An Empirical Investigation of Greek Municipalities Quality of Financial

Reporting
Sandra Coen
!
and "ikolaos #aimenakis
$
Correspondence address
Sandra Cohen
Lecturer of Accounting
Athens University of Economics and Business
76, Patission St.
Athens !"#$"
%reece
&e'( )$!*+!*,+!$6,,
-a.( )$!*+!*,+!$6"
E#mai'( scohen/aue0.gr

S. Cohen is a Lecturer of Accounting in the 1epartment of Accounting and -inance in

Athens University of Economics and Business
+
2. 3aimena4is is a Ph1 student in the 1epartment of Accounting and -inance in Athens
University of Economics and Business

Electronic copy available at: http://ssrn.com/abstract=1098868

An Empirical Investigation of Greek Municipalities Quality of Financial
Reporting
A%stract
Loca' governments on the municipa' 'eve' 5ere among the first organi6ations to
ta4e part in the accounting reform in %reece that sought the transformation of the
traditiona' 0udgetary cash accounting system to a ne5 system that com0ines cash
and accrua' accounting information. 7n this paper 5e e.amine the 'eve' of
information 8ua'ity o0tained 0y the end#of#the#year accrua' financia' statements of
%ree4 municipa'ities in terms of accounting princip'es comp'iance measured 0y
three a'ternative comp'iance indices. 7n addition to that, 5e investigate the ro'e of
e.terna' auditors in terms of the informationa' 8ua'ity of the financia' reports.
9oreover, 0ased on previous studies 5e investigate the effect of certain factors on
the three a'ternative comp'iance indices. :ur resu'ts indicate that there is p'enty of
room for improvement in re'ation to the 8ua'ity of the information content of
municipa'ities; financia' reports. A 0etter presentation of the magnitude of
deviations from accounting standards in auditor reports cou'd serve to5ards this
direction. Additiona''y, varia0'es that re'ate to the auditor si6e as 5e'' as to the
municipa'ity si6e, 5ea'th and e.perience in accrua' accounting 5ere found to
e.hi0it an inf'uentia' ro'e on the 'eve' of comprehensiveness of the accounting
information provided to sta4eho'ders through end#of#the#year financia' statements.
#ey&ords' accrua' accounting, comp'iance indices, audit reports, 8ua'ity of
financia' reporting, municipa'ities, %reece.
+
Electronic copy available at: http://ssrn.com/abstract=1098868
An Empirical Investigation of Greek Municipalities Quality of Financial
Reporting
Introduction
&he continuum of pro0'ems faced 0y many governments 5or'd5ide such as the
s8uander, the misa''ocation and the em0e66'ement of funds, the provision of
services to ta.payers that do not represent va'ue for money and so on, has 'ed to a
pu0'ic demand for radica' changes to5ards the improvement of pu0'ic sector
activities. 9ore specifica''y, pressure has 0eing app'ied to governments to 0ecome
more effective, efficient and accounta0'e for the use of pu0'ic'y generated funds
<=o8ue and 9o'', +!!>. &he ans5er to these pro0'ems came through the private
sector despite its fundamenta' differences in re'ation to its pu0'ic counterpart in
terms of the nature of its activities and the goa's it pursues <Carnegie and ?est,
+!!$>. &he techni8ues and management systems that have 0een deve'oped 5ithin
the private sector are perceived to 0e a0'e to enhance 8ua'ity, profita0i'ity and
accounta0i'ity even 5hen app'ied to the pu0'ic sector. &he transfer of these
techni8ues from the private sector rea'm to the pu0'ic one has 0een 4no5n as the
2e5 Pu0'ic 9anagement <hereafter 2P9> the uti'ity and resu'ts of 5hich are sti''
under de0ate in the re'evant 'iterature <see for e.amp'e on the topic of accounting
reforms in the 2P9 conte.t( Laps'ey, @@@A Caccia and Stecco'ini, +!!$A Car'in,
+!!B>.
Among the most important changes 2P9 0rought to pu0'ic sector organi6ations
5as the transformation of the traditiona' 0udgetary cash accounting systems to
systems that support accrua's. &his change 5as deemed necessary 0ecause of the
4ey ro'e accounting information p'ays in decision ma4ing <Pettersen, +!!>A
providing decision ma4ers 5ith more re'evant and of higher 8ua'ity accounting
information can u'timate'y enhance the appropriation of ta.payers; funds. &his
$
rationa'e 5as 0ased on the assumption that cash accounting e.c'usive'y trac4s cash
revenues and e.penditures that occur 5ithin the fisca' period, 5hereas accrua'
accounting has the advantage of focusing on resource f'o5s according to the period
in 5hich they are generated or consumed 5hich in turn a''o5s for a 0etter
understanding of the cost of services provided <%uthrie, @@,>. 7t is contended that
5ithout accrua' accounting a vast array of important information 5hich can 0e
used to improve decision ma4ing is 'ost <%uthrie, @@,>. 7n addition to that, reports
generated on the 0asis of accrua' accounting improve disc'osure to sta4eho'ders in
re'ation to the financia' condition of pu0'ic sector organi6ations and therefore
improve accounta0i'ity. &his, according to Chan <+!!$>, can potentia''y 'ead to
de0ates on intergenerationa' e8uity that is the e.tent to 5hich decision ma4ers
serve the needs of the current generation 5ithout adding financia' 0urdens to future
ta.payers. 9oreover, as =ood <@@B> notes, there is a conception among 2P9
supporters that the private 0usiness accounting methods a''o5 for the c'ose costing
and eva'uation of the activities of pu0'ic sector servants and professiona's.
=o5ever, many researchers have cha''enged these assumptions. &his is main'y
0ecause of the uni8ue nature of pu0'ic sector organi6ations and activities 5here the
goa' is the improvement of ta.payers; 8ua'ity of 'ife and not the profit as in the
private sector firms <see for e.amp'e Ai4en and Capitanio, @@BA %uthrie, @@,A
Carnegie and ?est, +!!$A Car'in, +!!B>. A'so, other scho'ars have argued on the
'ac4 of a so'id theoretica' 0asis for the perceived superiority of accrua' accounting
figures <%uthrie, @@,>. 2everthe'ess, despite the considera0'e criticism, accrua's
appear to 0e on their 5ay of 0ecoming the ne5 0asis of depiction of pu0'ic sector
entities financia' position and performance.
7n 'ine 5ith the 2P9 phi'osophy, the %ree4 government during the previous years
app'ied a num0er of changes in government su0sidi6ed entities among 5hich the
evo'ution of their traditiona' sing'e#entry 0udgetary accounting systems to dou0'e#
"
entry accounting systems that com0ined cash and accrua' information 5as
inc'uded. ?ithin this dua' system cash accounting and accrua' accounting 5ou'd
operate simu'taneous'y 0ut independent'y from one another. &he pu0'ic sector
entities invo'ved in the proCect 5ere supposed to issue 0usiness'i4e end#of#the#year
statements 0ased on the accrua' concept. 7ndependent e.terna' audit firms 5ou'd
revie5 these statementsA thus, re'ia0i'ity to the accounting figures 5ou'd 0e
provided. &he Presidentia' 1ecree $B*@@ <hereafter P1 $B*@@>, 5hich defined the
nature and operation of the dua' accounting system in municipa'ities had as an
effective date that of Danuary
st
+!!! and 5as to 0e app'ied under specific
restrictions

. =o5ever the imp'ementation of the ne5 system e.hi0ited

considera0'e de'ay that 5as the outcome of severa' shortcomings <see Cohen et. a'.
+!!7 for more detai's>.
