10 1108 - Jpbafm 22 02 2010 B006

JOURNAL OF
PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT
Volume 22, Number 2, Summer 2010

CONTENTS
Conceptualizing Financial Condition in Local Government ............ 149
W. C. Rivenbark, D. J. Roenigk, and G. S. Allison
What Hath the GASB Wrought? The Utility of the New Reporting
Model: A National Survey of Local Government Finance Officers 178
H. A. Frank and G. A. Gianakis
Symposium on Governmental Accounting Reforms: Part II …........ 205
O. J. Stalebrink and J. F. Sacco
In the Shadow of Corporate Scandal: The Use of Audit
Committees in U.S. Local Governments .......................................... 206
D. S. T. Matkin
The Adoption of GASB 34 in Small, Rural, Local Governments ..... 227
P. A. Patrick
Accounting Innovations: A Contingent View on Italian Local
Governments ..................................................................................... 250
E. Anessi-Pessina, G. Nasi, and I. Steccolini
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iv J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT
Governmental Accounting Editorial Board

William R. Baber, George Washington University
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Paul Copley, James Madison University
Mary Fischer, University of Texas at Tyler
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Jackie Reck, University of South Florida
Robin W. Roberts, University of Central Florida
Walter Robbins, University of Alabama
Marc A. Rubin, Miami University (Ohio)
Florence Sharp, Ohio University
Pamela C. Smith, University of Texas at San Antonio
Thomas Vermeer, University of Baltimore
Jayaraman Vijayakumar, Virginia Commonwealth University
J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 22 (2), 149-177 SUMMER 2010
CONCEPTUALIZING FINANCIAL CONDITION IN LOCAL GOVERNMENT

William C. Rivenbark, Dale J. Roenigk, and Gregory S. Allison*
ABSTRACT. While the passage of Statement No. 34 by the Governmental

Accounting Standards Board (GASB, 1999) created a more robust financial
reporting model, local officials continue to struggle with defining financial
condition, interpreting it from annual financial statements, and
communicating it in a systematic way. This review presents a framework for
analyzing, interpreting, and communicating financial condition within the
fund and government-wide reporting structure. It specifically responds to the
void in the public administration literature for a manageable, yet
comprehensive, approach to financial condition analysis. The goal is to help
local officials conceptualize financial condition from the interpretation of
resource flow and stock as presented in annual financial statements.
INTRODUCTION
Determining the financial position of a local government is
relatively straight forward. Management prepares external financial
statements at fiscal year end, which are subjected to an independent
audit. An unqualified audit opinion informs the reader that the
statements were prepared in conformity with generally accepted
accounting principles (GAAP) and that they present, in all material
respects, the financial position of the organization. While receiving an
unqualified audit opinion is extremely important, how does a local
official respond when a stakeholder moves beyond financial position
and inquires about financial condition?
------------------------------
*William C. Rivenbark, Ph.D., Dale J. Roenigk, Ph.D., and Gregory S. Allison,
CPA, are a Professor, a Lecturer, and a Senior Lecturer, respectively, School
of Government, University of North Carolina at Chapel Hill. William C.
Rivenbark specializes in performance and financial management. Dale J.
Roenigk is director of the North Carolina Benchmarking Project. Gregory S.
Allison specializes in governmental accounting and financial reporting.
Copyright © 2010 by PrAcademics Press

150 RIVENBARK, ROENIGK & ALLISON
The local official is faced with two fundamental problems. First,

unlike private firms with one income statement and one balance
sheet, a local government’s annual financial report contains multiple
operating statements and balance sheets. Second, while there is
universal agreement on the importance of fiscal health, there is little
agreement on what financial dimensions and indicators actually
represent financial condition (Wang, Dennis, & Tu, 2007).
The Governmental Accounting Standards Board (GASB)
responded to the first problem in 1999 with the passage of GASB
Statement No. 34, Basic Financial Statements—and Management’s
Discussion and Analysis—for State and Local Governments,
expanding the financial reporting model to include financial
statements at the fund level and financial statements at the
government-wide level (GASB, 1999). The government-wide financial
statements, similar to those of private firms, include one operating
statement (statement of activities) and one balance sheet (statement
of net assets) for the entire organization, opening the door for a more
comprehensive methodology for analyzing, interpreting, and
communicating financial condition.
Frank and Gianakis (2008) found, however, that local officials are
not using the expanded financial reporting model for many of the
same reasons for which it was passed, including financial condition
analysis. One possibility for this finding is that different reporting
levels and different methods of applying the accrual concept have
only increased the complexity of how financial statements are
prepared and presented in local government.1 Another possibility is
that current approaches to analyzing, interpreting, and
communicating financial condition do not align with the expanded
financial reporting model, including the fundamental objectives of
financial reporting.
This article reviews the financial reporting model, defines
financial condition, and presents a comprehensive framework for
conceptualizing financial condition from the interpretation of resource
flow and stock within the fund and government-wide reporting
structure. It then presents how a dashboard can be used to
effectively communicate financial indicators to individuals with or
without backgrounds in governmental accounting and financial
reporting.2 It concludes with a discussion on specific outcomes that
CONCEPTUALIZING FINANCIAL CONDITION IN LOCAL GOVERNMENT 151
occurred when a small municipality in North Carolina implemented

the framework.
REVIEWING THE FINANCIAL REPORTING MODEL

Mead (2002) made a strong case that government-wide
statements have allowed us to make another step toward the
objectives of financial reporting as contained in Concepts Statement
No. 1—Objectives of Financial Reporting—and adopted by the GASB
(1987). While we agree with his analysis, the irony of government-
wide statements is that they provide a more complete financial
picture for the entire organization and add another layer of complexity
for analyzing, interpreting, and communicating financial condition.
An important part of communicating financial condition is
providing users with a basic understanding of the financial reporting
model, focusing on the fund and government-wide statements that
drive the financial condition analysis. Our review is based on
analyzing, interpreting, and communicating financial condition from
governmental and business-type activities, governmental funds, and
enterprise funds.
While certain stakeholders may need information on fiduciary
funds and internal service funds, we do not include them in our
approach for evaluating financial condition. We do not include
fiduciary funds because the resources accounted for within pension
trust, investment trust, private-purpose trust, and agency funds are
owned by parties other than the local government. The local
government plays a fiduciary role in the stewardship of these
resources. We do not include internal service funds because of their
unique position within the new accounting model; for example,
multiple internal service funds are combined for presentation at the
fund level and their accumulated resources are dispersed back to
either governmental activities or business-type activities at the
government-wide level as required by GAAP for external reporting
purposes.3
Figure 1 contains the revised financial reporting model, excluding
internal service funds and fiduciary funds, for conducting the financial
condition analysis.4 Users need information on two important aspects
FIGURE 1
Revised Financial Reporting Model for Financial Condition Analysis
of the model before receiving data on financial condition. The first is

an overview of the fund level, including a complete list of the
governmental funds (general, special revenue, debt service, capital
projects, and permanent funds) and enterprise funds being used by
the local government and what services and activities are being
accounted for within each fund. This also provides users with
information on what governmental funds are being consolidated at
the government-wide level for presenting the financial position of
governmental activities and what enterprise funds are being
consolidated at the government-wide level for presenting the financial
position of business-type activities. The governmental activities and
business-type activities also are combined at the government-wide
level to present the financial position of the primary government.
The second aspect is how the accrual concept is applied
differently at the government-wide level and for enterprise funds as
compared to governmental funds. Government-wide activities
(governmental and business-type) and enterprise funds measure
economic resources using the accrual basis of accounting; therefore,
the value of capital assets and the amount of long-term debt

associated with these activities and funds are included on their
financial statements. Governmental funds measure financial
resources using the modified accrual basis of accounting; therefore,
the value of capital assets and the amount of long-term debt
associated with these funds are not included on their financial
statements.
The reality is that the financial reporting model created by GASB
Statement No. 34 is complicated. While we acknowledge this reality,
users must be provided with basic information on governmental
accounting and financial reporting before they are informed about
financial condition. This is especially true for elected officials, giving
them the ability to ask more informed questions and the ability to
read financial statements in carrying out their fiduciary
responsibilities.
DEFINING FINANCIAL CONDITION

Although the literature contains numerous definitions of financial
condition, the current ones are either specific in nature or broad in
scope (Wang, Dennis, Tu, 2007). A specific definition, for example,
would be defining financial condition as solvency. We could then
select a financial indicator like fund balance as a percentage of
expenditures to measure solvency with data taken directly from the
annual financial statements.
There are two advantages to this approach. One is the simplicity
of using a single financial ratio when communicating financial
condition, including the ability to compare it against a fund balance
policy or a professional standard for context. Another is that the
financial ratio of fund balance as a percentage of expenditures is
arguably the most recognized financial indicator in local government
and is based on the extremely important general fund. A major
limitation to this approach is that a narrow definition supported with a
single financial ratio simply cannot capture the numerous financial
dimensions of a local government across the multiple funds it uses to
account for the multiple types of services and activities provided.
One of the most cited definitions of financial condition, which is
much broader in scope, comes from the International City/County
Management Association (ICMA). Financial condition is defined as a

government’s ability to finance its services on a continuing basis,
including a government’s ability to maintain existing service levels, to
withstand systematic and unsystematic risk, and to meet the
demands of natural change over time (Nollenberger, 2003).5 This
definition is supported with a methodology that contains over 40
financial and environmental indicators that reflect dimensions of
financial condition and dimensions that impact financial condition,
respectively, taking into account the characteristics of time,
environment, multidimensional relationships, and implicit and explicit
obligations (Berne, 1996).
A clear advantage of this definition is its similarity with how bond
rating agencies measure financial condition and community risk,
focusing primarily on the likelihood of fiscal deterioration and on a
local government’s ability to amortize debt. Local governments, like
the cities of Rye, New York, and Scottsdale, Arizona, also have been
successful in tailoring the ICMA model to conduct comprehensive
financial trend reports.6
There are challenges with using a definition that is broad in
scope. One is the complexity of mixing dimensions of financial
condition with dimensions of the environment, representing a form of
analysis beyond interpreting financial condition at fiscal year end.
Another is that the ICMA model does not address government-wide
statements. Chase and Phillips (2004) made a very strong argument
that the new reporting model provides stakeholders for the first time
with a comprehensive overview of a local government’s financial
position and condition, representing a financial reporting objective
(GASB, 1987) and a primary reason for the passage of Statement No.
34 (GASB, 1999). Mead (2002) also concluded that the new
reporting model has advanced a local government’s ability to
demonstrate financial position but suggested that more work is
needed for better reporting of financial condition.
We recognize that any definition of financial condition in local
government is going to contain advantages and disadvantages.
Therefore, we turn to the two basic reasons why financial statements
are prepared. The first is to report on the flows of resources during a
given time period (Berne and Schramm, 1986), which is
accomplished with an operating statement that shows the revenues
and expenditures (expenses) of an organization. Focusing on

resource flow is aligned with two financial reporting objectives, which
are to assess interperiod equity and to provide information about
sources and uses of financial resources (GASB, 1987). The second
reason for financial statements is to report on the stocks of resources
at a given point in time (Berne & Schramm, 1986), which is
accomplished with a balance sheet that shows the stocks of assets,
liabilities, and fund balance (net assets). Focusing on resource stock
also is aligned with a financial reporting objective, which is to provide
information necessary to determine whether an organization’s
financial position improved or deteriorated as a result of resource
flow (GASB, 1987).
Expanding on the two reasons why local governments prepare
financial statements (Berne & Schramm, 1986) and on the objectives
of financial reporting (GASB, 1987), we define financial condition as a
local government’s ability to meet its ongoing financial, service, and
capital obligations based on the status of resource flow and stock as
interpreted from annual financial statements. The next step is to
select the financial dimensions and indicators that most closely align
with resource flow and resource stock, which are applied to fund and
government-wide statements for analyzing and interpreting a local
government’s ability to meet its ongoing obligations.
SELECTING FINANCIAL DIMENSIONS AND INDICATORS

The literature is rich with financial dimensions and indicators that
have been used over the past 30 years for analyzing, interpreting,
and communicating financial condition in local government. The ICMA
published one of the most comprehensive approaches for monitoring
financial and environmental factors in local government in 1980
(Nollenberger, 2003). This publication is now in its fourth edition.
Groves, Godsey, and Shulman (1981) described the advantages and
disadvantages of the ICMA model—which included technical and
managerial problems—and Berne (1996) used it to advance his
research on exploring alternative methods for measuring and
reporting financial condition. As mentioned earlier, the ICMA model is
more aligned with a bond rating approach (Wilson, Kattelus, & Reck,
2007) and does not address government-wide statements.
Brown (1993) created the ten-point test as a model to

communicate financial condition to a broad range of stakeholders
because evaluating and monitoring financial condition with a large
number of financial and environmental indicators can be difficult for
smaller organizations. The advantage of this approach is the ability to
evaluate financial condition with only 10 indicators and to
communicate it based on a scale created from the financial results of
other local governments, ranging from among the worst to among the
best. The major disadvantage is that the ten-point test was designed
for governmental funds only. It does not address enterprise funds.
The ten-point test was updated by Mead (2006) in response to
the new reporting model, using financial indicators to capture the
financial dimensions of financial position, financial performance,
liquidity, solvency, revenues, debt burden, coverage, and capital
assets. While the ten-point test continues to represent a simplified
approach for communicating financial condition, it does not apply the
selected financial dimensions and indicators across the fund and
government-wide reporting structure in a systematic way. The ten
indicators also are given equal weight—which may not be appropriate
for all local governments—and an overall positive score may hide a
particular area of weakness shown by an individual indicator.
Numerous studies on analyzing the financial condition of state
and local governments based on selected financial dimensions and
indicators also provide a wealth of information on what constitutes
financial condition. Chaney, Mead, and Schermann (2002) used the
financial dimensions of financial position, financial performance,
liquidity, and solvency to explore what the new financial reporting
model means to financial condition analysis, using the comparison of
two local governments for demonstrating relevance. Kamnikar,
Kamnikar, and Deal (2006) used the financial dimensions of liquidity,
solvency, and ability to provide basic services to rank the financial
condition of 47 states. Wang, Dennis, and Tu (2007) recently
published one of the most comprehensive approaches to analyzing
financial condition in state government, using cash solvency, budget
solvency, long-run solvency, and service solvency.
These studies, however, focused on financial condition at the
government-wide level and did not address the financial condition of
individual funds (governmental and enterprise). The problem with not
including funds when conducting financial condition analysis is that

the majority of policy decisions in local government are made on a
fund-by-fund basis, including the all important annual budget process.
Other sources also were reviewed for selecting the financial
dimensions and indicators used in our approach for analyzing,
interpreting, and communicating financial condition in local
government (Mead, 2001; Hendrick, 2004; Kloha, Weissert, & Kleine,
2005; Kloha, Weissert, & Kleine, 2005a; Ives, 2006; Wilson,
Kattelus, & Reck, 2007).
Selection Criteria
Our challenge was selecting from the numerous financial
dimensions and indicators contained in the literature to support our
framework. We began by focusing on dimensions and indicators that
most closely align with resource flow and stock, returning to the
specific language contained within our definition of financial
condition. This hierarchal process also is found in the performance
measurement literature, where program managers are encouraged to
identify higher order measures of efficiency and effectiveness from
their mission statements, goals, and objectives. By tailoring this
process, we have a mission (ability to meet obligations), goals
(adequate resource flow and stock), objectives (financial dimensions),
and performance measures (financial indictors).
We then moved toward dimensions and indicators that report on
financial condition—not on environmental conditions. We exclude
environmental factors because they do not represent actual financial
condition as determined from analyzing resource flow and stock from
annual financial statements, which represents the goal of our
research. Our framework should inform an elected official on whether
or not a local government’s financial position improved from when
the individual entered office four years ago. Including environmental
factors represents a different form of analysis; for example, when
local officials prepare for a bond rating presentation.
Another selection criterion that builds on the previous one is
limiting the number of indicators used for analyzing financial
condition. When the number increases and when environmental
factors are added, the complexity of the model increases, the model’s
utility for communicating financial condition to a broad range of
stakeholders decreases, and more organizational capacity and

management commitment are required (Groves, Godsey, & Shulman,
1981) for model implementation. This is why the ICMA model is used
primarily by larger local governments.
We also wanted dimensions and indicators that lend themselves
to specific interpretation. When the total margin indicator is above
one, for example, we know that resources available exceeded
resources consumed. In contrast, there is disagreement on how to
interpret the financial indicator of revenues per capita, which is
commonly found in the literature. Some have suggested that a low
result gives local governments flexibility in obtaining additional
resources. Others have interpreted a low result as local governments’
not having the tax base to support services. We do acknowledge that
subjectivity is more prevalent in some of our indicators as compared
to others.
A final criterion was to select dimensions and indicators that
could be used to analyze financial statements prepared on the
accrual basis (government-wide statements and enterprise fund
statements) and prepared on the modified accrual basis
(governmental funds). While we were successful to some extent, we
were not able to replicate all indicators because accrual statements
account for economic resources and modified accrual statements
account for financial resources. A reason for using the same
measures when possible is that users become more attuned to them,
reducing the complexity of using too many dimensions and indicators.
Flow and Stock of Economic Resources

