Manipulation of profits in Italian publicly-funded healthcare trusts

This paper examines earnings management in state-funded Italian healthcare trusts. Italy is unique in requiring trusts to have balanced budgets by law. Small negative and positive deviations from a balanced budget had quite different consequences. The authors found no evidence of accounting manipulation when trusts posted small losses. However, trusts were found to manipulate discretionary accruals, provisions and non-operating expenses to reduce small positive deviations from zero-profit.The authors have highlighted unintended consequences resulting from a balanced budget regime that are important for policy-makers making changes to financial reporting requirements. Policy-makers interested in mandating a ‘balanced budget’ in 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.