&he scope of the study is t5ofo'd. -irst'y 5e see4 to e.amine the informative
8ua'ity of %ree4 municipa'ities; end#of#the#year financia' statements. -or this
purpose a thorough study of the audit reports of the financia' statements that 5ere
pu0'ished 0y %ree4 9unicipa'ities for the fisca' year +!!$ 5as conducted. &he
resu'ts of this study provide a comprehensive vie5 on the issue of 8ua'ity of
accounting information in the conte.t of %ree4 municipa'ities 5here cash and
accrua' accounting coe.ist. 7n para''e', 5e ana'y6e the e.tent to 5hich e.terna'
auditors have contri0uted to the improvement of the 8ua'ity of accounting
information provided 0y %ree4 municipa'ities. Second'y, 5e investigate the factors
that e.ert an inf'uentia' ro'e to the 'eve' of accounting standards comp'iance. 9ore
specifica''y, 5e try to identify re'ations among severa' endogenous and e.ogenous
characteristics of municipa'ities and the 'eve' of the comp'iance they e.hi0it
to5ards accounting standards.
B
&he present study adds to the 'iterature of accrua' accounting innovations in the pu0'ic
sector in a num0er of 5ays. -irst'y, it provides an eva'uation of the 8ua'ity of accrua'
accounting information in a setting 5here not on'y accrua' and cash accounting operate
simu'taneous'y 0ut 5here they are 0oth used for decision ma4ing purposes. &his 0ui'ds
on the studies that have e.amined the adoption of accrua' accounting systems in a
setting 5here cash accounting is sti'' e.istent <Dones and Pend'e0ury, @@A Christiaens,
@@@A Christiaens, +!!!A Christiaens and Ean Peteghem, +!!7>. &his coe.istence of the
t5o accounting systems is 8uite a uni8ue phenomenon since in most cases throughout
the 5or'd the accrua' accounting systems have actua''y rep'aced the cash accounting
onesA in this sense our study gives the reader the opportunity to vie5 the 8ua'ity of
accrua' accounting information 5hen cash accounting is sti'' used in the same 5ay as it
used to traditiona''y operate. 9oreover, our e.amination goes further than most studies
that dea' 5ith comp'iance 5ith accounting standards in order to assess the informative
8ua'ity of accounting reportsA even though 5e eva'uate the 8ua'ity of accounting
information from a comp'iance perspective ourse'ves, 5e a'so ascertain 5hether the
e.terna' auditors that serve as a 8ua'ity assurance function are actua''y fu'fi''ing their
ro'e. -ina''y, 5e 0ui'd on the re'evant 'iterature 0y determining the effect of certain
factors on comp'iance thus contri0uting to comparisons 5ith simi'ar studies.
&he remainder of this paper is structured as fo''o5s( the ne.t section provides a
revie5 of the 'iterature 5hi'e the third section descri0es the research 8uestions and
the hypotheses deve'opment. &he methodo'ogy emp'oyed is descri0ed and the
resu'ts are presented in the fourth and fifth section respective'y. -ina''y the t5o 'ast
sections host the discussion of the resu'ts of the study and our conc'uding remar4s.
6
(iterature revie&
Accounting reforms in the pu0'ic sector aim at the improvement of information
provided to decision ma4ers and to sta4eho'dersA this improvement is a necessary
condition for the enhancement of pu0'ic sector organi6ations accounta0i'ity and
performance since accounting information p'ays a 4ey ro'e in decision ma4ing in
organi6ations <Pettersen, +!!>. 7n this spirit the traditiona' cash 0udgetary systems
that essentia''y focus on inputs, are transformed to output orientated accrua'
accounting systems that c'ose'y resem0'e those of the private sector. &his a'so
represents a shift from accounta0i'ity in terms of process accounta0i'ity to resu'ts
accounta0i'ity <=ood, @@B>. Even though the strict adoption of accrua's in pu0'ic
sector entities is not advisa0'e due to measurement pro0'ems, 'ac4 of theoretica'
support and increased su0Cectivity <Chan, +!!$>, the e.pected 0enefits are
over5he'ming'y more significant in comparison to the dra50ac4s.
1espite the amount of studies in the pu0'ic sector accounting 'iterature that focus on
the imp'ementation of accounting reforms, there is a distinct 'ac4 of eva'uation of the
resu'ts. 9ore specifica''y, apart from a fe5 studies discussed 'ater in this section, 'itt'e
attention has 0een paid to5ards the manner of the imp'ementation of these reforms in
terms of comp'iance. &his is a matter of utmost significanceA it is imperative that the
resu'ting accrua' accounting systems provide decision ma4ers 5ith re'evant and
re'ia0'e information. 7t is easy to see 5hy the resu'ting information is so important. &he
e.pected 0enefits of an accounting reform cannot 0e o0tained so'e'y 0y introducing
accrua's accounting in pu0'ic sector entitiesA accounting princip'es shou'd 0e app'ied
5ithout any deviations that 5ou'd serious'y a'ter the re'ia0i'ity of end#of#the#year
statements and thus hinder decision ma4ing. As Christiaens and Ean Peteghem <+!!7(
$76> point out( FWithout an adequate implementation, all the efforts made, the
presupposed goals of the reform and the
7
created expectations will be lost. Bearing in mind the importance of accounting
information for decision ma4ing purposes <Pettersen, +!!>, it is evident that 'o5#
8ua'ity information is 0ound to 'ead to erroneous Cudgments regarding the
a''ocation of pu0'ic sector organi6ations resources.
Even though, as 5e noted ear'ier, comp'iance issues are often over'oo4ed in pu0'ic
sector accounting 'iterature, a num0er of studies have eva'uated the adherence of
pu0'ic sector organi6ations to accounting standards. 7ngram;s <@,"> semina' study
tested an e.tensive 'ist of varia0'es in order to determine the factors that affect the
accounting practices in the United States. 9ore specifica''y, 7ngram tested the
inf'uence of these factors on 'oca' governments; disc'osure of accounting
information. 1isc'osure 5as measured via a simp'e dichotomous scoring inde. that
has 0een used <most'y modified> in a num0er of studies such as those conducted 0y
Go00ins and Austin <@,6>, 7ngram and 1eDong <@,7>, %irou. <@,@>, Cheng
<@@+>, A''en and Sanders <@@">, Coy et a'. <@@">, Christiaens <@@@>, Coy and
1i.on <+!!">, Gyan et a'. <+!!+>, and Christiaens and Ean Peteghem <+!!7>.
&hrough these studies it has 0ecome evident that the 8ua'ity of reporting 0y pu0'ic
sector organi6ations is not perfectA neverthe'ess, it seems that time has a 0eneficia'
effect over comp'iance <Gyan et a'., +!!+>.
Comp'iance is crucia' in order for financia' statements to 0e informative. =o5ever, the
figures on the financia' statements are not the on'y source of re'ia0'e accounting
information for the sta4eho'ders. Even if comp'iance 5ith accounting standards is not
fu''y achieved and an entity issues 'o5#8ua'ity accounting data, the opinion e.pressed
0y e.terna' auditors can serve as a 0uffer to sta4eho'ders. &he audit report anne.ed to
the annua' financia' statements contains usefu' information in re'ation to an entity;s
adherence to accounting standards. &his data can 0e used 0y the sta4eho'ders to rec4on
the 5indo5 dressing of the financia' position of a given
,
pu0'ic sector organi6ation. Even though it is not possi0'e for an e.terna' auditor to
identify every sing'e case of materia' misstatement <?right and ?right, @@7>, the
audit report serves as a pro.y of the 8ua'ity of the accounting statements and
therefore provides 'egitimi6ation to an entity that has fu''y comp'ied 5ith
accounting standards.
