Political interference in private entities’ financial reporting and the public interest: Evidence from the Spanish financial crisis

Abstract

This paper provides a theoretical background, based on legal and political fields, which we adapt to explain political interference in accounting in the “public interest”, at a critical moment —the last financial crisis. This framework goes beyond the positive accounting theory, and in particular the political cost hypothesis, to explain politicians’ influence on financial reporting. We examine the behavior of the newly elected Spanish government, which issued accounting impairment rules for banks in spite of IFRS being in place. The paper considers a highly politically connected financial entity —Bankia— as a case under study, where the political interference might have impacted the accounting practices as well. The analysis shows how after applying the new rules, the financial industry impairment trend was completely unrelated with the evolution of delinquency, as one could expect if IAS 39 were followed. Regarding Bankia, our analysis suggests that its bankruptcy was orchestrated as a means to justify the immediate government request of EU funding. We argue that the government intervention, which implied non-compliance with IFRS, was in line with its economic goals, led to the financial sector bailout, and avoided the rescue of the entire country. This is what we call “breaking rules to achieve public interest”. Our research provides a new angle to consider the political motivations to intervene in accounting, and highlights the long-term unintended consequences of governmental interference for the globalization of accounting standards

Keywords: Financial Sector, Earnings Management, Political Interference, Bankia, Banks Accounting

JEL Classification: M48