Table 1 contains the four financial dimensions we have selected
to analyze resource flow and the four financial dimensions to analyze
resource stock for the government-wide level (governmental activities
and business-type activities) and for enterprise funds, responding to
how they measure economic resources. Table 1 also contains the
description of each financial dimension, the indicator used to analyze
it, the calculation for each indicator, and how to interpret the results.
The four financial dimensions to analyze resource flow are
interperiod equity, financial performance, self-sufficiency, and
financing obligation. The dimensions of interperiod equity and
financial performance were selected to evaluate two important
aspects of resource flow. The total margin ratio—which is used to

interpret interperiod equity on whether or not a government lived
within its means—compares the amount of inflow (total revenues) to
the amount of outflow (total expenses), representing the primary
reason
TABLE 1
Government-Wide Level and Enterprise Funds
(Economic Resources and Accrual Basis)
Resource Flow
Dimension Description Indicator Calculation Interpretation
Addresses Total Total revenues A ratio of one or
whether or not margin divided by total higher indicates
a government ratio expenses that a
Interperiod
lived within its government lived
equity
financial means within its
during the fiscal financial means
year
Provides the Percent Change in net A positive percent
magnitude of change in assets divided change indicates
how a govern- net assets by net assets, that a
ment’s financial beginning government’s
Financial
position financial position
performance
improved or improved
deteriorated as
a result of
resource flow
Addresses the Charge to Charges for A ratio of one or
extent to which expense services higher indicates
Self- service charges ratio divided by total that the service is
sufficiency and fees expenses self-supporting
covered total
expenses
Provides feed- Debt Debt service
Service flexibility
back on service service (principal and
decreases as
flexibility with ratio interest
more resources
Financing the amount of payments on
are committed to
obligation resources long-term debt)
annual debt
committed to divided by total
service
annual debt expenses plus
service principal
TABLE 1 (Continued)
Resource Stock
Government’s Quick ratio A high ratio
Cash & invest-
ability to suggests a
ments divided
address short- government is
by current
Liquidity term obligations able to meet its
liabilities (minus
short-term
deferred
obligations
revenue)
Government’s Net assets Unrestricted net A high ratio
ability to ratio assets divided suggests a
address long- by total government is
Solvency
term obligations liabilities able to meet its
long-term
obligations
Extent to which Debt to Long-term debt A high ratio
total assets are assets ratio divided by total suggests a
financed with assets government is
Leverage
long-term debt overly reliant on
debt for
financing assets
Condition of Capital 1– A high ratio
capital assets assets (accumulated suggests a
defined as condition depreciation government is
Capital remaining ratio divided by investing in its
useful life capital assets capital assets
being
depreciated)
for why operating statements exist. An analogy would be a water tank,

determining whether or not water inflow was sufficient to cover water
outflow during a given time period.
The percent change in net assets—which is used to interpret the
financial performance dimension of how a government’s net assets
improved or deteriorated from resource flow—represents a new
indicator created as a result of the new reporting model (Gauthier,
2007). Returning to the analogy of the water tank, percent change in
net assets provides feedback on the magnitude of how the beginning
water level contained in the tank changed as a result of net water

flow during a given time period.
The remaining dimensions—self-sufficiency and financing
obligation—were selected to evaluate specific components of
resource flow. Self-sufficiency addresses the extent to which service
charges and fees cover total operating expenses. It has historically
been used with enterprise funds and is now being used at the
government-wide level, representing a primary reason for how the
statement of activities was designed to present resource flow for
governmental and business-type activities. A question may arise from
applying the self-sufficiency dimension to governmental activities
because governmental services with public good characteristics (e.g.,
police) are not designed to be self-supporting like governmental
services with private good characteristics (e.g., water utility). However,
elected officials are often interested in the mix between general
taxation and user fee revenue when balancing the budget for the
forthcoming fiscal year.
Financing obligation as measured by the debt service ratio
provides feedback on service flexibility, focusing on the amount of
resources committed to annual debt service and representing a key
financial indicator used by financial analysts (Nollenberger, 2003). As
a profession, we do not have an accepted benchmark for which the
ratio should not exceed. However, we do know that an upward trend
decreases flexibility and that local governments often adopt debt
management policies that contain maximum percentages.
The four financial dimensions selected to analyze resource stock
are liquidity, solvency, leverage, and capital. These dimensions, along
with their indicators, are more prevalent in the literature as compared
to the dimensions on resource flow. Liquidity, as measured with the
quick ratio, evaluates a local government’s ability to meet its short-
term obligations. We selected the quick ratio over the current ratio to
prevent current assets like inventory from being used to evaluate a
local government’s ability to meet its short-term obligations.
Solvency, as measured by the net assets ratio, evaluates a local
government’s ability to meet long-term obligations. While the
literature contains several indicators for measuring this dimension,
we modified the approach used by Kamnikar, Kamnikar, and Deal
(2006) from unrestricted net assets divided by total expenses to
unrestricted net assets divided by total liabilities.7 Leverage, as

measured by the debt to assets ratio, is the extent to which a local
government has used long-term debt to finance assets. While the
amount of debt carried by a local government is ultimately a policy
decision, there is a direct correlation between leverage and financing
obligation. Therefore, the two cannot be viewed in isolation of each
other.
The fourth dimension we selected is capital, responding directly
to the new reporting model and using the indicator of the capital
assets condition ratio on the remaining useful life of capital assets
being depreciated. Another popular measure for analyzing the capital
dimension is the percent change of the net value of capital assets
(Mead, 2006). We selected the capital asset condition ratio because
the percent change of the net value of capital assets is more aligned
with resource flow rather than resource stock.
Flow and Stock of Financial Resources

Table 2 contains the three financial dimensions we have selected
to analyze resource flow and the three financial dimensions to
analyze resource stock for governmental funds. Two of the
dimensions for analyzing resource flow, along with their respective
ratios, are similar to the approach as presented with financial
statements that measure economic resources. They are service
obligation and financing obligation.8 The dependency dimension, as
measured by the intergovernmental ratio, replaces the self-sufficiency
dimension and represents a common approach for evaluating
resource flow for governmental funds. It provides feedback on risk by
focusing on the extent to which a government is reliant on other
governments for resources.
The three dimensions selected for analyzing resource stock for
governmental funds are liquidity, solvency, and leverage. While these
dimensions are used with financial statements that measure
economic resources, different ratios are used to evaluate the
dimensions of solvency and leverage given how financial statements
are prepared for governmental funds. Solvency is measured with fund
balance as a percentage of expenditures, which represents the most
cited financial ratio in local government. The leverage dimension as
measured by debt as a percentage of assessed value is often found
in state laws, which dictate the percentages in which this indicator

cannot exceed.9
TABLE 2
Governmental Funds
(Financial Resources and Modified Accrual Basis)
Resource Flow
Addresses Total revenues
Operations A ratio of one
whether or not divided by total
ratio or higher
a govern- expenditures
indicates that
ment’s annual (plus transfers
Service a government
revenues to the debt
obligation lived within its
were service fund
annual
sufficient to and less
revenues
pay for annual proceeds from
operations capital leases)
Provides the A high ratio
Intergovern- Intergovern-
extent to may indicate
mental ratio mental revenue
which a that a govern-
divided by total
government is ment is too
Dependency revenue
reliant on reliant on
other govern- other
ments for governments
resources
Debt service Debt service Service
Provides
ratio (principal and flexibility
feedback on
interest decreases as
service
payments on more
flexibility with
long-term debt, expenditures
the amount of
Financing including are committed
expenditures
obligation transfers to the to annual debt
committed to
debt service service
annual debt
fund) divided by
service
total expendi-
tures plus
transfers
TABLE 2 (Continued)
Resource Stock
Cash &
Government’s Quick ratio A high ratio
investments
divided by
address short- government
Liquidity current
term can meet its
liabilities
obligations short-term
(minus deferred
obligations
revenue)
Fund balance
Government’s A high ratio
as a Available fund
percentage of balance as a
continue government
expenditures percentage of
Solvency service can continue
total expendi-
provision to provide
tures plus
uninterrupted
transfers out
services
Debt as
Extent to which Tax-supported, A high ratio
percent of
a government long-term debt suggests a
assessed
Leverage relies on tax- divided by government is
value
supported debt assessed value overly reliant
on debt
INTERPRETING FINANCIAL CONDITION

Similar to calculating performance measures, calculating a
financial indicator at one point in time provides only limited
information. Therefore, comparative data from trend analysis are
needed. Also needed are benchmarks created from the financial
results of other local governments, from professional standards as
promoted by organizations like the Government Finance Officers
Association (GFOA), or from thresholds established by internal
financial policies or state laws to make a more robust interpretation
of financial indicators for decision-making purposes. A critical
element of this framework is the flexibility with establishing
benchmarks. Each local government must identify appropriate
benchmarks based on population, service provision, financial
policies, and other related factors.
The financial ratio of fund balance as a percentage of

expenditures used to evaluate the financial dimension of solvency for
governmental funds represents an excellent example of using
comparative data for interpretation. The indicator can be calculated
at the end of each fiscal year for trend analysis, evaluating whether
solvency is improving or deteriorating over time. It can be
benchmarked against local governments of similar size, providing
comparative data for further analysis. It can be compared against the
GFOA’s recommended policy of maintaining a minimum amount of
unreserved fund balance that equates to no less than 5 to 15 percent
of revenues—the GFOA uses revenues as the denominator rather than
expenditures.10 It also can be compared against the organization’s
adopted fund balance policy, which represents one of the most
important financial policies in local government.
Figure 2 contains the capital assets condition ratio for
governmental activities and business-type activities, which is used to
analyze the capital dimension of resource stock for “Capital City.”11
The ratio calculates the remaining useful life of capital assets by
subtracting accumulated depreciation divided by capital assets being
depreciated from one. The ratio shows that, on average, capital
assets for governmental funds have significantly less than half of
their useful lives remaining with a value of .39.
FIGURE 2
Capital Dimension of Resource Stock for Capital City
Governmental Activities Business‐Type Activities
0.75 0.75
Capital
Capital 0.50 0.50
assets 0.25 0.25
condition
0.00 0.00
ratio
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Capital City = 0.39, Benchmark = 0.50 Capital City = 0.52, Benchmark = 0.60
Trend analysis over the past five years shows that capital assets
will continue to depreciate faster than resources have historically
been invested in them unless a policy decision is made to reverse the
trend. Benchmark data also show that Capital City has fallen behind
in investing in its capital assets as compared to similar municipalities.
While the ratio applied to capital assets of business-type activities
reveals a downward trend and a similar comparison against other
municipalities, the problem is not as alarming with a value of .52.
COMMUNICATING FINANCIAL CONDITION

Using dashboards to communicate information is becoming more
common in local government. One purpose of a dashboard is to
prevent “data overload” by selecting only the most important
indicators for presentation. Another purpose is to take advantage of
graphical designs, giving context in which to interpret data with a
numerical and visual format. A dashboard also is promoted to help
communicate financial condition to individuals with varying
backgrounds in governmental accounting and financial reporting.
Appendix A presents a dashboard of how the four financial
dimensions of resource flow and the four financial dimensions of
resource stock are used to communicate the financial condition of
governmental activities, business-type activities, and the primary
government within the context of comparative data. Each indicator
used to measure the respective financial dimension for Capital City is
presented with five years of historical data for trend analysis,
including a benchmark.
Appendix B presents a dashboard of how the same financial
dimensions and indicators are used to evaluate the financial
condition of the two enterprise funds of the local government. Capital
City, in this example, operates a water and sewer system and an
electric system in separate funds. We did not use the financial
dimensions and indicators to evaluate the total enterprise column,
which is the aggregate of major and non-major enterprise funds. With
the exception of how internal funds are handled, the sum of business-
type activities at the government-wide level approximates the total
enterprise column.
Appendix C presents a dashboard of how the three financial
dimensions of resource flow and the three financial dimensions of
resource stock are used to communicate the financial condition of
governmental funds, including the general fund and total
governmental funds for Capital City. Again, five-years of historical

data and selected benchmark data are used to provide the necessary
context for analyzing, interpreting, and communicating financial
condition.
The next step for Capital City is to present the information found
in Appendices A, B, and C to elected officials, for example—along with
a written analysis of the financial condition of the municipality—
providing them with a systematic assessment of financial condition
within the fund and government-wide reporting structure as shown by
the major financial dimensions and indicators of resource flow and
stock. The importance of this approach also includes how the
financial data taken from annual financial statements can be used to
calculate financial indicators over time and compared against
benchmarks, increasing their usefulness to decision makers.
VILLAGE OF PINEHURST, NORTH CAROLINA

Our framework for analyzing, interpreting, and communicating
financial condition in local government is largely based on normative
research. We selected this approach to focus solely on the
conceptualization of financial condition rather than on the results
from calculating either fund level or government-wide level financial
indicators, which has been the preferred methodology of previous
studies and has produced an ad hoc literature on financial condition.
However, the stage is being set for descriptive research in the form of
multijurisdictional case studies and empirical analysis as more local
governments implement our framework.
The village of Pinehurst, North Carolina, a municipality of
approximately 11,500 in population, implemented our framework
after its annual audit for fiscal year 2008. While other local
governments in North Carolina have implemented our framework, we
selected Pinehurst to specifically demonstrate its utility for smaller
local governments. The village’s primary purpose for implementing
the framework was to help board members understand the financial
condition of the village and to help frame further policy discussions.12
Only twelve financial indicators were needed for the financial
condition analysis because an overwhelming majority of the services
and activities provided by the village are accounted for in the general
fund. The four flow indicators and four stock indicators contained in
Table 1 were calculated over a five-year period for the governmental
activities, responding to the accrual basis of accounting used at the
government-wide level. The three flow indicators and three stock
indicators contained in Table 2 were then calculated over a five-year
period for the general fund, responding to the modified accrual basis
of accounting used for governmental funds.
The village identified four municipalities to calculate the
benchmark for each of the twelve indicators (Southern Pines,
Hendersonville, Carrboro, and Cornelius). These municipalities were
chosen because of population and because the majority of their
services and activities are accounted for in the general fund. Similar
size municipalities with major utilities (enterprise funds) were not
selected. The village specifically used comparative data to calculate
the benchmark for each indicator rather than using benchmarks from
internal policies or from benchmarks determined by state law. The
assistant village manager believed that this approach provided
additional context for discussion, understanding that the board
members were already aware of internal policies and state law. The
village also decided to present and discuss the results of the financial
indicators by financial dimension rather than by placing them on one
dashboard. This modified dashboard approach was used specifically
to highlight the financial strengths of the organization and the areas
that need further work.
Three outcomes occurred from the village’s implementing our
framework to financial condition analysis. The first outcome was that
board members asked more questions concerning financial condition
as compared to previous years, when they received only audited
financial reports. The assistant village manager responded that this
outcome alone was worth the staff time invested in preparing the
report.
The second outcome was that some board members were able to
connect the dots between the specific flow and stock indicators and
the financial statements from which they were calculated, which
again resulted in more questions about the annual financial audit.
The hope is that these connections also will further their
understanding of governmental accounting and financial reporting.
The third outcome was that the board agreed that the village
needed to improve its cash position by analyzing the liquidity
dimension (quick ratio) and solvency dimension (fund balance as
percentage of expenditures) for the general fund. While fund balance
has always exceeded the percentage threshold contained in the
village’s fund balance policy, the benchmarking data provided the
needed comparison for making this policy decision. The assistant
village manager noted that it was liquidity and solvency together that
magnified the need to improve the village’s financial condition along
these dimensions.
SUMMARY
An overarching question to financial condition is why should we
be concerned with defining and communicating it beyond the notion
that it represents sound financial management? One response is that
administrators and elected officials should leave a local government
in at least the same, or possibly even better, financial condition than
which they found it, giving new decision-makers the ability to advance
the organization rather than spend time on reversing financial
deterioration. Financial stewardship is a major responsibility of
administrators and elected officials.
Financial condition in local government is an extremely important
part of financial management, which only increases the need for
public administrators to agree on how to define it, how to measure it,
and how to communicate it in a systematic way. Another reason that
we promote the need for a systematic assessment of evaluating
financial condition in local government is to improve our ability to
effectively communicate with elected officials on how financial
condition impacts policy decisions. Elected officials, who ultimately
posses the fiduciary responsibility of the organization, need
understandable and useable information on financial condition when
making such policy decisions as increasing or decreasing the tax rate,
making adjustments to service delivery, issuing debt, and investing in
capital assets.
We responded to this need by developing a framework that is
based on fund and government-wide statements, on the
measurement focus of economic (accrual) and financial (modified
accrual) resources, on statements that are designed to report on
resource flow and stock, on the most recognized financial dimensions

and indicators in the literature, and on using a dashboard to present
each indicator within the context of trend and benchmark data. Local
governments spend an enormous amount of resources preparing
their annual financial statements, which has only increased with the
passage of Statement No. 34. It is now time to take the natural next
step by using the fund and government-wide financial statements to
advance our understanding of financial condition in local government.
NOTES
1. The different methods of applying the accrual concept are the
measurement focus of economic resources presented on the
accrual basis of accounting and the measurement focus of
financial resources presented on the modified accrual basis of
accounting. For more information on this subject, see Freeman et
al. (2009).
2. The comprehensive framework of financial condition we present
in this article is designed for communicating with any stakeholder
of local government. However, our primary audience is
administrators and elected officials who rely on financial
statements on an ongoing basis.
3. The accumulated resources of internal services funds are
disbursed to either governmental activities or business-type
activities based on which group of activities used them the most.
The profits or losses of internal funds are divided between
governmental activities and business-type activities based on
actual use. However, we acknowledge that internal service funds
must be handled on a case-by-case basis and that it may make
sense to include them in certain situations. Another issue is that
using an actuarial analysis to interpret the financial condition of
an internal service fund that accounts for such activities as risk
management and health insurance coverage may provide better
information for making decisions rather than using the financial
dimensions and indicators presented in this research.
4. Each local government will have to modify Figure 1 based on the
types of funds it uses for accounting purposes. For example,
many smaller local governments use only a general fund to

account for its services and activities.
5. The definition was slightly altered to use the terms systematic
and unsystematic risk based on the work of Hildreth and Miller
(2002).
6. See www.ryeny.gov/finance/Reports/06reports/06ftms.pdf for
more information on the city of Rye, New York. See
http://www.scottsdaleaz.gov/Finance/financialtrends.asp for
more information on the city of Scottsdale, Arizona.
7. The reason for the denominator change is that solvency is not
about service continuation from an economic perspective. It is
about an organization’s ability to satisfy debt. Solvency is about
service continuation from a financial perspective, where fund
balance is standardized against total expenditures.
8. Another approach could have been to bring the financial
performance dimension forward as well, changing the indicator to
percent change in fund balance. The literature, however, does not
contain this indicator and the indicator of fund balance as a
percentage of expenditures provides feedback on performance
and solvency under resource stock.
9. The financial data used to calculate all the financial indicators we
have selected for measuring resource flow and stock—regardless
of level or fund—are located in a local government’s general
purpose external financial statements, which include the notes to
the financial statements. The one exception is assessed value,
which may be located in the notes to the financial statements or
in the statistical section for local governments that prepare a
comprehensive annual financial report (CAFR).
10. The GFOA policy on fund balance—Appropriate Level of
Unreserved Fund Balance in the General Fund—was adopted by
the executive board on February 15, 2002. It can be found at
www.gfoa.org.
11. Actual financial data from a selected municipality were used to
populate the five-years of financial indicators. We used a
hypothetical municipality to underscore the importance of our
framework elements for conceptualizing financial condition rather

than on interpreting actual results.
12. The information on framework implementation was obtained from
a telephone interview with the assistant village manager in
December 2008. The complete financial condition assessment
report for the village of Pinehurst, North Carolina, is available
online at www.villageofpinehurst.org (located under financial
services department).
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Appendix A: Financial Condition at Government-Wide Level