&he importance of the e.terna' auditor;s function can 0e i''ustrated easi'y 0y
considering a situation 5here the financia' statements 5ou'd not 0e audited( in
such a case a sta4eho'der 5ou'd 0e una0'e to determine the re'ia0i'ity of a given
statement. A 'o5#8ua'ity financia' statement 5ou'd 0e treated in the same manner
as a statement issued 5ith tota' adherence to accounting standards. &herefore,
accounting information 5ou'd 0e of high ris4 and as a resu't of this it 5ou'd 0e
rendered use'ess. Auditors attest the credi0i'ity of the accounting figures reported
0y pu0'ic sector organi6ations in order to dea' 5ith the pro0'ems that arise from the
principa'#agent re'ationship that e.ists 0et5een the management of these entities
and their various sta4eho'ders <&he 7nstitute of 7nterna' Auditors, +!!6>. 9oreover,
e.terna' auditors provide through their opinion a degree of FcomfortH to
sta4eho'ders as to the re'ia0i'ity of accounting figures <Po5er, @@7( +">. &hus,
high#8ua'ity municipa'ities; financia' reports shou'd not on'y comp'y 5ith the
accounting standards 0ut at the same time they shou'd 0e accompanied 0y e.terna'
auditors reports that comment on their adherence to them.
As regards the effects of a p'ethora of e.terna' and interna' factors that have 0een
tested in previous studies as having an inf'uentia' ro'e on the 'eve' of comp'iance
5ith accounting standards the empirica' resu'ts found in 'iterature do not coincide.
9ore specifica''y, 7ngram, <@,">, 7ngram and 1eDong, <@,7> and Christiaens
<@@@> did not find any statistica' re'ationship 0et5een the municipa'ities; re'iance
on dept and comp'iance. :n the contrary, the empirica' evidence in the studies of
@
Go00ins and Austin <@,6> and Cheng <@@+> supported such a re'ationship.
7ngram <@,"> and Go00ins and Austin <@,6> assumed 0ut they did not succeed in
supporting 5ith empirica' evidence a positive re'ationship 0et5een comp'iance
and municipa' 5ea'th. A'so, the re'evant 'iterature remains inconc'usive as to the
effect of an organi6ation;s si6e on comp'iance 5ith accounting standards. 9ore
specifica''y, even though Christiaens <@@@> revea'ed a positive re'ationship,
Go00ins and Austin <@,6> and 7ngram and 1eDong <@,7> did not find such a
re'ationship.
&he 'iterature a'so inc'udes surveys that provide corro0orative evidence that
e.terna' auditors inf'uence the 8ua'ity of the financia' statements issued 0y their
c'ients <Beattie et a'. +!!!>. =o5ever, this research stream is main'y concentrated
on the private sector. Bec4er et a'. <@@,> and -rancis et a'. <@@@> have sho5n that
the e.terna' auditor si6e acts as a constraint to the c'ient;s earnings management
practices. Possi0'e e.p'anations for that are the higher 'osses audit firms may incur
in case of an audit fai'ure such as 8uasi rents <1eAnge'o, @,> or 0rand name
reputation dec'ine <3'ein I Leff'er, @,>. =o5ever, in the pu0'ic sector rea'm
Go00ins and Austin <@,6> did not revea' such a re'ationship.
As to the inf'uence of the attitude of po'iticians to5ards the 'eve' of comp'iance
5ith the accounting princip'es and 5ith the accounting reform in genera',
=ep5orth <+!!$> c'aims that it is imperative that po'iticians accept the need and
recogni6e the 0enefits of such a reform. -ina''y, Christiaens and Ean Peteghem
<+!!7> 5ho tested the effect of a municipa'ity;s accrua' accounting e.perience on
its comp'iance to accounting standards 5ere inconc'usive regarding the effect of
e.perience on comp'iance. =o5ever, Gyan et a'. <+!!+> found a positive
association 0et5een the years of accrua' accounting e.perience and comp'iance.
!
Researc o%)ectives and ypoteses development
&he accounting reform in %ree4 municipa'ities aimed at the improvement of
accounting information provided to decision ma4ersA this 5as e.pected to enhance
fund management and improve accounta0i'ity. =o5ever, for this to happen, the
output of the accounting system shou'd provide re'evant and usefu' information.
&he present research study see4s to determine the 8ua'ity of accounting
information provided 0y %ree4 municipa'ities; end#of#the#year financia'
statements. -or this purpose 5e e.amine on the one hand 5hether %ree4
municipa'ities have deviated from accounting standards, 5hi'e on the other hand
5e ascertain the 8ua'ity of information provided 0y audit reports. ?e a'so try to
assess the factors that inf'uence municipa'ities; comp'iance 'eve'. &herefore 5e
5i'' study the fo''o5ing three research 8uestions(
RQ1: At what extend hae !ree" municipalities adhered to the accounting
standards set out in the #$ %1&'(()
&he 8ua'ity of %ree4 municipa'ities financia' reporting is dependent on comp'iance
5ith accounting standards. A 'o5 <high> 'eve' of comp'iance 5ith the standards that
5ere esta0'ished through P1 $B*@@ 5i'' 0e the indicator of poor <good> informative
8ua'ity of the accounting data. 7n other 5ords, 5e 5ant to measure the Fdeve'opment
gapH <&er Bogt and Ean =e'den, +!!!> that is the difference 0et5een the idea' concept
of accounting changes and its u'timate deve'opment. 7n order to determine the 'eve' of
comp'iance 5ith accounting standards 5e emp'oy comp'iance indices. Comp'iance
indices have 0een used in previous studies <such as those 0y Christiaens, @@@A
Christiaens and Ean Peteghem, +!!7> and can serve as o0Cective measures of the
8uantification of the e.tent of adherence to accounting standards. &hrough such
measures it is a'so possi0'e to dra5 comparisons among various municipa'ities.
Bearing in mind though that 0y using a sing'e comp'iance inde. 5e

may fai' to accurate'y capture the fu'' 0readth of adherence 5ith standards 5e use
a'ternative indices that are e.pected to encapsu'ate 0oth in 8uantitative and
8ua'itative terms the e.tent of adherence to accounting standards.
RQ*: What is the informatie qualit+ of the audit reports that accompan+ the
financial statements of !ree" municipalities)
&he %ree4 centra' government has esta0'ished compu'sory revie5s 0y e.terna'
auditors of the municipa'ities; annua' financia' statements. &he audit must 0e
performed according to the %enera''y Accepted Auditing Standards, 5hich have
0een esta0'ished 0y the %ree4 7nstitute of Certified Auditors and Accountants. &he
audit opinion provides assurance that the financia' statements have 0een prepared
according to the %enera''y Accepted Accounting Princip'es of the %ree4 State and
the P1 $B*@@, and that they fair'y present the financia' position, the resu'ts of
operations, and the disposa' of surp'us or deficit of the audited firm. &he comments
presented in the audit opinion refer to materia' items and disc'ose instances 5here
genera''y accepted accounting princip'es and*or the 'a5s of the %ree4 state have
not 0een fo''o5ed. E.amp'es of such instances inc'ude the fo''o5ing( incorrect
accounting treatments or estimates, insufficient provisions, insufficient disc'osure
of materia' financia' statement information, and so on. &herefore, the audit report
p'ays an important ro'e 0y acting as a 0uffer against 'o5#8ua'ity information.
