.
Instead, they receive and re-address financial resources to local authorities
and other representative institutions. Municipalities are the lowest tier of
government and thus the one that is closest to the citizens. They provide local
(public) services in the fields of social care and assistance, local transport, urban
planning and security, waste disposal. They also perform the administrative tasks
connected to civil rights and commercial activities.
Alternatively, logistic regressions were also run separately for the two types
of government.


From a descriptive viewpoint, 55% of the responding LGs have introduced an

integrated system of budgetary and accruals accounting, with higher rates:

for provinces (64%) compared to municipalities (50%),

for mid-sized LGs (65%) compared to LGs with populations above 250,000
(59%) or below 100,000 (48%),
in the North-East (66%) than in the Centre (60%), the North-West (57%),
and especially the South (43%).

The survey also gave some insights on the role of CFOs in the introduction
and implementation of accruals accounting. In the majority of responding LGs
(80.63%), the current configuration of the accounting system was chosen by the
CFOs themselves, whereas in the remaining LGs this was a political decision.
Responding CFOs were also asked to mention the main forces affecting the
choice of accounting system. Organisational, human, and financial constraints
were mentioned by about 42% of the CFOs, compliance with law by about 36%.
The remainder underlined the relevance of technical issues.
In LGs with traditional accounting systems, CFOs generally argue that
accrual-based financial statements are not very useful because (i) decisions still
rely on the cash- and commitment-based system, which is used to appropriate
resources and constrain expenditures; (ii) accrual-based financial statements
derived from cash- and commitment-based data produce information with
limited accuracy and reliability; and (iii) public managers are not familiar with
accruals accounting techniques and perceive their implementation in LGs as a
merely formal requirement. In LGs with integrated systems, on the contrary,
CFOs usually point out that accruals-based statements provide them with a
better sense of the value of their assets and resources. Consistent with the
international literature (Bromwich and Lapsley, 1997; Anthony, 2000; and
Paulsson, 2006), most of them emphasise the importance of accruals accounting

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for internal, management control purposes as opposed to external accountability.
At the same time, many underline that concepts such as returns, profits and
losses do not belong to the LGs realm, that public organisations missions and
objectives are radically different from private companies, and that accruals
accounting cannot therefore be acritically transferred from the private to the
public sector.
From an explanatory viewpoint (see Table 2), hypotheses 2 (Geographic location)
and 5 (Preparers perceptions) were supported at the 10% and 5% significance
levels, respectively. For the remaining hypotheses, all variables are statistically
insignificant. These results were obtained after removing the three worst-
fit, most influential outliers and have proven robust to variations in the
model specification, including the use of separate regressions for provinces and
In the interpretation of results, a fruitful starting point may be to remember
that hypotheses 2 and 5 stem mainly from the institutional literature. This is
consistent with the importance attributed to coercive isomorphism (compliance
with the law) in the descriptive analysis. Rational/structural elements such
as complexity, types of activities performed, presence of surpluses, and access
to capital markets, on the contrary, are seemingly unhelpful in explaining
why a LG decides to introduce accruals accounting. What counts are the
perceptions of CFOs (whose key role in the choice of the accounting system
was confirmed by the descriptive analysis) and the North-South divide. Further
investigation is obviously in order, also because the model leaves a large amount

Table 2
Logistic Regression

Logistic regression Number of obs = 168

LR chi2 (12) = 31.63
Prob > chi2 = 0.0016
Log likelihood = 100.44455 Pseudo R2 = 0.1360

CONFIG Odds Ratio Std. Err. z P>z [95% Conf. Interval]