Key: Capital City Benchmark Group
Governmental Activities Business‐Type Activities Primary Government

Resource Flow
1.30 1.30 1.30
Interperiod 1.20 1.20 1.20
Total margin ratio
Equity 1.10 1.10 1.10
1.00 1.00 1.00
0.90 0.90 0.90
0.80 0.80 0.80
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Capital City= 1.10, Benchmark= 1.02 Capital City= 1.18, Benchmark= 1.12 Capital City= 1.14, Benchmark= 1.05
10% 10% 10%

Financial Performance
5% 5% 5%
Change in net assets
0% 0% 0%
‐5% ‐5% ‐5%
‐10% ‐10% ‐10%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Capital City= 5.4%, Benchmark= 2.0% Capital City= 9.3%, Benchmark= 5.0% Capital City= 7.4%, Benchmark= 3.5%
20% 110% 80%

Self‐Sufficiency
Charge to expense ratio 60%
10% 100% 40%
20%
0% 90% 0%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Capital City= 12.3%, Benchmark= 10.0% Capital City= 105.1%, Benchmark= 106.0% Capital City= 59.0%, Benchmark= 50.0%
10% 10% 10%

Financing obligation
Debt service ratio
5% 5% 5%
0% 0% 0%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Resource Stock
8 8 8
Liquidity
6 6 6
Quick ratio
4 4 4
2 2 2
0 0 0
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
1.00 1.00 1.00

Solvency 0.80 0.80 0.80
Net assets ratio 0.60 0.60 0.60
0.40 0.40 0.40
0.20 0.20 0.20
0.00 0.00 0.00
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
0.40 0.40 0.40

Leverage
0.30 0.30 0.30
Debt to assets ratio
0.20 0.20 0.20
0.10 0.10 0.10
0.00 0.00 0.00
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
0.75 0.75 0.75

Capital
Capital assets condition ratio 0.50 0.50 0.50
0.25 0.25 0.25
0.00 0.00 0.00
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Appendix B: Financial Condition for Enterprise Funds

Water and Sewer Fund Electric Fund

Resource Flow
1.40 1.40
Interperiod Equity
Total margin ratio 1.20 1.20
1.00 1.00
0.80 0.80
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Capital City= 1.30, Benchmark= 1.09 Capital City= 1.08, Benchmark= 1.05
15% 15%
Financial Performance
10% 10%
Percent change in net assets
5% 5%
0% 0%
‐5% ‐5%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Capital City= 10.4%, Benchmark= 2.0% Capital City= 9.3%, Benchmark= 5.0%
130% 130%
Self‐Sufficiency
120% 120%
Charge to expense ratio
110% 110%
100% 100%
90% 90%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
40% 40%
Financing obligation
30% 30%
Debt service ratio
20% 20%
10% 10%
0% 0%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Resource Stock
6 6
Liquidity
Quick ratio 4 4
2 2
0 0
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
0.60 4
Solvency
0.40 3
Net assets ratio
2
0.20 1
0.00 0
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
0.60 0.40
Leverage 0.50
0.40 0.30
Debt to assets ratio
0.30 0.20
0.20 0.10
0.10
0.00 0.00
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
0.75 0.75
Capital
Capital assets condition ratio 0.50 0.50
0.25 0.25
0.00 0.00
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Appendix C: Financial Condition for Governmental Funds
General Fund Total Governmental Funds

Resource Flow
1.20 1.20
Service obligation
Operations ratio 1.10 1.10
1.00 1.00
0.90 0.90
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
30% 30%
Dependency
Intergovernmental ratio 20% 20%
10% 10%
0% 0%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Financing obligation 10% 10%

8% 8%
Debt service ratio 6% 6%
4% 4%
2% 2%
0% 0%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
Resource Stock
20 10
Liquidity
15 8
Quick ratio 6
10
4
5 2
0 0
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
60% 60%
Solvency
Fund Balance as percent of 40% 40%
expenditures
20% 20%
0% 0%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
3% 3%
Leverage
Debt as percent of assessed value 2% 2%
1% 1%
0% 0%
2003 2004 2005 2006 2007 2003 2004 2005 2006 2007
WHAT HATH THE GASB WROUGHT? THE UTILITY OF THE NEW

REPORTING MODEL: A NATIONAL SURVEY OF LOCAL GOVERNMENT
FINANCE OFFICERS
Howard A. Frank and Gerasimos A. Gianakis*
ABSTRACT. Results from a national survey of local government finance

directors suggest that five years after implementation, the post-Statement
34 accrual-based accounting model has done little to stimulate the
development of operating cost data (such as activity-based costing) or
performance measurement, and provides decision makers with little
information to improve short- or long-term financial planning,. While younger
respondents attach greater value-added to the New Reporting Model (NRM),
overall support for the hybrid approach (traditional fund reporting plus entity-
wide full accrual reporting) is limited. Consistent with the “Theory of Planned
Behavior” applied in prior accounting research; traditional sociological
drivers (community size, form of government, and other demographic
factors.) do not impact perceptions of the NRM. Findings also suggest
“accrual anomie” due to lack of experience with this basis of accounting.
INTRODUCTION
This article is based on a national survey of local finance directors
regarding their attitudes towards adoption of what the authors term
the New Reporting Model (NRM). The NRM is our descriptor of the
state-local accounting model principally represented by the
implementation of Governmental Accounting Standards Board
Statement Number 34 of 1999, which focused on the adoption of
-------------------------------
*Howard A. Frank, Ph.D., is Professor, Department of Public Administration,
Florida International University. His teaching and research interests are in
local government financial management and productivity. Gerasimos A.
Gianakis, Ph.D., is an Associate Professor, Sawyer School of Management,
Suffolk University. His teaching and research interests are in public financial
management, taxation, and productivity.

WHAT HATH THE GASB WROUGHT? THE UTILITY OF THE NEW REPORTING MODEL 179
fixed asset depreciation and entity-wide statements, as well as

subsequent statements dealing with topics such as the treatment of
brownfields, and other post-employment benefits (OPEBS). The
preface to Statement 34 (Governmental Accounting Standards Board,
1999) notes that implementation was based on “retaining the
familiar” (p. 2) in keeping the reporting of traditional funds, while
“bringing in new information, including the sufficiency of revenues
relative to costs, the status of finances year over year, the investment
in capital assets, and the ability to make better comparisons between
governments” (p. 3). The authors view promulgation of the NRM as
part of the 25 year trend throughout the world’s industrialized
countries to adopt accrual-based accounting schemes having roots in
the private sector (Premchand, 2006). Support for these models can
be predicated on two assumptions: more realistic portrayal of
accounting condition and their capacity to address normative
concerns for intergenerational equity (Osborne & Plastrik, 2000; Coe,
2007).
Adoption of the NRM has not been without criticism. Christiaens
and Rommel (2008) contend that it is a de facto threat to a federal
system given that compliance with generally accepted accounting
principles (GAAP) may undermine community political preferences
(e.g., a community that funds schools better than its peers do but
spends less on sewers may be seen as “underinvesting” even if it is
building human capital that fosters economic growth). The
Government Finance Officers Association (GFOA) and the Government
Accounting Standards Board (GASB) have had serious differences of
opinion regarding the scope of GASB’s NRM implementation,
particularly the latter’s possible rollout of mandatory performance
reporting (Foltin, 2008). While this conflict is not central to our
discussion, its existence does speak to underlying disagreement
among local finance professionals regarding the NRM’s
organizational utility and of the GASB as a standard setter.
For the record, and to paraphrase from Julius Caesar, we come to
neither praise nor bury the NRM. Our principal interest is assessment
of the NRM’s perceived impact on a bundle of daily and long-range
managerial functions. While some of these functions may be outside
the realm of financial reporting for which respondents are primarily
responsible, we assume the following. While accounting data are
retrospective (i.e., “rear view”) in nature, their principal intent is to
180 FRANK & GIANAKIS
inform future managerial behavior (Simini, 1978; Monahan, 2001;

Niven, 2003; Siciliano, 2003). We make this assertion with two
important provisos: (a) our respondents’ influence and professional
judgment are attenuated by workplaces influenced by political forces
and highly differentiated “business lines;” (e.g., parks and recreation,
police, solid waste) and (b) dissemination of accounting reports and
statements may be of limited utility to a financially illiterate citizenry
(Coy, Dixon, Buchanan & Tower, 1997; Amercian Institute of Certified
Public Accountants, 2006; Frank & Fink, 2008), factors that
effectively limit their substantive and symbolic value as accountability
tools. These prisms notwithstanding, the authors believe they provide
an important read on the accrual-based accounting model that has
taken root in America and elsewhere.
Our work is primarily descriptive in nature. We do, however,
endeavor to find “drivers” of respondent attitudes, deploying
community and respondent characteristics such as population,
governance structure (city manager vs. strong mayor), years of
respondent experience, etc. Our hope is to present a “gestalt” or
pattern indicative of attitudes held by chief financial officers in regard
to the NRM and its impact on operations in their communities. We
conclude the paper with an assessment of how these attitudes might
square with the use of the NRM as a management tool now and in
the future.
LITERATURE REVIEW
The literature related to implementation of Government Account
Standards Board (GASB) Statement 34 and its succeeding
statements has taken several tacks. One approach, generally aimed
at practitioners, is of a “how to” nature -- describing, for example, how
different financial statements are created, what capital assets are to
be depreciated, and how these reports are to be prepared for public
dissemination. (Patton & Bean, 2001; Engstrom & Tidrick, 2001;
Chase & Triggs, 2001; Dillinger, 2001; Kinnersley & Patton, 2005).
Another direction is characterized as normative, with emphasis on the
expected value of an accrual model (i.e., the heightened awareness
of capital depreciation; expected concern for intergenerational
concerns of public budgeting decisions; utility for inter-jurisdictional
comparisons of financial condition (Chan, 2001; Kravchuk &
Voorhees, 2001; Mead, 2002; Esser, 2006; Gloster, 2006; Wang,
Dennis, & Yuan, 2007). Others have empirically assessed the impact
of accrual-based accounting on government balance sheets and bond
ratings (Frank, 1997; Marlowe, 2007).
This article follows on the works of Shirota (2003), Frank,
Gianakis, and McCue (2005) and Gianakis, McCue, and Frank (2007)
that examine a fundamental question: how and in what ways does
the NRM impact operations in local government financial
management? Subsidiary questions relate to the NRM’s relative
value as a reporting tool to critical stakeholders, including service
delivery managers, and of topical significance, local officers’ views of
the Governmental Accounting Standards Board (GASB) as both a
standard setter and proponent of a private-sector oriented accounting
model in the local sector.
Our rationale for this approach is twofold. First, we argue that the
value of a management innovation must be ultimately viewed in
terms of its value to daily operations (Armstrong, 1985; Ammons,
2002). In essence, organizational utility is a critical acid test for a new
management tool and limited integration with existing administrative
systems and management processes is a telltale sign of short-
circuited adoption or outright irrelevance. Second, we believe that
with at least a half-decade of experience with the NRM, survey-driven
findings are no longer tapping non-attitudes (Achen, 1975; Bertrand
& Mullainathan, 2001) with unclear referent and significant social
desirability bias (Newman, 2004). On the face of it, our respondents
have had sufficient time working with this model to speak to its
relative merits with a high degree of confidence, bolstering the
validity of the findings. We further expect they have complied with the
NRM for a number of accounting cycles, allowing for accurate
assessment of its tangible and intangible benefits and costs (Frank &
Fink, 2008)
METHODOLOGY
The authors conducted a national mail survey of chief financial
officers of cities 50,000 or larger during the summer of 2007. This
was from a randomly chosen sample of 407 cities. The thirteen
municipalities selected from New Jersey were eliminated, because
the state mandates that their municipalities report finances using a
format other than the GAAP promulgated by the GASB. Five cases
from the sample proved to be bad addresses. Of the 402 sound
surveys sent, the authors received 154 completed surveys after two
mailings, yielding a response rate of 38 percent, which is on par with
mail administrations undertaken in an era of increasing aversion to
surveys (Neuman, 2004). The majority of our survey items were
answerable with five-point Likert scales, with some 10-point scales,
and several simple binary or multiple-choice demographic questions.
We pre-tested the instrument with finance officials and staff from
professional survey firms.
To foster greater reliability of our findings, our definition of the
NRM as “embodied by GASB 34 and subsequent statements that
more closely align the local sector’s accounting approach to that
found in the private sector,” was on the survey instrument. While
there is no universally-accepted definition of the NRM, the authors
hoped this repetition would allow for a consistent definition during
administration.
TABLE 1
Key Respondent and Community Attributes
Attribute Mean Median
Years Experience in Finance 18.9 20.0
Age 50 51
City Population 102,947 51,460
General Fund Budget $82,715,000 $45,950,000
Table 1 contains the descriptive statistics regarding our

respondents and the communities they serve. Chief financial officers
in our sample are experienced (with length of service in their field of
nearly 20 years) and may be characterized as “mid-career” with an
average age of approximately 50. The average age and experience of
respondents suggest their formative professional years were prior to
the adoption of the NRM, a factor that may color their impressions of
its implementation. We also found that nearly 44.0 percent of our
respondents held an advanced degree, 97.0 percent were members
of the GFOA, and nearly three-quarters reported that their city had
won the GFOA’s Certificate of Achievement for Excellence in Financial
Reporting.
In terms of community demographics, our survey respondents

were predominantly representing smaller- to mid-size communities,
with 83.0% representing cities under 100,000 in population. We did,
however, receive 25 responses from cities with populations over
100,000, and cross-tabulation with our sample demographics does
not suggest a significant under-representing of larger cities with the
possible exception of cities over 1,000,000 populations (1 of 9
represented).
FINDINGS
Our initial survey findings are divided into three groups:
community impact, fiscal impact, and implementation. We then
examine the respondents’ attitudes regarding the role of the GASB,
and a sample of open- ended responses. Survey responses are on a
six-point Likert scale ranging from strongly disagree (SD) to strongly
agree (SA), allowing for a neutral response.
The data in Table 2 suggest that the NRM is a “non-event” in
terms of community impact. Fifty-six percent of our respondents
strongly disagree or disagree with NRM’s potential for more accurate
bond rating, while only 29.0 percent agree or strongly agree with the
model resulting in more useful information to bond buyers. These
results are surprising given the centrality of the bond rating
community to GASB in their promulgation of the NRM (Mead, 2001;
2002). Similarly, 78.0 percent disagree or strongly disagree with the
NRM’s ability to provide managers with information useful to program
planning or decision making. Almost half (45.0%) disagree with the
contention that the NRM will assist with benchmarking financial
condition to peers and nearly two –thirds (66.0%) disagree with its
utility in user fee and charge setting. Arguably, the NRM’s
characterization of net expense (revenues) as the difference between
program cost and income would facilitate establishment of fees as
well as inter-jurisdictional comparison (either in absolute terms or in
terms percentage of costs recovered). Our findings suggest this has
not been the case.
Only 15.0 percent of our respondents agreed that the NRM
“enhanced communication of government operations to the public.”
This finding is consistent with several decades of accounting research
(Justice, Melitski, & Smith, 2006; Frank & Fink, 2008) suggesting that
TABLE 2
Implementing the NRM in My Community Has…
Frequencies in Percent (N in Parentheses)
Statement SD D N A SA MD
Resulted in more accurate bond 25 31 31 11 1 2
rating (30) (37) (37) (13) (1)
Provided prospective buyers of 20 26 26 23 6 3
bonds/COP’s with more useful (25) (32) (32) (29) (7)
information
Informed the decision-making 36 37 15 10 2 2
capacity of elected officials (52) (55) (22) (15) (3)
Provided operating managers (e.g., 36 42 15 7 1 2
police, sanitation) with information (52) (64) (22) (10) (1)
they can use for program planning
and decision making
Enhanced comparisons of 19 26 30 19 6 3
jurisdiction’s financial condition (27) (37) (43) (27) (8)
relative to peers or benchmarks
Helped to align user fees and 24 42 19 13 2 2
charges with actual costs (36) (63) (29) (19) (3)
Enhanced communication of 31 38 14 14 1 2
government operations to the (46) (57) (21) (21) (2)
public
Legends: SD = strongly disagree; D = Disagreement; N = Neutral; A =
Agreement; SA = strongly agree; MD = Median Response.
numerous efforts to simplify government financial statements have