=o5ever, a necessary precondition in this F8ua'ity assurance processH is that the
audit reports provide information that assist sta4eho'ders to accurate'y eva'uate the
re'ia0i'ity of the accounting information issued 0y an entity. &hus, our aim here is
to determine 5hether the audit reports of %ree4 municipa'ities(
<a> Contain 8uantitative information re'ated to a municipa'ity;s deviations from
the accounting standards it shou'd adhere to. &his information shou'd provide
+
ade8uate input for proper adCustments to 0e made as to derive to the actua'
financia' condition and position of the entity, and
<0> Provide an audit opinion that summari6es the 8ua'ity of financia' reporting.
RQ%: Which factors exhibit an influential role on the leel of compliance with the
accrual accounting standards)
&his study a'so aims at determining the impact on the 8ua'ity of accounting
information of certain factors cited in previous studies. -or this purpose 5e
e.amine the fo''o5ing hypotheses(
=( ,unicipalit+ reliance on debt positiel+ affects its compliance with accounting
standards.
A municipa'ity that re'ies on de0t in order to finance its operations shou'd 0e
e.pected to 0e su0Cect to tight contro' 0y financia' institutions. &herefore it 5ou'd
0e restricted in app'ying standards 5ithout deviations that cou'd serious'y
inf'uence its financia' position and performance.
=+( ,unicipalit+ wealth is expected to be positiel+ associated with compliance.
9unicipa'ities that do not heavi'y re'y on government su0sidies are e.pected to 0e
4een in sho5ing their good financia' hea'th and therefore 0e more 5i''ing to
comp'y 5ith accounting standards so as not to cast dou0ts in re'ation to their true
financia' condition to a'' interested sta4eho'ders. &his 0ehavior is a'so e.pected to
0e driven 0y mayors 5ho 5ish to po'itica''y 0enefit from their municipa'ities;
good financia' hea'th.
=$( ,unicipalit+ si-e positiel+ affects its compliance with accounting standards.
$
* municipa'ity 5ith a 'arge popu'ation is e.pected to maintain an e8uiva'ent'y
'arge num0er of emp'oyees 5ho can 5or4 in preparing high 8ua'ity end#of#the#
year statements. 7n addition to that, it cou'd 0e argued that municipa'ities of a
significant si6e dra5 more attention from the press in comparison to sma''er ones
and are therefore more inc'ined to comp'y 5ith standards so as to avoid any
negative pu0'icity.
="( .xternal auditor si-e positiel+ influences the accurac+ of municipalit+/s end0
of0the0+ear statements.
&he si6e of the auditor is e.pected to e.ert a positive effect on comp'iance. Larger
audit firms are assumed to possess higher 'eve' of competence in comparison to
sma''er audit firms. 9oreover, audit firms of a significant si6e are 'ess dependent
on specific c'ients and therefore can provide more high#8ua'ity services. -ina''y, in
case of an audit fai'ure 'arger audit firms have more to 'ose than auditors of a
sma''er si6e.
=B( ,unicipalities compl+ with accounting standards more readil+ if their ma+ors
were elected with support from the ruling political part+.
&he accounting reform process is e.pected to 0e more favora0'y appreciated 0y mayors
5ho originate from the po'itica' party that governs. 7n %ree4 municipa'ities the e'ected
mayors are the driving force 0ehind the over5he'ming maCority of the proCects these
entities underta4e. Loca' government e'ections in %reece are to a great e.tent a
po'itica' arena of the maCor parties in 5hich they antagoni6e for po'itica' contro' of the
municipa'ities. &he mayors are a'most e.c'usive'y e'ected 5ith the support of the maCor
po'itica' parties that comprise the %ree4 Par'iament. 7f a mayor has chances of
retaining the support of a maCor po'itica' party he*she must sho5 active support to the
party;s agenda. &his 'eads us to assume that mayors 5ho
"
get e'ected 5ith the support of the ru'ing party 5i'' active'y see4 the success of the
reform so as to sho5 commitment to the governmenta' program. &herefore it
shou'd 0e e.pected that in such cases municipa'ities e.hi0it a higher comp'iance
5ith the accounting standards in comparison to municipa'ities 5hose mayors
0e'ong to opposition parties.
=6( ,unicipalities with long0term experience in accrual accounting will exhibit
higher compliance with accounting standards.
?e e.pect that 'oca' governments faced such a p'ethora of shortcomings 5hen they
had an accrua' accounting system insta''ed for the first time that had potentia''y
'ead them to e.hi0it deviations from accounting standards. =o5ever, it is 'i4e'y
that these pro0'ems 5ere dea't 5ith in 'ater periods than4s to the fami'iari6ation of
municipa'ities 5ith the accrua' concept. -or instance, it is possi0'e that asset
va'uations in the first 0a'ance sheet issued 0y a municipa'ity have not 0een
performed 5ith a0so'ute adherence to accounting standards due to the 'ac4 of
e.perience of the accounting personne' or the 'ac4 of the necessary data.
2everthe'ess, these difficu'ties shou'd 0e progressive'y overcome as a municipa'ity
is getting fami'iari6ed 5ith the ne5 accounting system.
Metodology
-or the purposes of our study 5e e.amined the audit reports of %ree4 municipa'ities;
end#of#the#year financia' statements for the fisca' year +!!$. &hese audit reports
contain monetary and 8ua'itative information that can 0e uti'i6ed in order to eva'uate
the degree to 5hich a municipa'ity adheres to accounting standards. Even though
according to studies conducted in the private sector <?right and ?right, @@7> auditors
do not report on every sing'e materia' misstatement, 5e
B
e.pect that the audit reports 5i'' give a good indication of the e.tent of adherence
to accounting standards. &hus, our revie5 of the audit reports 5i'' provide an
indication of the 8ua'ity of the audit 5or4 conducted on %ree4 municipa'ities;
annua' accounting statements.
&he overa'' eva'uation of the informative 8ua'ity of audit reports 5i'' 0e conducted
in para''e' 5ith the assessment of the municipa'ities; comp'iance to standardsA on
the one hand 5e 5i'' ascertain 5hether the e.terna' auditor has provided amp'e
information to 8uantify deviations from accounting princip'es, 5hi'e on the other
5e 5i'' use this data to deve'op the comp'iance indices for the municipa'ities.
Ea'ue of 9unicipa'ity e8uity
7n order to ans5er our t5o first research 8uestions that is to what extend the !ree"
municipalities hae adhered to the accounting standards set out in the #$ %1&'((
and what is the informatie qualit+ of the audit reports that accompan+ the
financial statements of !ree" municipalities 5e constructed three a'ternative
comp'iance indices.
&he first comp'iance inde. <C> attempts to 8uantify the deviations from
accounting princip'es as a percentage of the municipa'ity;s e8uity. 9ore
specifica''y, this comp'iance inde. is ca'cu'ated 0y the fo''o5ing ratio(
C=
Ea'ue of deviationsfrom accountingprincip'es
<>
&he data source for the ca'cu'ation of the FEa'ue of deviations from accounting
princip'esH is the audit report of every municipa'ity for the fisca' year +!!$. 7n order to
ca'cu'ate the va'ue of the numerator 5e a'ge0raica''y add up the va'ues of a'' amounts
that are inc'uded in the auditors; notes indicating the va'ue differences 0et5een the
resu'ting accounting num0ers provided princip'es 5ere correct'y fo''o5ed and the
reported amounts. &he FEa'ue of 9unicipa'ity e8uityH refers to the
6
reported va'ue of e8uity at the end#of#the#year +!!$. &his inde. provides
information that can 0e used to assess the degree to 5hich a municipa'ity has
misstated its financia' condition. A resu't of 6ero shou'd indicate, at 'east
theoretica''y, that the municipa'ity c'ose'y adheres to accounting standards. 7n
cases that the inde. ta4es va'ues different from 6ero, the municipa'ity e.hi0its
deviations in re'ation to the app'ication of standards. Jet, it shou'd 0e noted that the
inde. has informative po5er as regards to the 8ua'ity of a given municipa'ity
annua' financia' reports as 'ong as the auditors have identified, reported and
8uantified every materia' misstatement that e.ists in these reports. :ther5ise, a
va'ue of 6ero 5ou'd 0e nothing more 0ut the resu't of deviations from standards
8uantification fai'ure. &he importance of this comp'iance inde. can 0e i''ustrated
0y considering the conc'usion of %hicas et a'. <+!!,> in their research re'ated to the
re'evance of 8uantifia0'e audit 8ua'ifications in %ree4 7P:s. According to their
study the practice of reporting 8uantifia0'e 8ua'ifications in audit opinions is
e.pected to 0e a va'ua0'e feature in any audit setting. &hey 0ase their argument on
the fact that the amounts reported in the opinion indicate to the mar4et participants
<in our case sta4eho'ders> e.act'y ho5 much is missing from the financia'
statements <5hich is 8uantitative'y indicated in the auditor;s opinion> and not on'y
the information that something is missing.
