The Quality and Conservatism of the Accounting Earnings of Local Governments
Posted: 12 Apr 2006
Date Written: January 2006
We examine the properties of the accounting earnings reported by local governments across Australia. Specifically, we examine the following research questions: (i) Does accrual accounting for local governments provide useful information? and (ii) Are earnings reported by local governments conservative? The study is motivated by the interest world-wide of professional accounting bodies and central rule-making agencies in understanding the information content and the quality of accruals reported by public sector entities such as local governments. We find evidence that accrual accounting by local governments provides useful information. However the additional information provided may not be economically important. We find no evidence of conservatism in the financial reports of the average local government. This, we argue, is due to a lower level of demand for quality financial reports from these entities. Consistent with this argument, we find an increase in both the quality of accruals and the degree of conservatism for those local governments for which there is likely to be a higher demand for financial reporting quality.
Keywords: earnings, accruals, conservatism, usefulness, local governments.
JEL Classification: G28, H11, H79, M41, M44, M47, M48
Suggested Citation: Suggested Citation