done little to enhance their public understanding.
In the aggregate, findings in Table 2 indicate that the “disagree”
category emerges is modal in six of the seven items regarding
community impact. This suggests our respondents do not believe the
NRM constitutes an improvement in meeting the information needs
of external users, or potential internal users, and this perception is
grounded in a broad cross-section of municipal activities and
functions.
Our findings in Table 3 cover questions dealing with the NRM’s
implementation and its impact on city finances. Consistent with
findings reported in Table 2, we found little perceived impact of
implementation. For example, only four percent agreed or strongly
agreed that implementation was increasing reliance on fees and

charges or increasing general fund tax rates. Seventy-seven percent
disagree or strongly disagree with the NRM’s bringing increased
utilization of defined contribution pensions and only twenty-two
percent agree or strongly agree with its implementation leading to
reduced post-employment benefits. Eighty percent show disagree-
ment with rollout leading to more informed debate over operating
budget priorities, and a similar proportion (77.0%) disagree that it
leads to heightened debate over capital spending. The latter finding
is surprising in light of GASB 34’s intent to better reveal the “wearing
out” of fixed assets (Frank, 1997). And it is even more striking when
considering that 91.0% of our respondents adopted the depreciation
method (as opposed to the modified approach, grounded in periodic
engineering studies), suggesting their communities are receiving an
annual signal regarding net additions or subtractions to the physical
TABLE 3
Implementing the NRM in My Community Has Contributed To…
Statement SD D N A SA MD
Increased reliance on fees and 39 37 20 3 1 2
charges (57) (53) (29) (5) (1)
Increases in general fund tax rates 43 40 12 3 1 2
(65) (60) (18) (5) (2)
Increased pressure to adopt 39 38 14 6 4 2
defined-contribution pension plans (56) (54) (20) (8) (6)
Increased pressure to reduce other 28 32 18 16 6 2
post-employment benefits (42) (47) (27) (24) (9)
More informed political debate over 41 39 13 6 2 2
operating budget priorities (62) (59) (19) (9) (3)
More informed political debate over 42 35 12 9 2 2
capital budget priorities (63) (53) (19) (15) (4)
Heightened concern for short-term 39 38 16 7 1 2
budgetary balance (59) (58) (24) (10) (2)
Heightened concern for long-term 33 30 14 19 3 2
financial condition (51) (46) (22) (29) (5)
plant. Table 3 findings also indicate that sizable majorities (77.0%

and 63.0%, respectively) show disagreement with the NRM’s
heightening concern for either short-term balance or long-term
financial condition. In theory, the accrual-based model promulgated
by GASB should increase decision-makers’ awareness of the actual
financial conditions of their communities in terms of budget balance
and long-term solvency. Our findings suggest this may not be the
case.
The anomalous findings in Table 3 relate to the “increased
pressure to adopt defined-contribution pension plans” and the
“increased pressure to reduce other post-employment benefits”
items. Rapidly increasing costs of public pensions and post-
retirement benefits and their displacement of other current services
has become headline news across the country (Byrnes, 2005; McNeil,
2007; McDonald; 2007; Christensen, 2008; Lowenstein, 2008);
academic work suggests growth of these expenditures is beginning to
negatively impact bond ratings in at least some large communities
(Marlowe, 2007). Perhaps our respondents do not see the NRM as
the immediate driver of these benefit cost increases, but instead view
the causation as political in nature, with elected officials and
employees unwilling or unable to deal with the economic reality of
rapidly escalating pensions and OPEBs.1 In any case, Table 3’s
across-the-board median scores of 2.0 on a scale of 1.0 to 5.0
suggest that our respondents collectively view the NRM as having
relatively limited impact on community finances.
There is no unified theory of public financial disclosure (Frank &
Fink, 2008), and given the exploratory nature of this study, we felt a
priori statement of hypotheses would be premature. Nonetheless, the
authors collected data on a number of potential drivers of attitudes
such as education level, population, GFOA membership, GFOA award
status, form of government, and length of service. Of these, the one
consistent driver was length of service. We divided the “years of
experience in public finance” variable by quartile (less than 10 years,
11-19 years, 20-25 years, and greater than 25 years) and used
ANOVA (deploying conservative Scheffe a posteriori tests) to test for
impact and found that our youngest quartile of respondents
perceived greater impact on several key facets of financial
management. These included “helped to align user fees and charges
with actual costs” “more accurate bond ratings,” “pressure to spend
more on capital replacement,” “increased use of cost accounting

techniques,” “enhanced communication to the public,” pressure to
spend more on capital maintenance,” and “pressure to spend more
on capital replacement.” This finding suggests a possible
generational factor is at play in terms of perceived impact of the
NRM. Younger finance professionals may be more receptive to the
intent of GASB in implementing an accrual-based accounting system
due to formal training, or they have come of age professionally under
a new model and have had less to unlearn with its successful rollout.
This potential generational impact is consistent with Ajzen’s
(1991) Theory of Planned Behavior (TPB), often deployed in the
accounting literature (Clikeman & Henning, 2000; Bobek & Hatfield,
2003; Carpenter & Reimers, 2005). TPB would hold that finance
officers’ attitudes toward accounting disclosure are more likely
determined by subjective norms of appropriate behavior, including
their moral-ethical stance and perceptions of best practice among
peers, than traditional sociological determinants such as gender,
race, or educational level. Thus as younger professionals come to the
fore in local finance, they may have a more favorable view of the
NRM’s value to their respective communities.
Findings in Table 4 reveal respondents’ perceptions of the NRM
and its cost of implementation. These responses tap attitudes toward
the NRM as a generic type with an eye to assessing the organizational
resources required for its rollout.
Responses to the first two items in Table 4 address attitudes
regarding the value of the Statement of Net Assets and Statement of
Activities that are reported on full-accrual, jurisdiction-wide, and
functional basis (e.g., public safety, parks and recreation) reports.
These jurisdiction-wide reports have been superimposed on the
traditional fund accounting structure. In theory, these statements
should present information to senior managers and elected officials
which stimulate thinking about the economic resources “consumed”
by current residents relative to past and future users. In practice, this
“Dual-Perspective” accounting approach has been a source of
consternation to finance professionals since the promulgation of
GASB 34 (Government Accounting Standards Board, 1999, pp. 104-
105), because this complicated fund structure is tied to two different
bases of accounting (full accrual versus modified accrual) at different
TABLE 4
Views on Selected Issues Related to NRM Implementation
Statement SD D N SA A MD
Financial data required by the 4 14 21 40 21 4
NRM is too highly aggregated to (6) (21) (32) (60) (31)
inform the policy-making process
Financial data required is also too 4 9 16 46 25 4
highly aggregated to inform (7) (14) (24) (69) (37)
operations management
GASB should require the reporting 19 19 16 15 3 2
of financial data disaggregated to (26) (26) (23) (21) (4)
the departmental level
The NRM’s implementation has 36 40 14 8 1 2
encouraged the use of (53) (60) (21) (13) (2)
performance measures in my
jurisdiction
GASB should require some form of 64 21 7 6 3 2
performance measures (63) (21) (7) (6) (2)
The MD & A results in candid 9 14 26 36 15 4
reporting of the economic, (13) (22) (39) (55) (23)
political, and social factors that
affect my community’s financial
condition
Requirements of the MD & A have 27 39 25 5 3 2
forced my city to lengthen the time (40) (59) (38) (8) (5)
horizon of its financial planning
Compliance with NRM 6 26 35 23 9 3
requirements in our city has been (9) (40 (53) (35) (14)
more difficult than expected
organizational levels. Nearly two-thirds of our respondents (61.0%

and 66.0%, respectively) agree or strongly agree that these data are
too aggregated to assist with policy or programmatic decision-making.
These frequencies confirm an implicit hypothesis that the information
garnered in the newly-created government-wide statements is of
limited utility to daily operations because it is not tied to activities at
the departmental level, underscoring what might be termed a design
flaw in the NRM.2 These findings dovetail with those of an earlier

national survey of local finance officers (Gianakis, McCue, & Frank,
2007) in suggesting NRM rollout has provided little incentive to adopt
activity-based-costing (ABC) or related methods; the current findings
suggest that data aggregation to the fund level may present an
impediment to adoption.
Activity-based costing was not the only practice the NRM has
failed to stimulate. Over three-quarters of our respondents disagreed
or strongly disagreed with the contention that the NRM “has
encouraged the use of performance measures in my jurisdiction.”
Similarly, 85.0 percent showed disagreement with the statement that
“GASB should require some form of performance measurement.”
Consistent with what was stated at the onset, the authors are
agnostic on the “hot button” issue of mandatory “service effort and
accomplishment” (SEA) reporting. Nonetheless, it seemed
appropriate to query if NRM induced support for implementation.
Holding in abeyance GASB’s (and the Association of Governmental
Accountants’) strong support for performance reporting, we argue
that notions of effective practice in financial reporting link financial
and performance reporting. The federal government requires annual
reports that contain financials and performance data (Mullen, 2006).
Many local and state governments have adopted a balanced
scorecard (BSC) approach to performance that examines financial
and non-financial performance in annual budgeting (Monahan,
2001). Our findings suggest rollout of the NRM has not fostered
concomitant performance reporting in the local governments tapped
in this study.
Our respondents were more sanguine about the impact of the
Management Discussion and Analysis (MD&A), in which the
jurisdiction’s chief executive provides a narrative summary of the
community’s financial position and economic condition. A bare
majority (51.0%) agree that the NRM’s MD & A requirement has
stimulated more candid reporting of the socioeconomic conditions
impacting their communities. On the other hand, a majority (66.0%)
disagreed with the contention that the MD & A has stimulated long-
range financial planning. This dichotomy suggests that the import of
the MD & A from the private sector appears to have had mixed results
in terms of financial reporting and planning. A clear inference is that
the MD & A may contribute to more transparent reporting the current
financial condition but fails to stimulate debate regarding long-term

financial or economic development policy, a possible result of the
restrictions GASB places on MD & A content (Governmental
Accounting Standards Board, 2008).
Our results also show ambivalence in regard to the costs of
compliance with the NRM. The modal response to the contention
that “compliance with NRM requirements in our city has been more
difficult than expected” is neutral, although nearly one-third of the
respondents disagreed with this statement, and nearly one third
agreed. One possible explanation is that the GASB gave ample
warning about the costs of implementation. (GASB, 1999; Mead,
2002). The data in Table 5 provide further insight into why findings
may reflect a degree of ambivalence.
Responses indicate that the greatest burden is “retraining of
current staff,” while the third greatest incremental cost is “temporary
use of other department’s staff.” Other expenses related to
professional services and computer enhancements may be one time
costs. Although eight percent of the respondents report that their
jurisdictions had to invest in additional hardware to comply with the
NRM, two of the top three investments for NRM implementation were
not necessarily out-of-pocket, explaining in part the mixed distribution
of results. Open-ended responses to the “other” category were
TABLE 5
Incremental Resources Needed to Implement the NRM
Percentage of Cities Answering “Yes”
Resource Percent
Retraining of current staff 65
Hiring of Financial consultant/advisor 35
Temporary use of other department’s staff 32
Acquisition of new accounting software 22
Hiring of additional professional staff 20
Hiring of engineering consultants 20
Hiring of additional clerical staff 15
Reorganization of finance office 14
Other 14
Additional legal staff 8
Acquisition of new data processing hardware 8
primarily the increased auditing costs associated with auditing two

sets of books, entity-wide and fund-based. Thus, rollout has
generated fairly significant costs, but the greatest may be those
associated with redeployment of current staff and its associated
disruptions to other services.
The authors believed it was valuable to obtain respondent views
regarding the NRM as a generic type and of the GASB as the GAAP
standard setter. Prior research (Chan, 2003; Johnson & Lapsley,
2005) suggests local finance officials are at best ambivalent
regarding implementation of the NRM, appreciating its calls for
greater transparency in reporting but seeing little value added for
informing the public about local government operations or their
financing. The long-standing tiff between the GASB and the GFOA over
mandatory reporting of government performance standards noted
earlier (Gauthier, 2007) is a possible driver of local finance officials’
attitudes toward the NRM, attitudes that were probably formed during
a professional socialization period that antedated the NRM’s
implementation.
Table 6 presents findings regarding three questions concerning
the GASB and the NRM. Our respondents show limited enthusiasm
for the GASB as a standard setter (median score of 4.8). They show
even less support for the NRM as an approach to financial reporting
(median score of 4.0), with 90.0% of our respondents grading the
TABLE 6
Respondent Opinions of the Governmental Accounting Standards
Board (Frequencies in Parentheses)
Question 1-3 4-7 8-10 MD
How would you rate the GASB’s overall 33 55 13 4.8
performance as standard setting (i.e., GAAP (49) (82) (19)
establishing body for local governments? (1 is
poor, 10 is excellent)?
How would you rate the New Reporting Model 48 41 11 4.0
as a desired approach to municipal accounting (73) (62) (16
(1 is undesirable, 10 is highly desirable)?
On a scale from 1 to 10 (1 = strongly disagree, 41 40 19 5.0
10 = strongly agree), to what extent do you (60) (58) (27)
agree that the NRM eliminates the need for a
GASB that is separate from the FASB?
NRM at 7 or lower on our 10-point scale. That said, there does not
seem to be a groundswell of support for returning to the pre-1984
days in which government accounting standards were established by
the Financial Accounting Standards Board (FASB), a change that
might make sense if respondents saw the NRM and governmental
accounting as little more than a subset of its private counterpart
(median score of 5.0). In short, our respondents seem conflicted, with
considerable disaffection for the GASB and the NRM, but no
compelling desire to view government accounting as an adjunct of
private accounting. Taken in sum, these findings may suggest our
respondents find a “comfort zone” in a traditional control-oriented
fund accounting model and perceive limited utility in the NRM’s more
broadly-defined managerial model with private sector roots.
At the end of our survey we allowed for open-ended responses to
the simple question, “Do you have any comments regarding NRM
implementation in your city?” Fifty-five respondents (just over one-
third of our completed surveys) responded. Generally negative
responses outnumbered generally positive comments by an over a
four to one margin (45 to 10). It is very easy to characterize the
negative responses: the majority is couched in benefit-cost terms,
with respondents seeing little value-added relative to the cost and
effort of implementation. The second overarching theme is the
difficulty associated with understanding of the statements. Some
representative statements are as follows:
“Very expensive to implement, given the value received.”
“NRM has too few benefits compared to cost. Presenting two
sets of financial statements is confusing for the average
citizen. GASB needs a new mission and should stop finding
solutions where there are no findings.”
“I view it as an ‘Unfunded Mandate’ that created morale
problems, clouds the important issue of accountability by
Fund, and is not understood or appreciated by elected
officials; and it is not as important to bond rating agency
analysis as we’re led to believe.”
“The complexity of our CAFR’s deters most people including
our elected officials from using the data. Instead they rely on
budget data.”
“The information being reported has been of little use or

benefit to the elected officials, staff, or public. The info
generates difficult questions regarding interpretation of year
to year variance because of the high level of aggregation.
Reporting at this level of aggregation implies to the public that
more assets are available for general use than there are. I
asked the S & P analyst performing a rating review recently
about Statement 34 and was informed they don’t use it as
the level of reporting does not reveal information they can use
analytically due to the level of aggregation.”
“I do agree with capturing the cost of infrastructure with its
related depreciation, to show more true cost of operations of
the governmental units. I think this was a good result of the
NRM, and I also agree that governments should begin to
report some form of performance measurement, however, I
don’t think the financial statement is the correct format to do
that…The Statement of Activities is formatted to show results
similar to the private sector, however, government is not
funded like the private sector, so it is very difficult to draw any
sort of comparisons. If the purpose of the NRM was to draw
attention to the fact that governments are not supported
through fees and charges, then it succeeded. However, I think
that was pretty common knowledge in the first place.”
On a more positive note, some comments suggest that the NRM
has enhanced the quantity and quality of discussion regarding
community financial condition and spending priorities. Here are
some representative comments:
“There has been increased pressure and political debate on
spending issues, budgetary balance, capital maintenance and
replacement, and concern for both the short-term budgetary
balance and the long-term financial condition.”
“I believe through GASB 34 the “true” financial condition of
gov’t entities is presented; Adding pension + OPEB also
helps—for rating agencies and similar financial organizations,
not the average user (citizens, commission).”
“Easier to implement than we thought it would be. The MD &
A has been very helpful in explaining the financial position &
issues to non-finance elected officials and the public. Before
GASB 34 I used to write a summary memo to the town