-or the second comp'iance inde. <C+>, 5e use the num0er of audit remar4s as a pro.y
of municipa'ities; adherence to accounting standards. Even though this inde. fai's to
encapsu'ate in monetary terms the deviations from accounting standards it offers a
8ua'itative approach as to the overa'' 8ua'ity of the end#of#the#year financia'
statements. 9oreover, it summari6es not on'y the cases 5here the municipa'ity has
intentiona''y or not misstated its financia' position, 0ut it a'so inc'udes cases 5here the
municipa'ity does not operate in satisfactory terms <for e.amp'e, the auditors 5ou'd
comment on the 8ua'ity of the interna' contro' function of a municipa'ity>. 7t
7
is c'ear that a municipa'ity that is the su0Cect of a 'arge num0er of auditor
comments regarding the accuracy of its financia' reports produces 'o5#8ua'ity data
for the assessment of its performance 0y interna' and e.terna' sta4eho'ders.
=o5ever, in cases 5here the audit report contains on'y a sma'' num0er of
comments in re'ation to the re'ia0i'ity of the municipa'ity;s accounting figures, this
is a pro.y of high#8ua'ity information.
C+ K Sum of the num0er of comments <+>
&he third a'ternative inde. <C$> 5as constructed on the 0asis of the dichotomous
scoring comp'iance inde. 0ased on 7ngram <@,">. 7n particu'ar, after a carefu'
e.amination of the content of the audit reports for the fisca' year +!!$, 5e
summari6ed B distinct items#remar4s 5here auditors have identified that %ree4
municipa'ities fai'ed to adhere to accounting standards. -or every item#remar4 5e
used a dichotomous varia0'e of ! and A 5hen a municipa'ity fai'ed to comp'y 5ith
the re'evant accounting standard it 5ou'd ta4e a mar4 of 6ero 5hi'e if it comp'ied it
5ou'd ta4e a mar4 of . &he overa'' comp'iance inde. 5as ca'cu'ated for every
municipa'ity as the sum of its scores in a'' dichotomous varia0'esA a municipa'ity;s
inde. 5ou'd ta4e the va'ue of B if it adhered to a'' accounting standards. &he
items#remar4s <G to GB> that 5ere used in order to construct the comp'iance
inde. C$ are the fo''o5ing(
<G> E.istence of interna' audit function
<G+> Accurate va'uation of investments
<G$> Ca'cu'ation of provisions
<G"> Accurate va'uation of accounts receiva0'es
<GB> Proper cash account management
,
<G6> Accurate fi.ed assets va'uation
<G7> Proper operation of the dou0'e entry accounting system
<G,> Accurate va'uation of 'ia0i'ities
<G@> 7dentification of contingent 'ia0i'ities
<G!> Proper operation of computer information systems
<G> Accurate recognition of revenues
<G+> Accurate recognition of e.penses
<G$> Accurate ca'cu'ation of depreciation # amorti6ation
<G"> :peration of a cost accounting system
<GB> 9isce''aneous issues
B
C$ = R
i
<$>
i=
?here(
Gi corresponds to each one of the B aforementioned items#remar4s <iK to B>.
G
i
ta4e the va'ue of if the municipa'ity adheres to the accounting standard,
5hereas G
i
ta4es the va'ue of ! if the municipa'ity fai's to comp'y 5ith the
re'evant accounting re8uirement.
7t shou'd 0e noted ho5ever that according to Coy et a'. <+!!$> the methodo'ogy of
using dichotomous indices <such as indices C+ and C$> suffers from the 'ac4 of
@
discrimination in terms of the importance of the items it inc'udes as 5e'' as from
the ina0i'ity to 8uantify the e.tent of a misstatement. =o5ever, inde. C does not
suffer from this shortcoming.
7n order to ans5er our third research 8uestion that is which factors exhibit an
influential role on the leel of compliance with the accrual accounting standards
5e deve'oped mu'tivariate regressions that e.amine the effect of the factors that
5ere presented in the previous section on the a'ternative comp'iance indices. 7n
particu'ar, 5e used the comp'iance indices discussed a0ove as dependent varia0'es
and the fo''o5ing si. varia0'es that correspond to the hypotheses = to =6
descri0ed in the previous section as independent varia0'es in our mu'tivariate
regressions(
<> 1ong term $ebt per capita 5as used as a measure of a municipa'ity;s
dependence on e.terna' financia' institutions in order to finance its
operations. 7t is ca'cu'ated 0y dividing the 'ong#term de0t of the
municipa'ity 0y the num0er of the municipa'ity inha0itants.
<+> 2wn reenues'3otal reenues ratio 5as used as a measure of dependence
on governmenta' fundsA those municipa'ities that e.hi0it a high ratio are
not so'e'y dependent on intergovernmenta' funds in order to finance their
operations. &he nominator of this ratio is the va'ue of the tota' municipa'ity
operating revenues. &he denominator is the sum of municipa'ity operating
revenues p'us the su0sidies it receives from the centra' government. &his
measure is considered as a pro.y for 5ea'th.
<$> #opulation per square "ilometer 5as used as a pro.y of municipa'ity si6e.
7n order to ca'cu'ate this varia0'e 5e divided each municipa'ity popu'ation
0y its si6e in s8uare 4i'ometers.
+!
<"> A dichotomous varia0'e named Auditor 5as used in order to determine the
e.terna' auditor;s si6e. &hose municipa'ities that had their annua' reports
audited 0y S:L
+
that is considered one of the 0iggest audit firms in %reece
had a mar4 of 5hi'e those that 5ere not received a mar4 of !.
<B> A dichotomous varia0'e named ,a+or 5as used to indicate 5hether a
mayor is supported or not 0y the centra' government. 7n cases 5here such a
support e.isted 5e gave a mar4 of 5hi'e the remaining cases received a
mar4 of !.
<6> 7n order to test for 'earning effects 5e used a dichotomous varia0'e named
1earning .ffects that ta4es the va'ue of 5hen a municipa'ity has issued
accounting statements 0ased on the accrua' concept in previous operating
periods and ! 5hen year +!!$ 5as its first issuance year.
Statistical Results
?e o0tained through the 9inistry of 7nterior Pu0'ic Administration and
1ecentra'i6ation the annua' accounting statements of ,B %ree4 municipa'ities
issued for the fisca' year +!!$. A thorough e.amination of their corresponding
audit reports 5as conducted so as to construct the three a'ternative comp'iance
indices. &he data for the construction of the independent varia0'es that cou'd not 0e
retrieved from the financia' statements 5as o0tained through the 2ationa'
Statistica' Bureau. &he fo''o5ing ta0'e <&a0'e > summari6es some 0asic
descriptive statistics of the three a'ternative comp'iance indices(
+Insert ,a%le ! appro-imately ere.
