Abstract:
The concept of opportunistic financial reporting (OFR) is similar to earnings management in the corporate sector, but acknowledges several key differences in the governmental sector – most importantly, (a) most governmental revenues are not “earned” in the traditional sense, and (b) governments follow a unique reporting model, which utilizes both full accrual and modified accrual accounting, resulting in two separate sets of financial statements. In this study, I use a unique dataset of hand-collected financial data from over 200 Californian municipalities over a five-year period (2009-2013) to provide insight into three important aspects of OFR: motivation, methods, and materiality. With respect to motivation, I find that governments are incentivized to use OFR to pursue a breakeven income in both the full accrual and modified accrual financial statements, and that credit market participation significantly influences these activities. With respect to the methods of OFR, I find evidence that municipalities use discretion over accruals, make general fund transfers, and time asset sales opportunistically. With respect to materiality, I find evidence that municipalities are more likely to use OFR to fully avoid reporting a deficit when creditor scrutiny is high. My findings contribute to existing research that examines the association between credit market participation and accounting choices in governments. I also contribute to an emerging stream of research that examines managerial opportunism within the governmental reporting model.