POPULATION 0.9999985 1.04e06 1.49 0.137 0.9999964
EMPLOYEES 1.0000250 0.0001585 0.16 0.873 0.9997148 1.000336
NE 1.0374000 0.5586603 0.07 0.946 0.3610415 2.980815
CTR 0.6962431 0.3557033 0.71 0.479 0.2557943 1.895094
STH 0.4466466 0.2159976 1.67 0.096 0.1731108 1.152402
UNI 1.1703910 0.4436631 0.42 0.678 0.5567545 2.460357
RATING 1.6378140 0.8108050 1.00 0.319 0.6206895 4.321700
BONDS 0.6974704 0.2686693 0.94 0.350 0.3278222 1.483929
MYCONFIG 1.8813320 0.4956335 2.40 0.016 1.1225810 3.152920
CUMSURPLUS 0.9946894 0.0033779 1.57 0.117 0.9880909 1.001332
GOVTYPE 0.2684728 0.1972072 1.79 0.073 0.0636280 1.132797
PCTNIG 2.1940530 3.8883910 0.44 0.658 0.0680320 70.758930

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of variation unexplained (pseudo-Rsq = 13.6%). One may wonder, however, if

the introduction of accruals accounting is the result of internal perceptions and
external influences more than a solution to actual needs.
If this is the case, then the correct sign and the statistical significance of
CFOs perceptions (MYCONFIG) may simply show that accruals accounting is
introduced where it becomes the CFOs pet project, independent of the LGs
actual needs. Conversely, it may confirm that the slow and partial adoption
of accruals accounting by Italian LGs is largely explained by the resistance of
CFOs, for reasons of skills (CFOs are much more familiar with traditional
budgetary accounting than with accruals accounting) and power (budgetary
accountings traditional purpose of constraining expenditures is an important
source of influence for CFOs).
As to geographic location, the negative sign and statistical significance of
the geographical dummy for South (STH) confirms the findings of many other
studies, i.e., that Southern public organisations are less likely to introduce
managerial innovations than their Northern counterparts. More interesting is
the lack of statistical significance of the geographical dummy for Centre (CTR):
the north-south divide apparently runs south of Rome, at least with respect to
accruals accounting.
The apparently absent effect of exposure to capital markets (RATING and
BONDS are both insignificant) also deserves some consideration. Why should
lenders be totally unaffected by the presence of accruals accounting? Probably
because the accrual-based statements published by Italian LGs are generally
known for their limited reliability (Anessi-Pessina and Steccolini, 2005 and
2007) and are consequently discarded by potential users as irrelevant if not
misleading. This fuels a vicious circle: external users rely mainly on traditional
budgetary accounting statements, supplemented if necessary by special purpose
statements; LG accountants focus on traditional statements; accruals accounting
is viewed as yet another bureaucratic nuisance; accrual-based statements are
prepared with very little care and become unreliable; external users ignore such
statements even more. A more sophisticated explanation for the insignificance
of BONDS and RATING could emphasise that financial analysts often trust
cash flows more than accruals. The format and content of cash-based LG
statements, however, is far too distant from private-sector cash flow statements
to support such inference. A more convincing argument is that, for subnational
governments, liquidity and solvency have two key determinants that are not
disclosed in the balance sheet: the governments taxing authority and the
likelihood of a bail-out from an upper tier of government. Besides reliability,
this calls into question the relevance of current accruals accounting frameworks
for the public sector. Perhaps, even when reliable, existing accruals-based reports
do not sufficiently capture the financial position and performance of public sector
Finally, the role of slack resources is worth mentioning, as the results of
the explanatory analysis (CUMSURPLUS is not statistically significant) are

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difficult to reconcile with the descriptive analysis (many CFOs cite human
and financial resource constraints as hindering accounting innovation). This
apparent inconsistency may have different explanations. One is that the proxy
for slack resources may be unsatisfactory. Another is that CFOs may be trying
to find ex-post, rational justifications for their behaviours, feeling that they will
be more acceptable than institutional ones.