7ndices C+ and C$ indicate that the annua' accounting statements of %ree4
municipa'ities in genera' deviate from the accounting standardsA the descriptive
+
statistics sho5 that on average the audit reports inc'ude a num0er of remar4s in re'ation
to the municipa'ities; comp'iance. =o5ever, the descriptive statistics of inde. C
indicate that the municipa'ities do not seem to have engaged in accounting practices
that resu't in materia' misstatements. A c'oser e.amination of the audit reports has 'ed
us to the conc'usion that the 'o5 va'ues of this inde. 5ere the resu't of the 'ac4 of
8uantifia0'e deviations information provided 0y e.terna' auditors. 9ore specifica''y,
even though the audit reports provide amp'e information as regards the various
accounting practices that have resu'ted in misstatements, 5e came across very fe5
cases of 8uantification of these misstatements. -or e.amp'e, it 5as o0served in many
instances that a municipa'ity had not va'ued its 'ong#term investments appropriate'y 0ut
no 8uantitative information 5as provided in the auditors; reports as to the magnitude of
this effect on the organi6ation;s e8uity. As most municipa'ities audit reports contained
notes re'ating to deviations from accounting standards 0ut fai'ed to offer any
8uantification of these deviations, the first comp'iance inde. 5as inopera0'e since its
e.p'anatory po5er 0ecame undermined 0y the 'ac4 of numerica' data. -urthermore, it
has to 0e noted that regard'ess of the severity of the deviations from the accounting
practices that 5ere identified in certain audit reports, the auditors e.pressed an
un8ua'ified
$
opinion concerning the accuracy of the respective accounting statements.
-or instance, an un8ua'ified opinion 5as issued 5hen a municipa'ity fai'ed to provide
evidence regarding the true amount of its assets or its 'ia0i'ities, or 5hen there 5as no
interna' audit function. &o ma4e matters 5orse, the same opinion 5as a'so stated even
in instances 5here the very accrua' accounting system 5as essentia''y non#e.istent
5hich meant that the accounting statements under revie5 5ere not retrieved from a
forma' accrua' system 0ut 0y adCusting cash accounting data. 2everthe'ess, this is not a
uni8ue phenomenon in the %ree4 conte.tA the private sector audits fo''o5 the same
pattern 5ith our findings 5ith one, a'0eit, maCor in terms of significance difference.
&he remar4s in the auditors; reports that accompany private sector
++
financia' statements a'so revea' the areas 5here accounting information deviates from
the accounting po'icies that come from 'egis'ation
"
0ut such deviations are a'5ays
8uantified <see a'so %hicas et a'., +!!,>. =o5ever, even though these reports 5ere
regarded as of un8ua'ified opinion in %reece, they 5ou'd 0e considered in USA and
U3 as audit 8ua'ifications <:5usu#Ansah and Leventis, +!!6>.
&he issuance of poor audit reports constitute a very interesting phenomenon since it is
indicative of either a not in depth approach 0y e.terna' auditors, or an attempt not to
disp'ease their c'ients 0y presenting data that 5ou'd serious'y undermine the re'ia0i'ity
of the accounting figures contained in annua' statements. &his cou'd a'so 0e attri0uted
to the 'ac4 of third party revie5s of the audit reports issued 0y e.terna' auditors, or 0y
the 'ac4 of sanctions for poor 8ua'ity 5or4 <1eis, Dr. and %irou., @@+>. 9oreover, this
cou'd 0e indicative of the e.terna' auditors; 'ac4 of e.pertise in pu0'ic sector
organi6ations; accounting systems. According to 3rishnan <+!!$> and Carce''o and
2agy <+!!"> the specia'i6ation of the e.terna' auditor in a certain industry significant'y
improves the 8ua'ity of the audit 5or4A 0earing in mind that the accrua' accounting
systems of %ree4 municipa'ities have on'y recent'y 0ecome operationa', it can 0e
assumed that no audit firm possesses e.tensive re'evant e.pertise. &hus it cou'd 0e
e.pected that, at 'east in the short term, the audit reports issued for %ree4
municipa'ities 5ou'd not achieve a high'y informative po5er.
Since the first comp'iance inde. 5as rendered inopera0'e due to the 'ac4 of sufficient
data, 5e concentrated our ana'ysis of the comp'iance of municipa'ities on the other t5o
indices. &he descriptive statistics <see &a0'e > c'ear'y indicate that even though
e.terna' auditors fai'ed to provide 8uantitative information concerning the
municipa'ities; adherence to accounting standards, they did not refrain from revea'ing
areas of non#comp'iance. &he fo''o5ing ta0'e <&a0'e +> sho5s the issues covered 0y the
auditors; remar4s 5here it is sho5n that va'uation issues and the
+$
non#e.istence of the interna' contro' function 5ere the most encountered issues 0y
the e.terna' auditors.
+Insert ,a%le $ appro-imately ere.
?e tested 5hether the t5o indices C+ and C$ have a negative 'inear re'ationship
B
,
5hich cou'd indicate that even though they measure different aspects of
comp'iance they are actua''y c'ose'y measuring the same phenomenon. &he
statistica' resu'ts indicate that a strong negative 'inear re'ationship actua''y e.ists
<Pearson corre'ation coefficient( #!.@$$ significant at L, Spearman corre'ation
coefficient( #!.@6@ significant at L>. Even though one cou'd argue that such a
resu't shou'd 0e e.pected since inde. C$ re'ies heavi'y on inde. C+, it has to 0e
noted that in many cases one specific audit remar4 referred to t5o or more
accounting practices that resu'ted in misstatement of its accounts. =o5ever, in
other cases, these remar4s 5ere e.c'usive'y informationa' on various aspects <such
as that a municipa'ity 5as issuing accrua' 0ased accounting statements for the first
time ever> 0earing no information regarding deviations from standards.
As regards the effect of the si. factors descri0ed in our research hypotheses on the
e.tent of comp'iance 5ith accounting standards, 5e ran t5o mu'tivariate
regressions 5here the dependent varia0'e 5as either inde. C+ or inde. C$ and
independent varia0'es 5ere the si. conte.tua' varia0'es discussed in the previous
section.
&he :LS regression resu'ts are presented in the ta0'e 0e'o5 <&a0'e $>(
+Insert ,a%le / appro-imately ere.
&he resu'ts presented in &a0'e $ indicate that among the si. varia0'es 5hich 5ere
tested for effects on a municipa'ities; comp'iance 5ith accounting standards, the
+"
municipa'ity si6e and 5ea'th, the si6e of the e.terna' auditor and the 'earning
effects 5ere the most significant in statistica' terms. 9ore specifica''y, our
hypothesis =" 5as verified since 0oth regressions e.hi0ited that a higher 'eve' of
comp'iance is positive'y re'ated 5ith the si6e of the auditor. =o5ever, our resu'ts
go against hypotheses =+, =$ and =6 since our empirica' evidence supports that
municipa'ities that are either of a considera0'e si6e, or are aff'uent, or have
ac8uired fami'iari6ation 5ith accrua' accounting end#of#the#year statements in
previous periods, did not actua''y de'iver 0etter 8ua'ity reports in year +!!$.