council. Now it’s all in the MD & A. A big improvement.”
The majority of open-ended respondents tended to view the NRM
as little more than a paper exercise that complicates rather than
illuminates their financial reporting, with little or no value to the public
or elected officials. On the other hand, at least some respondents felt
that the NRM has achieved a modicum of success as a reporting tool,
enhancing the quality of financial reporting to critical stakeholders.
Positive views of the NRM tend to focus on the utility of the MD & A.
This split tends to corroborate our survey findings by demonstrating
both the range of views held by respondents, as well as the deep-
seated frustration that at least some harbor in regard to the NRM in
terms of its value to a broad cross-section of financial management
activities.
CONCLUSION
Interpretation of survey results is not an exact science and the
authors have not followed their fixed-response or open-ended
questions with probative interrogatories via face-to-face or electronic
means. That shortcoming notwithstanding, the attitudes reflected in
this survey’s responses are grounded in a half-decade of experience
under GASB 34 and its successors. Stated differently, we have
surveyed at a juncture that should reflect crystallization of attitude
based on real world experience with an accounting structure rooted in
the private sector. There are at least four plausible scenarios that
may drive the tepid support for the NRM found above. Taken in their
entirety they provide a grounded rationale for our survey findings:
1. Accrual Accounting is not a Panacea for Budgeting in Tough Times
The first determinant may be that accrual accounting has been
oversold as a financial management tool in the public sector.
Showing the true cost of government operations over their lifetime is
viewed as a pillar of contemporary public management (Osborne &
Plastrik, 2000). Nonetheless, Premchand (2006) notes that accrual
accounting has been deployed at all levels of government throughout
the Organization for Economic Co-Operation (OECD) for nearly 20
years, but has done little to restrain the growth of government or ease
fiscal stress. The NRM may illuminate trade-offs inherent in the
budgetary process but it is no substitute for political will needed for
tough choices. The NRM cannot eliminate the business cycle and its
impact on revenues, and it cannot bring us back to September 10,
2001, in terms of the perceived need for homeland security outlays
faced by local governments (Reddick & Frank, 2006). Nor can it
obviate the serious erosion of the local sector tax base in an era of
tax revolts, internet retailing, sectoral economic shifts, and fierce
inter-jurisdictional competition (Brunori, 1998). It is hard to disagree
with Charles Coe’s (2007) belief that full accrual accounting
represents an analytic advance over its cash or modified accrual
predecessors, but our work supports Premchand’s (2006) contention
in that respondents may not see the NRM as a tool for improved
decision-making. Policy makers and financial managers are buffeted
by winds that attenuate the utility of the NRM.
2. There is an “Accrual Anomie” with Respect to Government
Operations
Jorge, Carvalho, and Fernandes (2007) have studied the
implementation of accrual accounting in local governments
throughout Portugal and other countries in the Euro Zone and found
that many practitioners are unaware of how it has impacted fixed and
financial asset reporting or the meaning of “net worth” in their
communities. Mattison, Salme, and Tagesson (2004), had similar
findings in their work in Finland and Sweden, where implementation
in the latter was fostered by intervention from the central
government. These international studies point to the accounting
equivalent of Emile Durkheim’s sociological state of normlessness or
anomie.
We argue that such anomie may be the result of limited
experience with, or failure to understand, how information garnered
with an accrual model can be put to use for internal analysis or inter-
jurisdictional comparisons. Mead (2006) notes that it has only been
in the past few years that information made available via GASB 34
has been integrated into local government financial condition
analysis. Further, to the authors’ best knowledge, there exists no
Yahoo! Finance analog wherein practitioners can go online to see how
their communities compare in terms of administrative overhead,
annual percentage of fixed assets replaced, or accrued pension
liabilities, all at the click of a mouse. The upshot is that by dint of
training and experience, our respondents may suffer from “Accrual
Anomie.” In this view, realization of the potential benefits of the NRM

may require a much longer time than its designers imagined.
3. Older Respondents Have Come of Age under a Different
Accounting Model and See Limited Utility in Putting the NRM to Use:
Paradigm Shifts to Not Take Place Overnight,
The statistical differences in attitudes found between our younger
and older respondents suggest that a generation gap exists regarding
the NRM’s potential impact. Younger finance officials may see value-
added to at least some of the information now available to them.
Older professionals may not wish to invest the psychic energy or
organizational resources needed to embrace a new paradigm as
opposed to simply complying with its paper requirements. Conversely,
as our responses regarding defined contributions may suggest, older
officials may not want to hear any “bad news” brought about via
introduction of the NRM. Indeed, when we asked the finance officers
to rate the financial condition of their respective jurisdictions from 1
(poor) to 5 (excellent), they recorded a mean of 4.05 (standard
deviation .84), an estimate that does not comport with common
perceptions of a local sector strained by many crosscurrents, not the
least of which is implementation of the NRM.
This generational perspective hearkens to what Kuhn (1962)
spoke to in The Structure of Scientific Revolutions: Paradigm shifts do
not take place overnight and are instead a function of incremental
shifts in beliefs about what constitutes best explanatory theory. If
indeed the GASB has sought a paradigm shift from a control-oriented
model to one that supports a broader managerial approach, it may
take years or even decades of practice to take hold. Re-socialization
of adult behavior is not an easy task (e.g., physiology aside, the
military’s preference for young as opposed to middle-aged recruits).
Our generational differential is consistent with a slow-but-steady shift
in perceptions among finance professionals rather than any “big
bang.”
4. Adopting the “Dual Perspective” Accounting Model Sent Unclear
Signals about the Future of Local Financial Reporting.
The biblical proverb from Hosea 8:7 “They have sewn the wind,
and they shall reap the whirlwind,” may help in interpreting our
results. GASB’s “Dual Perspective” adoption of the accrual model did
not make a clean sweep with the past, leaving practitioners with
elements of a fund-based control orientation and jurisdiction-wide

accrual statements. This ambiguity may have contributed to the
“Accrual Anomie” among practitioners, limiting the incentives for
putting the information garnered from the NRM to use in daily
financial management activities or longer-range planning. A cleaner
break with the traditional fund model may have altered the prism
through which practitioners viewed the NRM and given impetus to
thinking through how accrual-based information could be utilized in a
redefined financial management capacity. However, a cleaner break
would entail a realignment of the organizational role of the finance
function from control to support of operating departments,
particularly in the form of disaggregated cost data. This broadened
role, may not square with their professional socialization or self-
defined roles (Gianakis & McCue, 1999).
Our findings hint that younger practitioners see greater utility with
the NRM than their senior colleagues. Future cohorts of finance
professionals may better understand how information garnered under
the NRM can be put to use for short- and long-term financial
management. Nonetheless, the majority of our respondents feel ill at
ease with the hybrid model GASB has brought to bear. Whether this
discomfort is the result of an objective benefit-cost calculus that
augurs against the NRM’s utility for decision-making or a subjective
assessment that the new model brings bad tidings (deferred
infrastructure repair, burgeoning costs of pensions and OPEB’s) that
might have been less visible under the old standards, is something
our findings cannot address. Nonetheless, they suggest that for the
foreseeable future, many local finance managers may view the NRM
as a wasteful effort that does little to help them in their day-to-day
tasks. Future research may reveal whether GASB expectations and
practitioner attitudes and practice will converge to run on parallel
tracks, wrought on a fulcrum that balances concern for short-term
efficiency and financial controls with a broader appreciation of
managerial effectiveness and intergenerational equity.
NOTES
1. A related alternative explanation is that our respondents and
many of the employees and managers of the communities in
which they work are in a state of denial regarding the financial
and political sustainability of their current pensions and OPEBs.
This would square with recent experience of “The Big 3”

automakers and the United Auto Workers (UAW) when the UAW
absorbed health costs and other OPEBs via creation of Voluntary
Employee Benefit Associations (VEBA’s) that took these liabilities
off the car makers’ books after decades of believing that their
funding issues could be solved within the respective corporations
(Lowenstein, 2008) . Herman Leonard (1988) raised this
possibility two decades ago in Checks Unbalanced: The Quiet
Side of Public Spending, when he noted the propensity of
governments to continually underfund their defined benefit
pensions and post-retirement benefits. Simply put, our
respondents may not be capable of understanding that when it
comes to pensions and OPEB’s the NRM is making their
communities “legacy employers” much like the automakers,
airlines, and steel companies in the recent past. It is worth noting
that the Pension Protection of Act of 2006 contains provisions for
such a reality via coverage of 457 and 403(b) plans typically
associated with public employment. This suggests that federal
legislators may understand, possibly better than those in the
proverbial “trenches,” that the days of traditional benefit
packages in local government are drawing to a close.
2. It is conceivable that the NRM would have stimulated more
activity-based costing (ABC) or related private sector costing
approaches if rollout had been mandated at the fund level. Only
about nine percent of our respondents reported that the NRM
had led to implementation of ABC in their communities. This
percentage squares with what Kennett, Durler, and Downs (2007:
27) report for large cities (population over 250,000) where ABC
was deployed by 16.0% of respondents.
ACKNOWLEDGEMENTS
The authors wish to thank William Rivenbark and two anonymous
reviewers for their constructive suggestions on substance and style.
We also thank Ms. Eliza Mykoo for her assistance with manuscript
preparation.
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SYMPOSIUM ON GOVERNMENTAL ACCOUNTING REFORMS: PART II

Editors: Odd J. Stalebrink and John F. Sacco

IN THE SHADOW OF CORPORATE SCANDAL: THE USE OF AUDIT

COMMITTEES IN U.S. LOCAL GOVERNMENTS
David S. T. Matkin*
ABSTRACT. Recent financial scandals in the private sector have led to

widespread speculation that public organizations may be susceptible to
similar events of financial misconduct and should, therefore, be required to
adopt similar strategies to those that are mandated of private-sector
corporations under the Sarbanes-Oxley Act of 2002. This paper looks at one
of those strategies by examining the use of audit committees in U.S. local
governments. Specifically, this paper explores (1) why local governments
have heretofore voluntarily created audit committees, (2) the perceived
benefits and problems of audit committees, and (3) whether the use of audit
committees is compatible with the principal-agent logic that underlies their
promotion.
INTRODUCTION
The financial collapse of energy-giant Enron and the subsequent
fall of its previously respected accounting firm, Arthur-Andersen, led
to widespread concern that established accounting and auditing
practices may be insufficient to prevent destructive events of
financial fraud and mismanagement in the private sector. In an
attempt to mitigate these concerns, the U.S. Congress enacted the
controversial Sarbanes-Oxley Act of 2002. Many observers have
subsequently speculated that the financial systems of government
and not-for-profits are similarly flawed and are thereby susceptible to
similar events of financial misconduct. Some have pointed to the
Sarbanes-Oxley Act as a model regulation that should be replicated in
--------------------------------
* David S. T. Matkin, Ph.D., is an Assistant Professor, Reubin O’D. Askew
School of Public Administration & Policy, Florida State University. His
research and teaching interests are in public management and public
budgeting and financial management.

THE USE OF AUDIT COMMITTEES IN U.S. LOCAL GOVERNMENTS 207
the public sector to prevent such a debacle (Candreva, 2006; Harris,

2005; Brown, 2005; Jackson & Fogarty, 2005).
Though the Sarbanes-Oxley Act (SOX) is often discussed as
though it is a single policy, in fact, it includes several distinct
components. For example, SOX increases penalties against corporate
executives who knowingly and willfully misstate financial statements;
it provides whistleblower protections for employees who report
corporate fraud; it requires corporate executives to certify their
company’s financial statements and to evaluate and report on the
effectiveness of their internal controls; and, it mandates the creation
of independent and fully-funded audit committees.
Because SOX is composed of so many different components, it is
wise to assess each one before imposing the whole act upon public
organizations. This paper is an examination of one of those
components within the public sector—the use of audit committees in
U.S. local governments.
Audit committees and similar financial-oversight committees are
already widely used by U.S. local governments—nearly 50 percent
already have an audit committee (West & Berman, 2002). Despite
their relatively common use, little is known about these committees.
This paper draws on a national survey of local government officials in
U.S. cities and counties to examine the current use of audit
committees in local governments. Using that data, this paper provides
preliminary answers to three questions: (1) why do local governments
create audit committees, (2) what are the perceived benefits and
problems with audit committees, and (3) is the principal-agent logic
that underlies the popular promotion of audit committees compatible
with the current use of audit committees?
This paper proceeds as follows. The next section provides a brief
introduction to audit committees. It is followed by a discussion of the
paper’s research questions. Then, the research methods are
described, followed by the findings. The paper concludes with a
discussion of the practical and theoretical implications of the
findings.
INTRODUCTION TO AUDIT COMMITTEES

Audit committees are groups of individuals who represent the
interests of their organization’s governing body and are responsible
208 MATKIN
for strengthening the organization’s internal controls and for ensuring

the accuracy of the organization’s financial reports. Audit committees
perform these functions by “ensuring that the whole subject of
internal control and financial reporting periodically appears on the
governing body’s radar screen and is dealt with in a timely and
appropriate manner” (Gauthier 2006, p. 13). Audit committees are
extensions of their governing bodies and often include individuals
from the governing body in their membership, but they do not set
policy or manage administrative units.
The rationale behind the need for audit committees is based on a
concern that principal-agent problems are inherent in the
management of financial resources (Brehm and Gates 1999).
Governing bodies (e.g., city councils) are thought to be unable to
provide adequate oversight of their organizations’ financial systems
due to unavoidable limitations in their time, attention, and technical
expertise. Relaxed oversight is potentially problematic because
financial activities are technically complex, and self-interested
financial managers could take advantage of that complexity to
prevent their governing bodies from detecting events of financial
mismanagement or fraud. Relaxed oversight may also be problematic
if interested stakeholders, such as grantors, business investors, or
bond investors are less confident in the accuracy of the
organization’s financial reports or in the organization’s ability to
prevent financial mismanagement or fraud. If interested stakeholders
perceive an organization to be at higher risk of financial misconduct,
they may require a premium to work with or invest in the organization.
One way governing bodies respond to this problem is by
contracting with external auditors to conduct annual audits of their
financial reports and internal controls. Unfortunately, governing
bodies also face principal-agent problems in the selection and
monitoring of external auditors, especially since finance directors are
often key participants in the selection and monitoring of external
auditors.
Audit committees are viewed as a way to mitigate these principal-
agent problems by increasing the oversight of financial management
activities—the so-called monitoring function of accounting systems—
and by ensuring the accuracy of financial auditing and reporting—the
so-called signaling function of accounting systems (Evans & Patton
1987). Audit committees perform these functions by monitoring the
integrity of their organization’s financial systems and by participating

in the selection of an organization’s external auditor to ensure that
the auditor is qualified and independent.
Corporate Origins
Although they are relatively new to the public sector, audit
committees have been part of corporate governance for nearly a
century. In 1940, the six-year-old Securities and Exchange
Commission recommended that all publicly-traded corporations
create an audit committee. In 1977, the New York Stock Exchange
required its listed companies to establish audit committees and other
security exchanges followed their lead—the National Association of
Securities Dealers in 1987 and the American Stock Exchange in
1993.
Though corporate audit committees were relatively common by
the early 1990s, interested observers speculated that these
committees were often insufficiently designed to effectively limit
fraudulent activity—in part because the committees tended to meet
infrequently and their members often lacked sufficient financial
expertise and were frequently corporate insiders with significant
conflicts of interest (National Commission on Fraudulent Financial
Reporting, 1987). For example, the Blue Ribbon Committee on
Improving the Effectiveness of Corporate Auditing Committees (1999)
found that too many individuals were serving on audit committees for
the primary purpose of improving their chances of eventually
obtaining a position on the corporation’s board of directors.
Subsequent research supports the Blue Ribbon Committee’s
concern for the importance of audit committee membership. Klein
(2002) found a relationship between the membership composition of
corporate audit committees and events of earnings manipulation.
Incidents of earnings manipulation increase when a majority of audit
committee members have a financial interest in the organization.
Krishnan (2005) found that the independence and financial expertise
of audit committee members was associated with fewer incidences of
internal control problems on audit reports.
In order to correct perceived deficiencies in the independence
and financial expertise of audit committees, the Sarbanes-Oxley Act
of 2002 mandates that all publicly-traded corporations create an
210 MATKIN
audit committee and ensure that their committees are fully funded,
perform a central role in the auditing process, and have a
membership that is independent from the managerial interests of the
corporation (SOX, 2002). The focus of these requirements is oriented
toward mitigating principal-agent problems in financial oversight and
reporting.
Recommended Practice in State and Local Government

In 1997, the Governmental Finance Officers Association (GFOA)
issued the first recommended practice on the use of audit
committees for state and local governments. The GFOA revised their
recommendation in 2002, the same year that the Sarbanes-Oxley Act
was enacted, and again in 2006. Their most recent revision was
primarily influenced by “substantial changes [that took] place in
private audit committee practice” (Gauthier, 2006, p. ix)—especially
as a result of the Sarbanes-Oxley Act, Security and Exchange
Commission regulations and the 1999 Report of the New York Stock
Exchange’s Special Blue Ribbon Committee on Improving the
Effectiveness of Corporate Audit Committees (Gauthier, 2006, p. ix).
Not surprisingly, therefore, the GFOA’s current recommended practice
on audit committees is similar to the required practice for corporate
audit committees under the Sarbanes-Oxley Act and shares its focus
of mitigating principal-agent problems in financial oversight and
reporting (Government Financial Officers Association, 2006).
Actual Practice in Local Government

