Abstract

Local governments on the municipal level were among the first organizations to
take part in the accounting reform in Greece that sought the transformation of
the traditional budgetary cash accounting system to a new system that
combines cash and accrual accounting information. In this paper we examine the
level of information quality obtained by the end-of-the-year accrual financial
statements of Greek municipalities in terms of accounting principles compliance
measured by three alternative compliance indices. In addition to that, we
investigate the role of external auditors in terms of the informational quality of
the financial reports. Moreover, based on previous studies we investigate the
effect of certain factors on the three alternative compliance indices. Our results
indicate that there is plenty of room for improvement in relation to the quality of
the information content of municipalities financial reports. A better presentation
of the magnitude of deviations from accounting standards in auditor reports
could serve towards this direction. Additionally, variables that relate to the
auditor size as well as to the municipality size, wealth and experience in accrual
accounting

were

found

to

exhibit

an

influential

role

on

the

level

of

comprehensiveness of the accounting information provided to stakeholders

through end-of-the-year financial statements.

Methodology
For the purposes of our study we examined the audit reports of Greek
municipalities end-of-the-year financial statements for the fiscal year 2003.
These audit reports contain monetary and qualitative information that can be
utilized in order to evaluate the degree to which a municipality adheres to
accounting standards. Even though according to studies conducted in the private

sector (Wright and Wright, 1997) auditors do not report on every single material
misstatement, we expect that the audit reports will give a good indication of the
extent of adherence to accounting standards. Thus, our review of the audit
reports will provide an indication of the quality of the audit work conducted on
Greek municipalities annual accounting statements.

discussion
The present research study focused on the outcome of the accounting
reform that took place in Greek municipalities. More specifically, we examined
the quality of end-of-the-year statements issued by these entities for the fiscal
year 2003. Moreover, we tested whether a number of factors previously cited in
the relevant literature influence municipalities compliance with accounting
standards. Our results indicate that the majority of municipalities under review
have clearly failed to provide high-quality data to their stakeholders. This finding
has severe implications regarding the success of the accounting reform since the
main objective was to provide the municipalities stakeholders with high-quality
accounting information; this however does not seem to have been accomplished.
Therefore, it is rational to assume that the other expected benefits from the
reform such as the improvement of accountability, which depends on the
enhancement of accounting information have not been achieved, at least to the
desired extend, either.
Moreover, our empirical evidence cast doubts upon the quality of external
auditors assessments of local governments end-of-the-year statements. The
examination we conducted on the municipalities audit reports revealed that the
deviations from accounting standards that were disclosed by the external
auditors were mostly not quantified; thus it is not possible to ascertain the

magnitude of these organizations attempts to distort their true financial

condition. In addition to that, the opinions that were issued by external auditors
regarding the reliability of the municipalities financial statements were in every
single case unqualified regardless of the severity of certain issues revealed in the
reports. These findings clearly demonstrate the strong need for improvement of
the external auditor assessments; the current situation leaves the municipalities
stakeholders exposed to potentially low-quality accounting data that cannot be
considered as a solid basis for decision making.
The

prerequisite

for

the

improvement

of

effectiveness,

efficiency,

economy and accountability in these public sector organizations is the

enhancement of information that their accounting systems provide. Our findings
however reveal that this has not been accomplished since the municipalities on
the one hand and their respective external auditors on the other do not seem to
have fulfilled their roles in full scale. Of these two parties however, the
responsibility of the external auditor may be much greater; even if the window
dressing is managements goal in order to ameliorate the financial performance
and position of an entity, it is up to the external auditor to ensure that
stakeholders could accurately interpret this set of data. The case of Greek
municipalities as discussed in this paper strongly supports the conclusion that
Jones and Pendlebury (2004) came to; that as long as preparers of financial
statements and auditors are content with the underlying accounting, any noncompliance with financial reporting policies is an irrelevance.
As regards the factors that affect municipalities compliance with
accounting
standards, this study demonstrated a relationship with the auditor size, as well
as with the municipality size, wealth, and previous experience in issuing accrual

accounting end-of-the-year statements. In particular, the auditor size was found

to be positively related with compliance, while municipal size, wealth and
experience with accruals accounting exhibited a negative relationship. Larger
municipalities are probably experiencing bureaucratic problems that inhibit the
reform process and therefore the financial reports produced are of low
informative

quality.

Wealthier

municipalities

could

have

approached

the

implementation issue rather superficially since they do not heavily depend on

state financing and are therefore less inclined to satisfy the central government
which is the main source of financing for the less affluent local governments.
Moreover, even though the negative relationship concerning the accrual
accounting experience rejects our initial hypothesis, it is worth mentioning that
the results presented in Christiaens and Van Peteghem (2007) show that
compliance fluctuates through time. The two other variables we tested (namely:
dependence on debt financing and mayor support by the central government)
were not found to be statistically associated with compliance.
Finally, it is worth mentioning that even though the central government
has
established fines in the event that a municipality fails to adhere to the
accounting
standards set out by PD 315/99, no such action has been taken. This situation
could also be another reason why municipalities have failed to fully adhere to
accounting standards as exhibited in our statistical results. As Berry and Jacobs
(1981) comments, the absence of an enforcement system is a leading reason of
noncompliance.

This study contributes to the literature of accrual accounting reforms in public

sector organizations through the examination of the quality of the accrual
accounting end-of-the-year financial statements. It has been argued throughout
the study that these reforms can be considered successful in delivering high
quality information to decision makers only when the issuing organizations
comply with accounting standards and when their respective external auditors
provide ample information concerning the extent of their clients compliance.
However, experience on a worldwide basis has shown that accruals accounting
cannot be easily transferred into the public sector realm. Even when this
happens, the transition is considered far from successful since the quality of
information provided by the new accounting systems is rather low and therefore
its use for decision making purposes should be made with caution.

This is the case in Greek municipalities where the advent of accrual accounting
cannot

easily

be

characterized

as

successful

due

to

their

inability

or

unwillingness to fully adhere to the new accounting standards. Moreover, the

audit reports that are supposed to provide a reliable basis for stakeholders to
review the accounting data provided by the municipalities are also of
questionable quality. Concerning this phenomenon it could be expected that the
familiarization of auditors with the municipalities accounting systems will
significantly improve the current situation. The quality of audit reports can be
expected to improve through the establishment of a system where the reports
are subject to third party reviews and sanctions are imposed to audit firms in the
event they issue low quality reports. Furthermore, our results indicate that
compliance is affected by the external auditor size, as well as by the municipality

size, wealth and experience in accrual accounting. However, eventhough these

results provide interesting implications, the low availability of data beyond the
fiscal year 2003 limits the ability to generalize our findings. Thus, a follow up
study conducted on the municipalities of our sample could provide a useful
perspective concerning the over-the-time effect of the variables that are
expected to influence compliance, as well as the long-term evolvement of the
informative quality of municipalities financial reporting. In addition to that, it
would be interesting to further research on the way shareholders and
managements perceived usefulness of accrual accounting financial reports
influences Greek municipalities adherence to accounting standards.