Why do some governments resort to ‘creative accounting’ but not others? Fiscal governance in the Brazilian federation

Abstract

This paper investigates the determinants of compliance with fiscal rules. Using information from 27 Brazilian state governments, the paper shows that the level of political competition and the degree of political autonomy of the fiscal watchdogs explain the extent of creative accounting in the Brazilian federation. Despite hard budget constraints imposed by the much-acclaimed Fiscal Responsibility Law, state governors retain the strategic ability to undertake fiscal window dressing in response to fiscal stress. As fiscal watchdogs are not immune to the influence of the legislature and state governor, however, this paper demonstrates that their level of independence and autonomy is associated with the degree of creative accounting. In addition, we show that political competition encourages non-compliance through various causal mechanisms. Building effective and autonomous institutions is a precondition for deterring fiscal misconduct but this solution is ultimately a by-product of a political equilibrium resulting from selfenforced behavior of politicians.

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

“…The inclusion of this category is motivated by the debate among academics and practitioners about public-sector accounting and accountability (Manes-Rossi et al, 2020), which has shown that academic research has had a moderate impact on accounting practices (Steccolini, 2019). Indeed, the results emerging from the analysis (Figure 12) support the idea of such a limited influence, as 73 out of the 78 articles (about 94%) were written by academics, while only four articles (von Hagen and Wolff, 2006;Cheng et al, 2010;Melo et al, 2014;Kartiko et al, 2018) were written by a team that included at least one practitioner.…”

Divergências metodológicas dos Tribunais de Contas e seus efeitos sobre as regras de despesa com pessoal

“…The results of the research can be explained by the institutional limitations to the performance of the Courts of Account in the control of the rules concerning expenses. Melo, Pereira, and Souza (2014) associate the existence of a "fiscal creativity" to the institutional fragilities of the Courts of Account by exposing them to the pressure from local executive and legislative branches. One of such fragilities would be the absence of council members at full bench sessions who are selected by exams.…”

Courts of accounts divergent methodologies and its impacts on personnel expenditure rules

“…Lack of uniformization as to how to assess expenses with personnel not only impairs any comparability between balance sheets -especially the Fiscal Management Report -, but it also allows some Courts of Account to increase their own limit to expenses with personnel based on the methodology they apply by avoiding to resort to the adjustment measures set under the LRF. Nunes et al (2019) and Melo et al (2014) identified other divergences in the interpretations of such external control organs, which allow the record of the remaining payable balance over the cash flow available at the end of any tenure (in breach of section 42 of the LRF), or which were permissive with administrations failing to comply with their fiscal targets. The aforementioned authors state as the main justification the political interest of council members in courts who do not wish to harm local legislative or executive branches.…”