Audit committees are now widely used in U.S. local governments—
nearly 50 percent of local governments have an audit committee
(West & Berman, 2002). However, the structures and practices of
these committees are substantially different from the GFOA’s
recommended practices.
The GFOA, for example, recommends that audit committee
membership be composed entirely of elected officials and
recommends excluding administrative staff from committee
membership. However, West and Berman (2007, p. 338) found that
12.4 percent of their surveyed local governments do not allow elected
officials to serve as members of their audit committee, and 42.5
percent include their finance director or comptroller as a member of
the committee, and the city manager or other chief-appointed
administrator is a committee member in 27.4 percent of local

governments.
The GFOA also recommends that audit committees should serve
as the central connection between the external auditor and the
governing body. However, West and Berman (2007) find that fewer
than 50 percent of audit committees are involved in guiding the
independent auditor’s level of responsibility or in examining the audit
plan.
The GFOA also recommends that audit committees perform a
central role in financial oversight and internal controls. However,
West and Berman (2007, p. 344) report that nearly 30 percent of
audit committees are not informed of unusual financial transactions
within their government—such as “related party transactions,” “illegal
activities” and “all instances of fraud.”
Given that the GFOA’s recommended practices on audit
committees is relatively new, it is perhaps not surprising that there is
a notable disparity between their recommendations and the actual
use of audit committees in U.S. local governments. Many local
governments are likely to have created their audit committees well
before the GFOA published their first recommended practice on the
subject. If improved independence and financial expertise are truly
the goals of local government audit committees, it is logical that the
disparity between recommended and actual practices will decrease
over time as local government officials understand the benefits of the
GFOA’s recommendations. It is also possible, however, that the
disparity between recommended and actual practices may indicate
that principal-agent problems are only part of the reason for the
adoption of audit committees in local government. If audit
committees achieve other objectives, local government officials may
be satisfied with less independence and/or less expertise in these
committees. So that the reader can better understand the use of
audit committees in local governments and the disparity between
recommended and actual practices, three questions are asked.
RESEARCH QUESTIONS
The first question is “Why do local governments create audit
committees?” This question is exploratory. It is answered by
identifying common reasons why local governments have voluntarily
212 MATKIN
created audit committees and by identifying why other local

governments have chosen not to create audit committees.
The second research question is “What are the perceived benefits
and problems with the use of audit committees in local government?”
This question is also exploratory. It is answered by identifying
commonly perceived benefits and problems of audit committees.
Care is taken to distinguish between the perceptions of public
officials who are more experienced with audit committees—so-called
expert opinions—versus perceptions from those officials that have
less direct experience with audit committees.
The third research question applies information from the answers
to the first two research questions to assess the underlying logic of
audit committees. The third question asks “Is the principal-agent logic
that underlies the promotion of audit committees compatible with the
actual use of these committees?” The principal-agent logic behind
audit committees suggests that governments are most likely to create
audit committees in order to deal with financial control problems
such as events of fraud or mismanagement or in situations when
interested stakeholders lack confidence in the integrity of a
government’s financial reports and practices. The principal-agent
approach also suggests that local governments are likely to view the
benefits and problems of audit committees in terms of their ability, or
inability, to prevent events of financial mismanagement and fraud or
to improve confidence in financial reporting.
RESEARCH METHODS
Sample
In order to examine the use of audit committees, officials from
195 local governments in 42 different states were contacted and
asked about their government’s experience with audit committees or
similar financial oversight committees. (Details on how the 195 local
governments were selected are discussed in Note 1). A researcher
contacted each local government’s finance department and
introduced the study to the finance director. The researcher then
asked the finance director for consent to talk with an individual within
the government who is most knowledgeable about their government’s
use of financial-oversight committees. In a few situations, the
researcher was referred to a more knowledgeable contact but most of

the interviews were completed with the finance directors.
Of the 195 local governments contacted, semi-structured
interviews were completed with 136 officials (a response rate of
69.74 percent). Four attempts were made to contact each local
government over a three-week period in November and December
2007.
Of the responding governments, 50 (36.8 percent) currently have
an audit committee, or similar financial oversight committee; 11 (8.1
percent) recently had an audit committee, but the committee is now
dissolved; 15 (11.0 percent) have considered creating an audit
committee in the past five years but do not currently have one; and,
60 (44.1 percent) do not have a committee, have never had one, and
have never considered creating one.
Twenty-nine jurisdictions did not complete an interview—only four
declined to be interviewed. A review of the 29 governments that did
not complete an interview reveals no evidence of response bias
based on jurisdictional size or geographic location.
Survey
Interview questions were designed to gather information that is
necessary to answer the research questions. Government officials
were asked different interview questions, based on their
government’s experience with audit committees. Table 1 lists the
areas of information that were pursued by the interviewer depending
on their government’s level of experience with audit committees.
TABLE 1
Interview Structure
Audit committee
status in
Information gathered in the interview
respondent’s local
government
- Circumstances that preceded the committee’s creation
- Influential stakeholders (both for and against the
Currently has an
committee’s creation)
audit committee
- Challenges and successes of the audit committee
- General observations about audit committees
214 MATKIN
TABLE 1 (Continued)
Audit committee
status in
Information gathered in the interview
respondent’s local
government
- Circumstances that preceded the committee’s creation
Previously had an
audit committee
- Challenges and successes of the audit committee
- Circumstances that led to the committee’s removal
- Circumstances that initiated the committee’s
consideration
Has considered
creating an audit
committee
- Circumstances that led to the decision not to create a
committee (if the decision has been made)
Never had an audit
- Level of knowledge regarding audit committees
committee and has
- Circumstances that may suggest a need for increased
never considered
financial oversight or improved financial reporting
creating an audit
- General observations about audit committees
committee
To strengthen convergent validity, a variety of prompts were used

to gather the information used to answer each question. Interview
prompts are listed in Table 2. The prompts were used to help the
interviewers organize their questions but the prompts were not
always asked exactly as written in Table 2. Interviews were usually
completed in ten to fifteen minutes.
Analysis
The interviewers took structured notes during each interview. To
strengthen the reliability of the analysis, four raters, including the
original interviewer, analyzed each interview. The raters identified
observations that were relevant to the research questions.
To answer the first research question, the researchers identified
interviewee statements that provided information on (1) sources of
support or resistance to the creation of audit committees, (2) relevant
events that occurred prior to the creation of audit committees, (3)
issues that were considered in the creation of audit committees, (4)
TABLE 2
Interview Prompts
Information gathered in
Prompts
the interview
- “Why was the committee created?”
- “Where did the idea come from?”
- “When was it created?”
- “Where there any financial problems in the city
Circumstances that
around the time the committee was created?”
preceded the
- “Was this the first time the government ever
committee’s creation
discussed creating an audit committee?”
- “Was the committee discussed in response to an
event?”
- “Was the committee discussed in preparation for
an event?”
Circumstances that
initiated the
- Similar to the questions above.
committee’s
consideration
Circumstances that
suggested the need for
increased financial - Similar to the questions above.
oversight or improved
financial reporting
Influential stakeholders - “Who championed its creation?”
in the committee’s - “Where there sources outside of the government
creation that recommended its creation?”
Influential stakeholders
- Similar to the questions above.
in the committee’s
consideration
- “Is it difficult to maintain membership?”
- “Is it difficult to obtain participation from elected
officials?”
Challenges and - “Are there unexpected difficulties that affect the
successes of the audit committee’s performance of its duties?”
committee - “Are there political challenges?”
- “Are there administrative challenges?”
- “Have you noticed any positive response from
stakeholders?”
- “How have financial practices been affected?”
Circumstances that led - Similar to questions above.
to the committee’s - “Did a different strategy take the place of the
removal audit committee?”
216 MATKIN
TABLE 2 (Continued)
Information gathered in
Prompts
the interview
Circumstances that led
to the decision not to - Similar to the questions above.
create a committee
Level of knowledge
regarding audit - No specific prompts.
committees
- “Is there any additional information you can
General observations
provide that may help me better understand the
about audit committees
use of audit committees in local government?”
reasons why local government officials choose to not create audit

committees, and (5) each respondent’s level of knowledge regarding
audit committees.
To answer the second research question, the researchers
identified interviewee statements that provided information on (1)
benefits and weaknesses of audit committees that are specific to the
respondent’s jurisdiction, (2) benefits and weaknesses of audit
committees that the respondent has observed in other jurisdictions,
and (3) general statements on the efficacy of audit committees in
local government.
To answer the third research question, interview responses were
analyzed for common observations regarding the rationale for
creating audit committees and the benefits of and problems with
audit committees. These observations were then assessed for their
compatibility with the principal-agent logic that underlies the popular
promotion of audit committees. It is expected that the principal-agent
logic will be supported if local governments create audit committees
in order to mitigate principal-agent problems. That logic will also be
supported if public officials view the benefits of audit committees in
terms of improved oversight and better financial reporting and audit
committee problems in terms of their inability to improve oversight or
the quality of financial reporting. The findings are presented in the
next section.
FINDINGS
The Creation of Local Government Audit Committees
Sixty-one of the local government respondents surveyed currently
have an audit committee or recently had an audit committee. The
reason for the committee’s creation was unknown in 21 of those
governments (See Table 3). Most of those 21 governments created
their audit committees over ten-years ago and the reason for their
creation was no longer commonly known—though respondents in five
of those governments knew that their committee was not created in
response to a financial scandal.
Of the 40 governments where the reason for the adoption of the
audit committee is known, the most common reason (18 of 40) for
implementing an audit committee is to improve financial oversight.
Only five of those were created in response to a financial scandal,
such as embezzlement or gross mismanagement of financial
resources.
TABLE 3
Reason for Creating an Audit Committee
Currently have Previously
an audit had an audit Total
committee committee
Reason Count % Count % Count %
Respondent did not know 12 24.0 4 36.4 16 26.2
Respondent did not know, but
5 10.0 5 8.2
knew it wasn’t a scandal
Desire to improve oversight 12 24.0 1 9.1 13 21.3
State mandate 3 6.0 4 36.4 7 11.5
Other 5 10.0 2 18.2 7 11.5
In response to a financial
5 10.0 5 8.2
scandal
In order to stay current with
national trends in the private 5 10.0 5 8.2
sector
To make better informed
3 6.0 3 4.9
financial decisions
218 MATKIN
Seven of respondents indicated that they adopted their

committee in order to satisfy regulatory requirements—primarily state
mandates that require local governments to use an audit committee
when they select an external auditor. Most of the mandated
committees are used only as needed—they are convened when the
local government selects a new auditor and dissolved immediately
after they have performed their mandated functions.
Five of the respondents indicated that national “best practices”
are an important influence in the decision to create an audit
committee. Also, 25 percent of the respondents from governments
that are actively considering creating an audit committee indicated
that national “best practices” are an important influence. GFOA
recommended practices and administrative communities were
identified as an influential source but respondents also indicated that
elected officials are exposed to audit committees in their private
employment or through business media and, as a result, are often
champions of audit committees in order to stay current with the
“state-of-the-art” in corporate governance.
Four of the respondents indicated that they created an audit
committee in order to improve their government’s financial decisions.
In these situations, the audit committee performs finance committee
tasks such as evaluating tax instruments and reviewing capital
expenditure proposals. None of the governments identified the need
to improve the quality of their financial reporting as a reason for
creating their audit committees.
Principal-Agent Rationale and the Creation of Audit Committees

We have information on 40 governments as to why they
implemented an audit committee; nearly half were adopted to
improve financial oversight or in response to financial scandal. Of the
jurisdictions that have never considered creating an audit committee,
nearly 50 percent indicated that the primary reason they have not
created a committee is because their existing internal controls are
sufficient and they have not had a significant financial scandal. These
findings provide evidence that audit committees are often created to
mitigate principal-agent problems and are not created when
government officials do not perceive their government to be at risk of
financial misconduct—supporting the logic behind the popular
promotion of audit committees.
Other findings, however, suggest that concerns about the risk of

principal-agent problems are insufficient antecedents to the creation
of audit committees. Eleven of the 60 respondents whose
governments have never considered creating an audit committee
indicated that they have ongoing internal control problems or have
recently experienced a large financial scandal, yet they have never
considered creating an audit committee.
In addition, none of the governments identified the need to
improve the quality of their financial reports as a rationale for
creating an audit committee. This finding is especially interesting
because a key reason for the Sarbanes-Oxley Act of 2002 was to
improve investor confidence in financial reporting. These findings may
suggest that government officials do not consider audit committees
as a tool for improving their financial reporting. They may also
indicate that improving the quality of their financial reporting is a low
priority for most local government officials. Either way, government
officials do not seem likely to create an audit committee to improve
their financial reporting.
Perceptions of Benefits and Problems

Perhaps not surprisingly, most of the respondents from
governments that recently dissolved their audit committees did not
identify a benefit of audit committees (9 of 10). That view is not
shared, however, by respondents in governments that currently have
an audit committee where only 8 of 58 did not state a benefit of audit
committees.
Of those respondents that stated a benefit, the most frequently
cited benefits are that audit committees improve the communication
of financial information between financial administrations and
elected officials (32.8 percent) and, as the organization’s financial
practices are better understood, audit committees improve the
credibility of financial managers and the quality of their practices
(13.8 percent). Improved communication is also associated with the
perceived benefit that audit committees can expedite financial
decisions (6.9 percent).
Five of the respondents indicated that audit committees improve
auditing and accounting practices. Only one of those five respondents
220 MATKIN
stated that the audit committee was an effective tool in improving the
quality of financial reports.
Three of the respondents (5.2 percent) indicated that audit
committees benefit their government by reducing the amount of
media oversight. Audit committee meetings are public meetings but
receive significantly less media and public attention than meetings of
the entire governing body. As such, some respondents explained that
they are better able to discuss complex and controversial financial
issues in audit committee meetings than is advisable in a city council
or county commission meeting.
TABLE 4
Reported Benefits of Audit Committees
Currently
Previously
have an
had an audit Total
audit
committee
committee
Reported Benefits Count % Count % Count %
Improved communication of
financial information between
19 32.8 00 0.0 19 27.9
elected and administrative
officials
None stated 8 13.8 9 90.0 17 25.0
Improved financial management
8 13.8 1 10.0 9 13.2
practices
Improved credibility of financial
management practices among 8 13.8 0 0.0 8 11.8
elected officials
Improved auditing and oversight
5 8.6 0 0.0 5 7.4
processes
Expedited financial decision
4 6.9 0 0.0 4 5.9
processes
Financial deliberations less
3 5.2 0 0.0 3 4.4
scrutinized by the media
More financial resources 3 5.2 0 0.0 3 4.4
The respondents also identified a variety of problems with audit

committees (see Table 5). Those respondents who identified
problems with their audit committees saw two broad categories of
problems. One category of perceived problems included a variety of

logistical challenges to effectively operate an audit committee. For
example, respondents indicated that it is difficult (a) to engage their
TABLE 5
Reported Problems of Audit Committees
Currently have Previously
an audit had an audit Total
committee committee
Reported Problems Count % Count % Count %
None stated 21 36.2 6 60.0 27 39.7
Difficult to obtain participation of
6 10.3 1 10.0 7 10.3
members
Members often lack sufficient
5 8.6 0 0.0 5 7.4
financial knowledge
Committee has a difficult time
5 8.6 0 0.0 5 7.4
making decisions
Hard to arrange meeting times 4 6.9 0 0.0 4 5.9
Government lacks sufficient
4 6.9 1 10.0 5 7.4
resources for audit committee
Political pressures influence audit
3 5.2 1 10.0 4 5.9
committee decisions
There is more work to do than
2 3.4 0 0.0 2 2.9
audit committee can perform
Not enough work to do 2 3.4 0 0.0 2 2.9
Tensions arise when some
council members have more 1 1.7 0 0.0 1 1.5
financial information than others
Hard to know when to bring items
1 1.7 0 0.0 1 1.5
to the committee
Audit committee doesn't
communicate well with city 1 1.7 0 0.0 1 1.5
council
Creates another boss for the
1 1.7 0 0.0 1 1.5
finance director
The government already has too
1 1.7 0 0.0 1 1.5
many committees
City council limits the
committee’s authority to keep
1 1.7 0 0.0 1 1.5
power away from non-elected
committee members
Not right for small towns 0 0 1 10.0 1 1.5
222 MATKIN
members (10.3 percent), (b) to recruit members with sufficient

financial expertise (8.6 percent), (c) to schedule committee meetings
(6.9 percent), and (d) to manage the committee’s workload (3.4
percent stated that there was too much work to perform and 3.4
percent stated that there is not enough work to keep the committee
busy).
Respondents from governments that have not considered
creating an audit committee frequently stated that audit committees
are especially difficult to implement in small jurisdictions because
those governments have less access to individuals who have
sufficient financial expertise to add value as a member of their audit
committee. The recruiting challenge of small jurisdictions is especially
problematic because small jurisdictions are often more likely to have
internal control weaknesses due to fewer resources.
The other category of problems with audit committees included a
variety of political and organizational challenges to their use. For
example, political pressures are likely to occasionally influence
committee members (5.2 percent); audit committees can create
tension because they provide some elected officials and citizens with
more financial information than others (1.7 percent); and, audit
committees can create another boss for the finance department (1.7
percent).
Principal-Agent Rationale and the Perceived Benefits and Problems of