Possi0'e e.p'anations for this phenomenon concerning the 5ea'th and si6e of the
municipa'ities cou'd 0e that on the one hand 5ea'thy municipa'ities do not re'y on
government su0sidies to finance their operations and have therefore no pressure
from the centra' government to app'y the standards. :n the other hand, 'arger
municipa'ities are possi0'y e.periencing 0ureaucratic pro0'ems that ma4e the
adoption process more rigid in comparison to sma''er 'oca' governments 5here
there is more f'e.i0i'ity. -ina''y, the adverse'y e.pected resu't evidenced in re'ation
to the 'earning effects cou'd 0e indicative of an un5i''ingness of municipa'ities to
improve the 8ua'ity of their accounting statements throughout time. &his finding
5ou'd 0e Custified on the grounds that municipa'ities perceive accrua' accounting
as Cust a 'egitimate o0'igation they have to comp'y 5ith and they do not strive
to5ards information improvement. 9oreover, any deviations from accounting
standards that 5ou'd 0e e.cused or over'oo4ed 0y audit firms during the first year
of accrua' accounting imp'ementation 5ou'd 0e identified in audit reports in the
fo''o5ing years 5hen auditors discovered that their recommendations 5ere not
serious'y ta4en into account.
0iscussion
+B
&he present research study focused on the outcome of the accounting reform that
too4 p'ace in %ree4 municipa'ities. 9ore specifica''y, 5e e.amined the 8ua'ity of
end#of#the#year statements issued 0y these entities for the fisca' year +!!$.
9oreover, 5e tested 5hether a num0er of factors previous'y cited in the re'evant
'iterature inf'uence municipa'ities; comp'iance 5ith accounting standards. :ur
resu'ts indicate that the maCority of municipa'ities under revie5 have c'ear'y fai'ed
to provide high#8ua'ity data to their sta4eho'ders. &his finding has severe
imp'ications regarding the success of the accounting reform since the main
o0Cective 5as to provide the municipa'ities; sta4eho'ders 5ith high#8ua'ity
accounting informationA this ho5ever does not seem to have 0een accomp'ished.
&herefore, it is rationa' to assume that the other e.pected 0enefits from the reform
such as the improvement of accounta0i'ity, 5hich depends on the enhancement of
accounting information have not 0een achieved, at 'east to the desired e.tend,
either.
9oreover, our empirica' evidence cast dou0ts upon the 8ua'ity of e.terna' auditors;
assessments of 'oca' governments; end#of#the#year statements. &he e.amination 5e
conducted on the municipa'ities; audit reports revea'ed that the deviations from
accounting standards that 5ere disc'osed 0y the e.terna' auditors 5ere most'y not
8uantifiedA thus it is not possi0'e to ascertain the magnitude of these organi6ations;
attempts to distort their true financia' condition. 7n addition to that, the opinions that
5ere issued 0y e.terna' auditors regarding the re'ia0i'ity of the municipa'ities; financia'
statements 5ere in every sing'e case un8ua'ified regard'ess of the severity of certain
issues revea'ed in the reports. &hese findings c'ear'y demonstrate the strong need for
improvement of the e.terna' auditor assessmentsA the current situation 'eaves the
municipa'ities; sta4eho'ders e.posed to potentia''y 'o5#8ua'ity accounting data that
cannot 0e considered as a so'id 0asis for decision ma4ing.
+6
&he prere8uisite for the improvement of effectiveness, efficiency, economy and
accounta0i'ity in these pu0'ic sector organi6ations is the enhancement of
information that their accounting systems provide. :ur findings ho5ever revea'
that this has not 0een accomp'ished since the municipa'ities on the one hand and
their respective e.terna' auditors on the other do not seem to have fu'fi''ed their
ro'es in fu'' sca'e. :f these t5o parties ho5ever, the responsi0i'ity of the e.terna'
auditor may 0e much greaterA even if the 5indo5 dressing is management;s goa' in
order to ame'iorate the financia' performance and position of an entity, it is up to
the e.terna' auditor to ensure that sta4eho'ders cou'd accurate'y interpret this set of
data. &he case of %ree4 municipa'ities as discussed in this paper strong'y supports
the conc'usion that Dones and Pend'e0ury <+!!"> came toA that as 'ong as preparers
of financia' statements and auditors are content 5ith the under'ying accounting,
any non#comp'iance 5ith financia' reporting po'icies is an irre'evance.
As regards the factors that affect municipa'ities; comp'iance 5ith accounting standards,
this study demonstrated a re'ationship 5ith the auditor si6e, as 5e'' as 5ith the
municipa'ity si6e, 5ea'th, and previous e.perience in issuing accrua' accounting end#
of#the#year statements. 7n particu'ar, the auditor si6e 5as found to 0e positive'y re'ated
5ith comp'iance, 5hi'e municipa' si6e, 5ea'th and e.perience 5ith accrua's accounting
e.hi0ited a negative re'ationship. Larger municipa'ities are pro0a0'y e.periencing
0ureaucratic pro0'ems that inhi0it the reform process and therefore the financia' reports
produced are of 'o5 informative 8ua'ity. ?ea'thier municipa'ities cou'd have
approached the imp'ementation issue rather superficia''y since they do not heavi'y
depend on state financing and are therefore 'ess inc'ined to satisfy the centra'
government 5hich is the main source of financing for the 'ess aff'uent 'oca'
governments. 9oreover, even though the negative re'ationship concerning the accrua'
accounting e.perience reCects our initia' hypothesis, it is 5orth mentioning that the
resu'ts presented in Christiaens and Ean Peteghem <+!!7>
+7
sho5 that comp'iance f'uctuates through time. &he t5o other varia0'es 5e tested
<name'y( dependence on de0t financing and mayor support 0y the centra'
government> 5ere not found to 0e statistica''y associated 5ith comp'iance.
-ina''y, it is 5orth mentioning that even though the centra' government has
esta0'ished fines in the event that a municipa'ity fai's to adhere to the accounting
standards set out 0y P1 $B*@@, no such action has 0een ta4en. &his situation cou'd
a'so 0e another reason 5hy municipa'ities have fai'ed to fu''y adhere to accounting
standards as e.hi0ited in our statistica' resu'ts. As Berry and Daco0s <@,>
comments, the a0sence of an enforcement system is a 'eading reason of non#
comp'iance.
Conclusions
&his study contri0utes to the 'iterature of accrua' accounting reforms in pu0'ic
sector organi6ations through the e.amination of the 8ua'ity of the accrua'
accounting end#of#the#year financia' statements. 7t has 0een argued throughout the
study that these reforms can 0e considered successfu' in de'ivering high 8ua'ity
information to decision ma4ers on'y 5hen the issuing organi6ations comp'y 5ith
accounting standards and 5hen their respective e.terna' auditors provide amp'e
information concerning the e.tent of their c'ients; comp'iance. =o5ever,
e.perience on a 5or'd5ide 0asis has sho5n that accrua's accounting cannot 0e
easi'y transferred into the pu0'ic sector rea'm. Even 5hen this happens, the
transition is considered far from successfu' since the 8ua'ity of information
provided 0y the ne5 accounting systems is rather 'o5 and therefore its use for
decision ma4ing purposes shou'd 0e made 5ith caution.
&his is the case in %ree4 municipa'ities 5here the advent of accrua' accounting cannot
easi'y 0e characteri6ed as successfu' due to their ina0i'ity or un5i''ingness to
+,
fu''y adhere to the ne5 accounting standards. 9oreover, the audit reports that are
supposed to provide a re'ia0'e 0asis for sta4eho'ders to revie5 the accounting data
provided 0y the municipa'ities are a'so of 8uestiona0'e 8ua'ity. Concerning this
phenomenon it cou'd 0e e.pected that the fami'iari6ation of auditors 5ith the
municipa'ities; accounting systems 5i'' significant'y improve the current situation.
