Manipulation of profits in Italian publicly-funded healthcare trusts

Abstract

This paper examines the prevalence of earnings management in state-funded Italian health care local Trusts. The Italian setting is unique in that 'balanced-budget' requirements have been put forth by legislators. Furthermore, small negative and positive deviations from the balanced-budget bear different consequences. We find no evidence of manipulation when Trusts post small losses. However, we find the Trusts manipulate discretionary accruals, provisions and non-operating expenses to reduce small positive deviations from zero-profit. IMPLICATIONS The findings shed some light on potential incentives provided by a balanced-budget regime and thus are important for policy-makers in informing discussions on changes in financial reporting requirements, which may have unintended consequences. Specifically, policymakers interested in mandating a 'balanced-budget' within the health care sector or any sector that offers public services, should be aware of potential manipulation of reports both through accruals, and, importantly, through cuts in expenses, which may ultimately affect the level and quality of the services provided. The results from the Italian case allows generalisations to be drawn for other countries seeking to implement balanced-budget plans in their National Health Care Systems such as the UK.

Earnings management in public-sector organizations: a structured literature review

“…In addition to this, there is one case study analyzing one Finnish municipality (Vinnari and N€ asi, 2008). Six articles analyzed healthcare organizations (Ballantine et al, 2007(Ballantine et al, , 2008Greenwood et al, 2017;Greenwood and Zhan, 2019;Ibrahim et al, 2019;Anagnostopoulou and Stavropoulou, 2021), while only three studies (Capalbo et al, 2014(Capalbo et al, , 2020Gaio and Pinto, 2018) concentrated on state-owned enterprises. The remaining articles focused on other issues (e.g.…”

“…It could be argued that studies on public-sector EM are in their first stage; quite frequently, scholars adopt the same approaches and methods used in private-sector research or develop hypotheses based on findings emerging from previous studies (e.g. Ibrahim et al, 2019). While the contributions that investigated local governments considered the New Public Management paradigm (Vinnari and N€ asi, 2008), none sought to develop a new framework.…”

“…There are also studies using models with essentially no adaptions (e.g. Pilcher and Van der Zahn, 2010; Ferreira et al , 2013; Cohen et al , 2019; Ibrahim et al , 2019) or studies that develop their own models that are not directly related to private-sector EM research (e.g. Stalebrink, 2007; Felix, 2015).…”

Properties of accrual accounts in public sector entities: evidence from the Italian National Health Service

“…In the healthcare setting, Ballantine et al. (2007) document evidence of EM to avoid reporting a deficit in the U.K., but Ibrahim et al. (2019) and Greenwood et al.…”

Nonprofit expense management and the zero-profit threshold

“…Consequently, CEOs minimize reporting costs by managing earnings toward zero.” While humans target round-numbered thresholds across many settings, incentives related to nonprofit firms’ earnings make one round-numbered threshold particularly relevant in this setting: zero. Many prior papers have examined the behavior of nonprofit firms around this zero-profit threshold (see, for example, Leone and Van Horn, 2005; Hoerger, 1991; Ibrahim et al , 2019; Jegers, 2013; Anagnostopoulou and Stavropoulou, 2021 and Ballantine et al , 2007).…”