Audit Committees
These findings indicate that government officials rarely judge the
success of their audit committees in terms of their ability to improve
the monitoring of financial practices or the quality of financial
reporting. More often, financial officers perceive the benefits of audit
committees in terms of their ability to improve the communication of
financial information and the problems with audit committees in
terms of their logistical, political, and organizational challenges.
CONCLUSION
Drawing on a national sample of U.S. local government officials,
this paper provides preliminary evidence on the reasons why local
governments create audit committees and the perceptions of local
government officials on the benefits and problems of those
committees. The findings indicate that there are several factors that
influence the creation of audit committees in local governments. The
most common reasons are to improve financial oversight, to comply
with state mandates, and to follow trends in corporate and
governmental “best practices.”
Interestingly, the findings also demonstrate that the reasons why
audit committees are created have little to do with the perceived
benefits and problems of these committees. The most commonly
cited benefit of audit committees is their ability to improve the
communication of financial information between public
administrators and elected officials. The most commonly cited
problems with audit committees are associated with logistical
difficulties in recruiting qualified committee members and ensuring
that they meet regularly. Other problems include difficulties
associated with the political value of financial information and how
audit committees increase the access to that information for some
individuals.
Another important finding of this paper is that the logic behind the
popular promotion of audit committees by the GFOA and in the
private sector is poorly reflected in the use of audit committees in
local governments. That is, efforts to improve financial oversight and
the quality of financial reporting are only a part of the story behind the
adoption and perceived efficacy of audit committees. Does this mean
that the GFOA’s recommended practices are misguided? No. Cross-
sectional quantitative research on the effects of audit committees at
improving financial oversight and report quality is needed to address
the value of the GFOA’s recommendations. This study clearly does not
provide such an analysis.
The disparity between recommended and actual practices may
actually provide a justification for the GFOA’s leadership on this issue.
This study identifies similar problems in the use of local government
audit committees as those found within the corporate sector audit
committees in the 1980s and 90s. Local government audit
committees often meet infrequently, have insufficient resources, and
their members commonly lack sufficient financial expertise. These
are similar problems that corporate sector observers claimed would
lead to financial oversight debacles in the private sector. This study,
therefore, should be viewed as encouraging national trends with the
224 MATKIN
recognition of practical and political barriers that must be considered

if these trends are to diffuse without regulatory assistance.
It should be noted that these findings may be highly influenced by
the common institutional role of the respondents. Elected officials
may provide a different list of perceived benefits and problems.
Further research should seek to include measures of benefits and
problems that are less reliant on perceptions of a single type of
official. Further research should also use a larger sample of
governments to improve the external validity of the findings. As is, the
findings should be considered preliminary.
ACKNOWLEDGEMENTS
This research project was supported by the Reubin O’D. Askew
School of Public Administration & Policy at Florida State University
and the capable research assistance of Kristin Brown, Karen
Modzelewski and Jordan Rockwell. Two anonymous reviewers
provided thoughtful comments that improved this paper. Errors and
omissions are, of course, the author’s.
NOTES
1. The 195 local governments were selected because the
researcher had self-reported data on whether they had an audit
committee from a previous study conducted by one of the
authors. That study was a mail survey completed by finance
directors from 1,000 general-purpose local governments—
randomly selected from a GFOA membership list that included
over three-thousand members. The mail survey also collected
data on the membership characteristics of the government’s
audit committee and the functions the audit committee performs.
The response rate for the mail-survey was 19.7 percent
(197/1000), of which 195 were usable.
This sampling frame may lead to a few problems. First, a
sampling frame of GFOA members may limit the external validity
of the findings. Responses did demonstrate variability in
geographic local, jurisdictional size, and form of government (i.e.
city, town, and county forms). Responses were received from local
governments in 42 different states—the median number of
responses from any one state is three. Second, the low response
rate could indicate bias in the respondents. The respondents

appear to be comparable with the sampling frame in their
regional location, population size and form of government. Third,
there could be a concern that the responses would over-represent
individuals that had more knowledge about audit committees.
This concern is mitigated because the mail survey collected data
on a variety of financial management practices; the audit
committee questions were asked at the end of the survey and
comprised less than twenty-five percent of the survey content.
The benefit of using these respondents is the availability of
detailed information on the membership and functions of their
audit committees. And, since the mail-survey had identified
jurisdictions with audit committees, and those without, the
researcher knew from the outset that there was a mix of both
types of jurisdictions in the sampling frame—a national random
sample of local governments, in contrast, could have produced a
sampling frame with too few governments with audit committees,
or too few without.
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THE ADOPTION OF GASB 34

IN SMALL, RURAL, LOCAL GOVERNMENTS
Patricia A. Patrick*
ABSTRACT. In June 1999, the Government Accounting Standards Board

issued Government Accounting Standards Board Statement No. 34 - Basic
Financial Statements and Management's Discussion and Analysis for State
and Local Governments (GASB 34) to improve the transparency and
accountability of governments. This study examines the adoption of GASB 34
in local governments where the state government does not mandate GAAP-
compliant financial reporting. The findings show low adoption rates among
small, rural, local governments and high adoption rates among large, urban,
local governments. Factors such as occupational specialization, government
type, and a history of GAAP-compliant financial reporting are positively
associated with adoption.
INTRODUCTION
In June 1999, the Government Accounting Standards Board
issued Government Accounting Standards Board Statement No. 34 -
Basic Financial Statements and Management's Discussion and
Analysis for State and Local Governments (GASB 34) to improve the
transparency and accountability of local governments. Governments
are expected to begin issuing GASB 34-compliant statements for
years beginning after June 15, 2005. An examination of local
governments in Pennsylvania shows that only 19% of small, rural,
local governments adopted GASB 34 while more than 85% of large,
urban, local governments adopted GASB 34. Most of the adopting
governments are staffed by highly specialized accounting
professionals that were issuing GAAP-compliant financial reports
------------------------------
* Patricia A. Patrick, Ph.D., CPA, CFE, CGFM, is Associate Professor, Grove
College of Business, Shippensburg University of Pennsylvania. Her research
interests include government accountability.

228 PATRICK
before the issuance of GASB 34. Most of the non-adopting

governments are small, rural, local governments staffed by semi-
skilled municipal secretaries, which use the cash basis of accounting.
This study explores how the type of local government, occupational
specialization and past practices such as compliance with Generally
Accepted Accounting Principles (GAAP) and basis of accounting are
associated with the adoption of GASB 34. It also discusses how state
government reporting requirements can influence the adoption of
reformative government accounting standards such as GASB 34.
OVERVIEW OF GASB 34
GASB 34 was issued to encourage local governments to begin
reporting balance sheet information such as current and long-term
assets and liabilities, in addition to budgetary revenues and
expenditures. GASB 34 asks local governments to cease using the
cash basis of accounting and to report financial statement elements
using the modified and full accrual basis of accounting. Ideally, local
governments will issue fund financial statements using the modified
accrual basis of accounting and government-wide financial
statements using the full accrual basis of accounting. The objective of
GASB 34 is to improve the overall transparency and accountability of
local governments (Patton & Bean, 2001).
GASB 34 is rooted in Government Accounting Standards Board
Concept Statement No. 1 - Objectives of Financial Reporting
(Kravchuck & Voorhees, 2001). Concept Statement No. 1 was issued
in 1987 with the purpose of making local governments more
accountable to the public. The Board holds that taxpayers in a
democratic society have the right to know how local governments are
fulfilling their duties to the public and to receive facts about the
activities of governments. Financial reporting should provide relevant
and reliable information to legislators, state oversight agencies,
investors, creditors and the citizenry. This information should enable
users to assess the financial viability of governments and to
determine whether governments are maintaining inter-period equity.
Inter-period equity is maintained when existing taxpayers carry the
burden of current governmental activities and the cost of those
activities are not passed onto future generations. Financial
information contains the information needed to make these
assessments. For this reason, financial reporting plays a major role
THE ADOPTION OF GASB 34 IN SMALL, RURAL, LOCAL GOVERNMENTS 229
in government accountability. Kravchuck and Voorhees (2001)

believe GASB 34 was issued to achieve the accountability the Board
hoped to achieve with Concept Statement No. 1 more than twenty
years ago.
GASB 34 requires significant changes in the way governments
report financial information (Freeman & Shoulders, 2000). One of the
biggest changes involves the handling of long-term assets (Harris,
1999; Patton & Bean, 2001). GASB 34 encourages local
governments to record and depreciate infrastructure assets such as
roads, bridges, sewers, and water treatment plants, in addition to
fixed assets such as property, plant and equipment. Large, local
governments are expected to record and depreciate infrastructure
assets on a retroactive basis. Small, local governments are expected
to record them prospectively (Johnson & Bean, 1999). This will be a
significant undertaking for many local governments because most
infrastructure assets were acquired or constructed decades ago.
Measuring and valuing these assets will be an especially daunting
task for small, rural, local governments because many of them have
never capitalized or depreciated even their fixed assets. The handling
of infrastructure assets is one of the more controversial aspects of
GASB 34.
The changes required by GASB 34 are significant, even for large,
urban local governments, which have the ability to adapt to rapidly
changing conditions (Cote & Herron, 2000; Wilson & Kattelus, 2001).
The provisions of GASB 34 are even more significant for small, rural,
local governments with limited capacity and resources (Cote &
Herron, 2000). Many of these small, rural local governments are
likely to find the provisions of GASB 34 costly and difficult to
implement (Wilson & Kattelus, 2001). Many are also likely to find
GASB 34 a significant departure from their past practices, which was
probably limited to reporting budgetary information on the cash basis
of accounting.
GASB 34 is a generally accepted accounting principle. Therefore,
the adoption of GASB 34 is necessary to comply with GAAP (Wilson &
Kattelus, 2001). Governments that fail to adopt GASB 34 can face a
variety of consequences. One such consequence is a qualified or
adverse audit report by an independent certified public accountant
(Wilson & Kattelus, 2001). Auditors will issue adverse audit opinions
to governments with financial statements containing material
230 PATRICK
departures from GAAP. Other consequences are lower bond ratings

and higher interest costs. Bond-rating agencies will give non-
compliant governments lower bond ratings on bond issuances. This
will, in turn, drive up the costs of interest on these issuances (Wilson
& Kattelus, 2001). Non-compliant governments may also violate the
debt covenants required by lenders. These are just a few of the
potential consequences for failing to adopt GASB 34.
Some governments will issue GAAP-compliant information to
satisfy users. The key users of government financial information
include state and local government administrators and officials,
legislative bodies, investors, creditors, and the citizenry. Savvy users
prefer GAAP-compliant information because it helps them assess the
financial viability and inter-period equity of governments (Plummer,
Hutchinson & Patton, 2007). Without GAAP-compliant information,
users cannot assess the financial condition of a government. Nor can
they evaluate the government’s key financial statement elements
(assets, liabilities, net assets, revenues, and expenditures). They
cannot know whether the government has prudently used debt to
finance its operations, whether it is having cash flow problems, or if it
is liquid. This can make it difficult, if not impossible, to determine
whether the government can sustain its current operations or
whether it is maintaining inter-period equity. GAAP-compliant
reporting strives to make available to users the information needed to
make these important assessments.
Despite the wishes of users, not all governments will comply with
GAAP. These governments will disclose only budgetary information
such as revenues and expenditures. Budgetary information is the
simplest form of information. It includes only the cash received and
paid by the government. Budgetary information is less costly to collect
and report than GAAP-compliant information, but it does not allow
users to assess long-term viability or inter-period equity because it
does not include assets and liabilities or accruals and deferrals.
Assets and liabilities provide information about the government’s net
assets. Accruals and deferrals show what has transpired beyond the
cash received and paid by the government.
Local governments will presumably issue GAAP-compliant
financial information if they are required to do so by their state
governments (Ingram & DeJong, 1987). Local government financial
reporting is not regulated by the federal government, so the
standards imposed by the state government are paramount. Ingram

and DeJong note three possible impositions by state governments: (1)
state governments may require GAAP-compliant financial reporting;
(2) state governments may require compliance with a state-imposed
but non-GAAP financial reporting standard; or (3) state governments
may not impose any financial reporting standard. Local governments
that are required by their state governments to issue GAAP-compliant
financial information are most likely to adopt GASB 34 because such
governments are more likely to receive incentives for compliance and
penalties for non-compliance. Thus, state-imposed reporting
standards can be very influential (Ingram & DeJong, 1987; Mead,
2008).
GASB 34 is quite possibly the most important change in
government accounting history (Heinfeld, 2003), yet we know little
about the extent to which it has been adopted in states that do not
require GAAP-compliant financial reporting (Mead, 2008; Patrick,
2007). The adoption rate among small, rural, local governments is
particularly questionable, since these governments may not have the
capacity to adopt significant reformative measures such as GASB 34.
Pennsylvania does not require GAAP-compliant financial reporting for
most of its 2,632 local governments. It only recently began to require
GAAP-compliant reporting for its 67 counties. It also has an
abundance of small, rural, local governments run by part-time staff
with limited financial expertise. Accordingly, Pennsylvania is the focus
of this study.
FINANCIAL REPORTING REQUIREMENTS IN PENNSYLVANIA

In many ways, the Commonwealth of Pennsylvania is progressive
when it comes to local government financial reporting. The State
government requires local governments to submit annual, audited
financial reports to a State oversight agency. The State government
imposes rules and regulations, regarding how the financial
information is to be prepared and it can report governments that do
not submit reports to local law enforcement agencies. It also
provides ongoing training and assistance to local government
accounting staff. This training is provided by a variety of State
agencies and is provided on a one-to-one basis in the local
government workplace and regionally in group settings. Much of this
training is free, although governments may incur occasional
232 PATRICK
registration fees or travel expenses. It is also noteworthy that a group

of Pennsylvania local governments are consistent recipients of the
Government Finance Officer Association’s coveted Certificate of
Achievement for Excellence in Financial Reporting award. Harrisburg
City has received the award for twenty consecutive years. Many other
Pennsylvania local governments are repeat award winners.
Despite these strengths, there are shortcomings in the financial
reporting requirements of Pennsylvania’s local governments. First,
Pennsylvania does not require GAAP-compliant financial reporting for
2,565 of its 2,632 local governments. It does require its 67 counties
to issue GAAP-compliant financial reports, but it only began to do so
in June 2002. The remaining 2,565 local governments are asked to
submit annual, audited, financial reports containing specified fields of
financial information. These reports can be prepared using any basis
of accounting, including the cash basis of accounting. Thus,
Pennsylvania allows 97% of its 2,632 local governments to report
financial information using the most simplified form of reporting.
Second, Pennsylvania local governments are not required to issue
financial statements in the traditional sense. Instead, they are
required to submit annual financial information on a State
government form (DCED-CLGS 30 - Municipal Annual Audit and
Financial Report). This form contains only certain fields of information
requested by the State government. These fields focus primarily on
budgetary items such as revenues, expenditures and long-term
liabilities. The form does not contain fields for current assets, current
liabilities, long-term assets, or related depreciation. As of this writing,
the State government has no known intentions of collecting and
disseminating this information for 2,565 of its 2,632 governments.
Third, Pennsylvania local governments are required to obtain
annual audits of their funds, but the quality of some of these audits is
questionable. Local government pension and other restricted funds
are audited by the Pennsylvania Auditor General, certified public
accountants and State agencies such as the Pennsylvania
Department of Transportation. No one questions the quality of these
audits because they meet the strict auditing standards imposed by
the American Institute of Certified Public Accountants and
Government Accountability Office. These audits are conducted by
highly qualified State government employees and independent
auditors. These individuals meet the rigorous standards of
competence acquired through years of professional training and

experience. These audits meet the highest standards of quality.
At issue in this study is the quality of the audits performed by
elected and appointed municipal auditors. Pennsylvania local
governments are required to obtain annual audits of their general
funds and these audits can be performed by elected or appointed
municipal auditors. Municipal audits may be inferior to independent
audits in three important ways. First, municipal audits are conducted
using a standardized audit program prepared by the State
government, rather than a customized audit program tailored to the
engagement. Most audit standard-setters do not recommend
standardized audit programs because they are not designed to detect
the material misstatements potentially present in the financial
records of the audited organization. Second, municipal auditors are
not required to meet the rigorous educational standards imposed
upon independent auditors. The educational and experience
requirements of municipal auditors are established by statute and
contained in the municipal codes. A review of the applicable codes
reveals that municipal auditors need not possess any specialized
education in accounting or auditing. Finally, municipal auditors do
not provide audit opinions in the same manner as independent
auditors. Instead, they audit financial information for the purpose of
reporting it to the State government. Thus, municipal audits do not
convey the important information ordinarily disclosed in independent
audit reports. These are important differences that arguably impair
the quality of municipal audits.
A final shortcoming in Pennsylvania’s financial reporting structure
is the lack of enforcement authority vested in the Pennsylvania
Department of Community and Economic Development (DCED). The
DCED collects the annual financial reports prepared by the local
governments, but it has limited enforcement authority over local
governments. Statutes prescribe the way the reports should be
prepared, but the statutes do not give the DCED authority to contest
the manner in which the reports are prepared or the ability to enforce
the submission of the reports. The DCED can report local
governments that fail to submit annual reports to local law
enforcement officials, but it rarely takes such action. The DCED more
often collects the information provided to it without incident. As a
234 PATRICK
result certain local governments fail to submit annual financial