&he 8ua'ity of audit reports can 0e e.pected to improve through the esta0'ishment
of a system 5here the reports are su0Cect to third party revie5s and sanctions are
imposed to audit firms in the event they issue 'o5 8ua'ity reports. -urthermore, our
resu'ts indicate that comp'iance is affected 0y the e.terna' auditor si6e, as 5e'' as
0y the municipa'ity si6e, 5ea'th and e.perience in accrua' accounting. =o5ever,
even though these resu'ts provide interesting imp'ications, the 'o5 avai'a0i'ity of
data 0eyond the fisca' year +!!$ 'imits the a0i'ity to genera'i6e our findings. &hus,
a fo''o5 up study conducted on the municipa'ities of our samp'e cou'd provide a
usefu' perspective concerning the over#the#time effect of the varia0'es that are
e.pected to inf'uence comp'iance, as 5e'' as the 'ong#term evo'vement of the
informative 8ua'ity of municipa'ities; financia' reporting. 7n addition to that, it
5ou'd 0e interesting to further research on the 5ay shareho'ders; and
management;s perceived usefu'ness of accrua' accounting financia' reports
inf'uences %ree4 municipa'ities; adherence to accounting standards.
+@
Endnotes

&he reform 5as mandatory for a'' municipa'ities that met the criteria of more
than B,!!! citi6ens or revenues of more than .B mi''ion M.
2
&he %ree4 audit mar4et is dominated 0y a fe5 maCor firms, 5hich 5ith the
e.ception of the audit firm S:L S.A. have sho5n 'itt'e interest in entering the
mar4et of municipa' audits. &hus the municipa'ities; audits have 0een underta4en
0y either S:L S.A. or 0y sma'' audit firms.
$
&he audit reports conc'ude 0y stating that( Fta4ing into consideration our
aforementioned remar4s 5e 0e'ieve that the present financia' statements represent
the true and fair financia' position of the municipa'ityH. &his same 5ording,
according'y adCusted, is customari'y used to e.press an un8ua'ified opinion in the
private sector as 5e''.
"
7t is a customary practice in %reece for auditors to ma4e remar4s in their audit
reports in accordance 5ith the =e''enic Auditing Standards and Professiona' Ethics
<&he 7nstitute of Certified Auditors in %reece, @@@, p. ,!>.
B
?e refer to a negative re'ationship since in the comp'iance inde. C$ a
municipa'ity is considered to 0e fu''y comp'iant 5ith accounting standards 5hen it
ta4es a mar4 of B and to 0e tota''y non#comp'iant 5hen it ta4es a mar4 of !.
$!
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$"
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$B
,a%le !' 0escriptive statistics for te tree alternative compliance indices
Compliance Std1
Inde- " Minimum Ma-imum Mean 0eviation
C ,B !.!! !.B !.!!76 !.!,@
C+ ,B !.!! .!! $.7+"$ +."$@"
C$ ,B ".!! B.!! .B"!B +.!,+B
?here(
C is the ratio of <alue form deiations from accounting principles'<alue of ,unicipalit+
equit+.
C+ is the num0er of the auditor;s comments.
C$ is the overa'' comp'iance inde. that is ca'cu'ated as the sum of the B dichotomous
varia0'es that refer to the municipa'ities; comp'iance 5ith accounting practices.
$6
,a%le $' Areas of non2compliance contained in audit reports
Auditors Remark "um%er of "um%er of
municipalities municipalities tat
tat adered to failed to adere to te
te accounting accounting standard
standard
. E.istence of interna'
audit function
+. Accurate va'uation
of investments
$. Ca'cu'ation of provisions
". Accurate va'uation of
accounts receiva0'es
B. Proper cash account
management
6. Accurate fi.ed
assets va'uation
7. Proper operation of the
dou0'e entry
accounting system
,. Accurate va'uation
of 'ia0i'ities
@. 7dentification of
contingent 'ia0i'ities
!. Proper operation of
computer
information systems
. Accurate recognition
of revenues
+. Accurate recognition
of e.penses
$. Accurate ca'cu'ation of
depreciation # amorti6ation
". :peration of a cost
accounting system
B. 9isce''aneous issues
@7 <B+."$L> ,, <"7.B7L>
7 <$,.$,L> " <6.6+L>
6" <,,.6BL> + <.$BL>
"6 <+".,6L> $@ <7B."L>
6+ <,7.B7L> +$ <+."$L>
B6 <,".$+L> +@ <B.6,L>
"! <7B.6,L> "B <+".$+L>
B7 <,".,6L> +, <B."L>
66 <,@.7$L> @ <!.+7L>
76 <@B."L> @ <".,6L>
6, <@!.,L> 7 <@.@L>
7! <@.,@L> B <,.L>
6, <@!.,L> 7 <@.@L>
77 <@B.6,L> , <".$+L>
7 <6$.+"L> 6, <$6.76L>
$7
,a%le /' 3(S regression results
C+ K a ) 0 1ong term $ebt per capita ) c 2wn C$ K a ) 0 1ong term $ebt per capita ) c 2wn
reenues'3otal reenues ) d #opulation per square reenues'3otal reenues ) d #opulation per square
"ilometer ) e Auditor = f ,a+or ) g 1earning .ffects ) "ilometer ) e Auditor = f ,a+or ) g 1earning .ffects )
u u
a +.@B7SSS <"."",> +.$$SSS <+.!,+>
0 #!.!!!B67 <#!.@+> !.!!!@" <!.$6,>
c +.+,SS <+.,!> #.BB6S <#.77>
d !.!!!!,+S <.6@!> #!.!!!!,,SS <#+.!@+>
e #.",SSS <#$.!,7> !.7$"SS <+.+7@>
f #!."! <#!.@$,> !.B6 <.B,>
g !.6!S <.67!> #!.B@BS <#.@!>
G
+
!.$7 !.!
adCusted
-#Ea'ue B.7,$SSS ".7+$SSS
SSS,SS,S indicate that the resu't is statistica''y significant at the L, BL, and !L 'eve' respective'y
t#va'ues are sho5n in 0rac4ets
?here(
C+ is the num0er of the auditor;s comments.
C$ is the overa'' comp'iance inde. that is ca'cu'ated as the sum of the B dichotomous varia0'es that
refer to the municipa'ities; comp'iance 5ith accounting practices <see &a0'e +>.
1ong term $ebt per capita: &he ratio Long term de0t*Popu'ation is a measure of the de0t 0urden of
the municipa'ity.
2wn reenues'3otal reenues: &his ratio sho5s the a0i'ity of the municipa'ity to generate 5ea'th
through its o5n means.
#opulation per square "ilometer: ?e pro.y for the si6e of the municipa'ity 0y dividing the num0er
of a municipa'ity;s inha0itants to its geographica' si6e.
Auditor: &his determines the e.terna' auditor;s si6e. A va'ue of is given 5hen a municipa'ity is
audited 0y S:L S.A. P 5hich is the 'argest audit firm conducting municipa' audits P 5hi'e a va'ue of
! is given 5hen it has 0een audited 0y a sma''er audit firm.
,a+or: &his varia0'e indicates 5hether a mayor is supported or not 0y the centra' government. A
va'ue of is given 5hen a mayor has 0een e'ected 5ith the centra' government support. :ther5ise a
va'ue of ! is given.
1earning .ffects: 3his ariable sho5s 5hether the municipa'ity has issued accrua' 0ased financia'
statements prior to +!!$. A va'ue of is given 5hen it has issued statements prior to +!!$.
:ther5ise, a va'ue of ! is given.
$,
$@