The effects of poor financial information systems on the long term sustainability of local public services. Empirical evidence from the Catalan Municipalities
In this paper we describe the existence of financial illusion in public accounting and we comment on its effects for the future sustainability of local public services. We relate these features to the lack of incentives amongst public managers for improving the financial reporting and thus management of public assets. Financial illusion pays off for politicians and managers since it allows for larger public expenditure increases and managerial slack, these being arguments in their utility functions. This preference is strengthen by the short time perspective of politically appointed public managers. Both factors run against public accountability. This hypothesis is tested for Spain by using an unique sample. We take data from around forty Catalan local authorities with population above 20,000 for the financial years 1993-98. We build this data basis from the Catalan Auditing Office Reports in a way that it can be linked to some other local social and economic variables in order to test our assumptions. The results confirm that there is a statistical relationship between the financial illusion index (FI as constructed in the paper) and higher current expenditure. This reflects on important overruns and increases of the delay in paying suppliers, as well as on a higher difficulties to face capital finance. Mechanisms for FI creation have to do among other factors, with delays in paying suppliers (and thereafter higher future financial costs per unit of service), no adequate provision for bad debts and lack of appropriate capital funding either for reposition or for new equipments. For this, it is crucial to monitor the way in which capital transfers are accounted in local public sheet balances. As a result, for most of the Municipalities we analyse, the funds for guaranteeing continuity and sustainability of public services provision are today at risk. Given managerial incentives at present in public institutions, we conclude that public regulation recently enforced for assuring better information systems in local public management may not be enough to change the current state of affairs.
|Date of creation:||Apr 2004|
|Contact details of provider:|| Web page: http://www.econ.upf.edu/|
When requesting a correction, please mention this item's handle: RePEc:upf:upfses:746. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.