The introduction of accruals accounting in Italian LGs has been mandated in a

way that permits, and in fact encourages, a merely formal compliance. LGs are
expected to produce a balance sheet and an operating statement, but are free
to do so without introducing double-entry bookkeping, by simply translating
cash and commitment data into accrual-based data at year-end. Moreover,
should they introduce a proper accruals-accounting system, they would not be
allowed to abandon traditional budgetary accounting. Why, then, should they
Apparently, many of them do bother. According to our survey, 55% of Italian
LGs with populations of at least 40,000 have integrated traditional budgetary
accounting with accruals accounting. But why?
In the literature, accruals accounting is often recognised to be better than
traditional budgetary accounting (for a discussion, see Anessi-Pessina and
Steccolini, 2007) at providing relevant information to external and internal
users. It could consequently be expected to be more widespread where LGs have
more resources (size, cumulated surpluses), are subject to stronger disciplining
forces (capital markets), or perform activities that amplify the information
benefits of accrual accounting. Our findings, however, do not support this
expectation. Rather, they show that the adoption of an integrated system of
accruals and budgetary accounting is influenced by such cultural variables as
CFO perceptions and geographic location.
One possible interpretation of these findings is that accruals accounting is not
really worthwhile. This conclusion, however, would contradict a huge amount
of literature and should consequently be based on a much wider and more
detailed set of empirical evidence. There are, however, at least two alternative
explanations to put forth.
The first explanation is that Italian LGs may not yet be sufficiently
autonomous and accountable to appreciate the full benefits of better information
for internal and external purposes. At this stage, there is no real need or incentive
for Italian LGs to use accruals-based information for decision making, for raising
money, or for increasing consensus among the electorate. Among external users,
in particular, the central government is the most prominent, but it notoriously
relies only on budgetary accounting data.
The second explanation is that, as emphasised in the introduction, accruals
accounting is itself an umbrella term and its usefulness thus depends on its

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specific features. For Italian LGs, the reliability and relevance of accruals
accounting statements is seemingly jeopardised by at least two major design
faults: the coexistence with traditional budgetary accounting, on the one hand;
and the only marginal and superficial adjustments from private-sector standards,
on the other.
If rational explanations for the adoption of accounting innovations do not
hold, the importance of institutional and cultural variables when introducing
public sector reforms is further confirmed. In our study, particularly important
was the role of CFOs, who seem to exert a fundamental influence on the design
of LGs accounting systems. When explaining their choices, responding CFOs
often underlined the need to comply with legal requirements. Interestingly, this
was particularly true for LGs that had maintained a traditional system, but only
slightly rarer among those that had chosen an integrated system. Thus, it is likely
that in some cases (where the traditional system was maintained), the reforms
were seen as a formal requirement and the traditional system as the simplest
way to comply with the new legislation without significantly affecting the LGs
culture and structure. In other cases, however, the law was seized as an excuse
to justify a more profound change and, for CFOs, to follow the prescriptions of
their professional networks.
In terms of policy implications, the most immediate is that CFOs and their
networks can significantly affect the successful implementation of accounting
reforms and must consequently be involved in policy formulation and reassured
about their potential role under the new system of accounting. CFOs must also
be encouraged to focus not only on the best technical design of the accounting
system, but also on its organisational impacts and its consistency with user needs
and accountability requirements. Another implication is that change cannot
be achieved by introducing innovative legislation only: other variables must be
taken into account, including the competencies, abilities, perceptions and overall
willingness to change of managers and politicians.
In terms of future research, several avenues can be mentioned. First, the
determinants of accounting innovation should be further investigated by looking
at other sets of variables, such as LG political orientation and stability on the one
hand, human factors (see, for instance, Nedovic et al., 1996) on the other. Second,
the relationship between accounting innovation and LG autonomy/accountability
could be fruitfully analysed using international comparisons. Third, it could
be interesting to investigate the relationship between the general attitude
towards organisational innovation and the specific attitude towards accounting
innovation. Fourth, the static and predominantly external perspective adopted in
this paper could be complemented by a dynamic, processual approach that also
pays due attention to internal variables: cases and longitudinal analyses which
study the evolutionary path of accounting changes over time and the unfolding
and interaction of internal and external variables could significantly enrich our

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1 LGs are likely to have only partially succeeded in conducting the reform. Under the integrated-
system label, in other words, different approaches and speeds of implementation can be found.
However, the focus of this paper is not on the degree and direction of implementation, but
rather on the determinants of the choice of whether to adopt an integrated system of accrual.

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