reports to the DCED without consequence.
Despite the lack of a government-imposed mandate to comply
with GAAP, certain governments will voluntarily issue compliant
statements. These governments will comply with GAAP to derive the
benefits that are associated with GAAP-compliant reporting. These
benefits include unqualified audit reports, higher bond ratings, and
lower interest rates on debt (Wilson & Kattelus, 2001). Others will do
so to seek the prestigious Certificate of Achievement for Excellence in
Financial Reporting Award. Some must issue compliant reports to
meet debt covenants or other externally-imposed reporting
requirements (Baber & Sen, 1984). The absence of a statewide
mandate to comply with GAAP does not mean all local governments
will fail to comply with GAAP. Certain governments will voluntarily
comply with GAAP to signal quality (Evans & Patton, 1983; Evans &
Patton, 1987). Others will do so to achieve the benefits of GAAP-
compliant reporting.
This study hypothesizes that while some governments may
voluntarily adopt GASB 34, the overall rate of adoption among
Pennsylvania’s local governments is likely to be low, given the lack of
a statewide mandate to comply with GAAP. The study hypothesizes
that adoption rates will be especially low in small, rural, local
governments because they lack the resources and capacity to adopt
reformative measures such as GASB 34. The study examines how
government type, occupational specialization and a government’s
past practices such as prior compliance with GAAP and basis of
accounting are associated with the adoption of GASB 34.
METHOD
Pennsylvania has 2,632 local governments. These governments
consist of 67 counties, 56 cities, 959 boroughs, 1 town, and 1,549
townships. The 1,549 townships are comprised of 92 townships of
the first class and 1,457 townships of the second class. First class
townships tend to be large, urban, local governments whereas
second class townships tend to be small, rural governments. In
Pennsylvania, a government is considered rural if its population
density is less than 274 persons per square mile. Sixty-four percent
of Pennsylvania’s governments are rural.
For purposes of selecting a sample, Pennsylvania's 2,632 local

governments were stratified by size in terms of annual revenues. The
stratifications were based on the different reporting requirements
and deadlines imposed by the Government Accounting Standards
Board. The Board refers to these stratifications as “Phases” (Patton
& Bean, 2001). Governments are expected to adopt GASB 34
according to the following deadlines:
- Phase 1 - Governments with total annual revenues of $100
million or more must retroactively record infrastructure assets
for the years beginning after June 15, 2005.
- Phase 2 - Governments with total annual revenues between
$10 and $100 million must retroactively record infrastructure
assets for the years beginning after June 15, 2006.
- Phase 3 - Governments with total annual revenues less than
$10 million are encouraged to retroactively record
infrastructure assets, but are not required to do so. They must
record infrastructure assets prospectively.
The local governments were also stratified by type of government
(county, city, borough, town, and townships of the first and second
class). In Pennsylvania, local governments are classified according to
historic geographic boundaries and population densities. Different
type governments possess different characteristics, operate under
different laws, serve different populations, and are staffed by people
of differing skill levels. The differences in type government reflect
governments with different resources and capabilities.
The population of Pennsylvania’s local governments consists of
28 Phase 1 governments, 174 Phase 2 governments, and 2,430
Phase 3 governments. A sample is drawn from this population. All of
Pennsylvania’s Phase 1 and 2 governments are selected for the
sample. The remaining 2,430 Phase 3 governments were stratified
alphabetically first by county, then alphabetically by type government
within each county. A systematic random sample of 304 Phase 3
governments was selected from the population of Phase 3
governments. The final sample consisted of 506 total governments
(28 Phase 1 governments + 174 Phase 2 governments + 304 Phase
3 governments). Table 1 shows the summary of the sample by
phase.
236 PATRICK
TABLE 1
Summary of the Sample by Phase
Phase Total Adoption Population Sample
Revenue Deadline* Municipality County Total Total
(In Million)
Phase 1 +$100 12/31/2006 8 20 28 28
Phase 2 $10-100 12/31/2007 139 35 174 174
Phase 3 -$10 12/31/2003 2,418 12 2,430 304
Total 2,565 67 2,632 506
Notes: * Pennsylvania local governments report on a calendar
yearend.
Table 2 shows that 47% (237/506) of the local governments in

the sample are rural; the remaining 53% are urban. The sample is
comprised of 61 counties, 29 cities, 135 boroughs, and 281
townships. Forty-six or 16% of the 281 sampled townships are
townships of the first class; the remaining 235 are townships of the
second class. Thus, 84% of the sampled townships are small, rural,
second class townships. Table 2 presents a Summary of the Sample
by Type Government and Rural/Urban Status.
TABLE 2
Summary of the Sample by Type Government and Rural/Urban Status
Status Type Government
County City Borough 1st Class Twp 2nd Class Twp Total
Rural 66% 0% 36% 0% 63% 47%
(40) (0) (49) (0) (148) (237)
Urban 34% 100% 64% 100% 37% 53%
(21) (29) (86) (46) (87) (269)
Total 100% 100% 100% 100% 100% 100%
(61) (29) (135) (46) (235) (506)
Notes: The number of municipalities is provided parenthetically.
Pennsylvania local governments report financial information on a

calendar yearend. The adoption deadline for the Phase 1 and Phase
2 governments is December 31, 2006, and December 31, 2007,
respectively. The Phase 3 governments are expected to adopt the
prospective provisions of GASB 34 by December 31, 2003.
The data for the study was derived mostly from archival data
maintained by the DCED’s Center for Local Government Services. The
DCED collects and maintains financial and non-financial data about
Pennsylvania local governments. This data has been collected
annually from 1986 through the present and is made accessible to
the public through the Internet. Data indicating whether the
government adopted GASB 34 (or not) and the government’s basis of
accounting was not collected by the State government at the time of
this study (the State now collects basis of accounting), so a survey
was sent to the sampled local governments, asking if and when they
adopted GASB 34 and the basis of accounting used prior to adoption.
Follow-up telephone calls were made to non-responders. The
response rate was 100% and there was no missing data.
Adoption rates were examined using descriptive statistics. The
dependent variable is binary (adopt or not). There are six independent
variables: (1) Phase (Phase 1, 2, 3); (2) type government (county, city,
borough, first class township, second class township); (3) degree of
occupational specialization (controller, chief administrator, finance
director, manager, municipal secretary); (4) GAAP-compliance prior to
adoption (yes or no); (5) basis of accounting prior to adoption (cash,
modified accrual, full accrual basis of accounting); and (6) rural or
urban status.
FINDINGS
The descriptive statistics indicate that 235 or 46% of the sampled
governments adopted GASB 34; however, it is unlikely that the
adoption rate in the population is this high. Recall that the sample
was stratified and included a census of the Phase 1 and 2
governments. All the Phase 1 governments in the sample adopted
GASB 34, 85.6% of the Phase 2 Governments adopted it, as did
19.1% of the Phase 3 governments. Adjusted for the adoption rates
of the three Phases, about 24% or 641 of the governments in the
population likely adopted GASB 34. This estimate is calculated as
follows: 24% = 641/2,632 = ([28 Phase 1 governments x 1.0
adoption rate) + (174 Phase 2 governments x .856 adoption rate) +
(2,430 Phase 3 governments x .191 adoption rate]). Table 3
summarizes the Estimated Adoption Rate in the Population by Phase.
238 PATRICK
TABLE 3
The Estimated Adoption Rate in the Population by Phase (N= 506)
Phase Adoption Number of Estimated Estimated
Rate in the Governments Number of Adoption
Sample in the Adopters in Rate in the
Population the Population
Population*
Phase 1 100.00% 28 28* 100.00%
Phase 2 85.60% 174 149* 85.60%
Phase 3 19.10% 2,430 464* 19.10%
Total 2,632 641** 24.30%
Notes: * The adoption rate in the sample multiplied by number of
governments in the population.
** The sum of the Phase 1, 2 and 3 estimated number of
adopters in the population.
The data show further that adoption appears to be directly

associated with the government’s rural or urban status. Sixty-seven
percent of the sampled urban local governments adopted GASB 34.
The opposite is true for rural governments. Seventy-seven percent of
the rural governments did not adopt GASB 34. Thus, urban
governments adopted GASB 34 at high rates while rural governments
adopted at low rates. Table 4 summarizes the Adoption Patterns of
Urban and Rural Local Governments.
Type of government is also associated with the adoption of GASB
34. Ninety-two percent of the sampled counties, 90% of the cities,
and 80% of the first class townships adopted GASB 34. These are
the largest local governments in Pennsylvania. The smaller local
governments adopted at much lower rates. Only 34% of the sampled
TABLE 4
The Adoption Patterns of Urban and Rural Local Governments
Adoption Rural Urban Total
Patterns Number % Number % Number %
Non-Adopter 183 77 88 33 271 53
Adopter 54 23 181 67 235 47
Total 237 100 269 100 506 100
boroughs and 30% of the second class townships adopted GASB 34.
These findings suggest that government type is directly associated
with the decision to adopt GASB 34.
The findings are similar for Phase of government. All the Phase 1
governments and 85% of the Phase 2 governments adopted GASB
34. As noted above, Pennsylvania amended Section 1705 of the
Commonwealth County Code (P.L. 323, No. 130) in June 2002 and
began requiring Pennsylvania counties to make and keep financial
records in accordance with GAAP. Since GASB 34 is a requirement of
GAAP, the amendment effectively required all Pennsylvania counties
to adopt GASB 34. This statutory change is likely responsible for the
high adoption rates among counties. As of this writing, all the Phase 1
counties were in compliance with the amended County Code while
some of the Phase 2 counties had yet to adopt GASB 34.
Occupational specialization may also play a role in adoption. In
this study, occupational specialization is used to proxy the degree of
specialized training and education possessed by the local
government accounting staff. Specialization is measured by the job
title of the highest-level staff person performing the accounting
function. In Pennsylvania, the titles of these employees include in
descending order: controllers, chief administrators, finance directors,
managers and municipal secretaries. The more specialized the
accounting staff, the better able it is to adopt and implement
accounting reforms such as GASB 34 (Honadle, 1999). Ninety-two
percent of the county controllers adopted GASB 34, but they were
required to do so. Other highly specialized staff also adopted at high
rates. Seventy-eight percent of the chief administrators, 75% of the
finance directors, and 72% of the managers adopted GASB 34.
These accounting staff adopted GASB 34 on a voluntary basis.
Municipal secretaries are the only staff that did not adopt GASB
34 at high rates. Only 19% of the governments with municipal
secretaries adopted GASB 34. Municipal secretaries can be full-time,
highly trained individuals with regular salaries, but in Pennsylvania
municipal secretaries are more likely to be part-time staff with limited
bookkeeping and accounting experience. Ninety percent of the
municipal secretaries in Pennsylvania work in small, rural, Phase 3,
local governments and receive very limited income for their services.
One explanation for the low adoption rate among municipal
secretaries may be that municipal secretaries lack the skills needed
240 PATRICK
to adopt GASB 34. Another explanation may be that the

administrators of small, rural, local governments do not believe the
benefits outweigh the costs of implementing GASB 34. It is also
possible that they did not have access to training or assistance with
implementation. Perhaps the decision to comply with GAAP (or not) is
influenced by the auditor that prepares the government’s financial
information.
Sixty-five percent of the adopting governments use independent
CPAs to perform their annual audits. By contrast, 80% of the non-
adopting governments use elected or appointed municipal auditors.
These findings support the assertion that affiliations with
independent CPAs are positively associated with the decision to adopt
GASB 34, just as affiliations with municipal auditors are associated
with the failure to adopt GASB 34. Although the reasons for these
findings are unclear, it is possible that CPAs believe compliance with
GAAP is preferable to non-compliance (Carpenter, Cheng, & Feroz,
2007). It is also possible that governments use municipal auditors to
avoid the costs of hiring a CPA. Municipal auditors work at statutorily-
set rates, keeping the cost of their services low. Municipal auditors
may be capable of producing GAAP-compliant information, but there
is little incentive for them to do so since the State government does
not require it of them.
Reform ideas such as GASB 34 stand the greatest chance of
adoption when they are compatible with past practices (Fals Borda,
1960). The decision to adopt a new accounting standard such as
GASB 34 is therefore influenced by the accounting practices
employed by the government before the new standard is introduced.
A review of the GASB 34 adopters in this study shows that 90% were
GAAP-compliant before they adopted GASB 34. Likewise, 78% of the
non-adopters did not comply with GAAP. Another past practice is the
basis of accounting used prior to adoption. Most of Pennsylvania's
small, rural, local, governments used the cash basis of accounting
prior to the issuance of GASB 34. In fact, more than eighty percent of
the non-adopters report that they still use the cash basis of
accounting. By contrast, 78% of the adopters used the modified or
full accrual basis prior to adoption. These findings support the
assertion that would-be adopters are more likely to adopt a new
practice, if it is consistent with their past practices.
DISCUSSION
Users of local government financial statements have eagerly
awaited the issuance of GASB 34-compliant financial information.
They want this information to evaluate the long-term viability and
inter-period equity of local governments (Plummer et al., 2007;
Wilson & Kattelus, 2001), but it is unlikely that Pennsylvania users
will see this information soon. Seventy-six percent of Pennsylvania’s
local governments have yet to adopt GASB 34. Most of these non-
compliant governments are small, rural, local governments, which still
use the cash basis of accounting. It is impossible to pinpoint a single
reason for the high rate of non-adoption among these small, rural
governments. The lack of adoption is more likely the result of many
factors, including the possibility that small, rural, governments lack
the capacity and resources to adopt reformative accounting
standards such as GASB 34 and GASB 34 does not provide enough
benefits to outweigh the costs of implementation, particularly in a
state that does not require GAAP-compliant financial reporting. We
must also consider the possibility that noncompliance is a rational
choice for these governments.
In sharp contrast to the large number of non-adopting small,
rural, governments is the relatively high number of governments that
adopted GASB 34 on a voluntary basis. Twenty-four percent of
Pennsylvania’s large, urban counties, cities, and townships of the first
class adopted GASB 34. Many of these governments are staffed with
specialized accounting professionals and tout a history of GAAP-
compliance. Some of these governments were required to adopt
GASB 34, but many others adopted on a voluntary basis. Either way,
these governments represent exemplars of financial reporting in
Pennsylvania.
State governments can play a significant role in the financial
reporting of local governments. They issue the enabling legislation
that creates local governments. They offer incentives and impose
penalties regarding the operations of local governments (Loyd &
Crawford, 2008). They transfer money to local governments through
grants and intergovernmental revenue –it seems reasonable they
might impose rules about how that money is reported. State
governments could exert a substantial degree of influence over the
financial reporting of local governments if they chose to do so.
242 PATRICK
No one knows exactly how many of the 87,575 local governments

in the United States issue GAAP-compliant financial reports, but the
number is estimated to be low for a number of reasons (Mead,
2008). First, the fifty state governments only recently began to
comply with GAAP (Carpenter, 1991; Carpenter, Cheng & Feroz,
2007) and twenty-two of those state governments did not comply with
GAAP until recently. Also, only thirty-six of the states require GAAP-
compliant reporting for their local governments and most of those
states do not impose GAAP-compliance upon their small, local
governments (Mead, 2008).
The Government Accounting Standards Board recently attempted
to estimate the number of local governments in the United States
that comply with GAAP (Mead, 2008). The Board sampled 17,577
large, local governments not required by their state governments to
comply with GAAP. The Board did not sample large, local
governments required to comply with GAAP because these
governments presumably comply. Likewise, the Board did not sample
small governments because it was too difficult to collect the data and
these governments are unlikely to comply on a voluntary basis. The
Board estimates that 67% of the large, local governments in the U.S.
that are not required to comply with GAAP do so on a voluntary basis
(Mead, 2008). The Board cautions against inferring that these
results apply to small, local governments, since the Board’s sample
did not include 56,354 of the smallest U.S. local governments.
GAAP-compliance among U.S. local governments is so low that
users could get the impression that GAAP-compliant reporting by local
governments is unimportant. That is simply untrue. In addition to the
benefits stated above, there are three key reasons why GAAP-
compliant reporting is important. The first reason is to achieve
comparability among governments. It is currently difficult, if not
impossible, to compare the fiscal condition of local governments on a
nationwide basis because they use such a wide variety of accounting
methods (Coe, 1999; Stevens & LaPlante, 1987). Researchers can
often assess the fiscal condition of governments within a single state,
but conducting a nationwide assessment of fiscal condition poses a
much greater challenge. This might not be an important consideration
during times of economic boom, but it could be critical in times of
economic crisis, since few organizations impact the quality of our
lives the way local governments do. Users need to know whether local
governments are prudently using their short and long-term debt or

passing the burdens of today’s taxpayers onto future generations.
They also need to know whether a local government can sustain its
current level of services or is struggling to maintain services. Users
should also know whether a government has access to alternative
sources of revenue, if once reliable sources are discontinued. GAAP-
compliant information can help users make these important
assessments.
The second reason is to improve the public’s confidence in
government. Governments play an important role in our lives, but the
public’s opinion of government is often tainted by anti-bureaucratic
sentiment and distrust. Stories of fraud, waste and abuse remind us
too often that government officials are vulnerable to corruption.
Distrust of government is the root of reform movements such as
“New Public Management” and “Reinventing Government,” which
strive to run the government as a business (Barzelay, 1992; Light,
1997; Osborne & Gabler, 1992). Despite the widespread support
enjoyed by these movements, some public administrators question
the appropriateness of applying private-sector concepts to
government (see Denhart & Denhart, 2000; Radin, 2000; Vigoda,
2002). These scholars caution administrators about thinking of
citizens as customers, taking risks with taxpayer money, and running
the government according to the forces of supply and demand (Terry,
1998).
To the extent that GASB 34 encourages governments to issue
financial information that is similar to that issued by the private-
sector, GASB 34 may be an extension of the “Reinventing
Government” movement (Sacco, 2000). If this is true, then some
administrators may be opposed to GASB 34 on ideological grounds.
However, before dismissing GASB 34 as inappropriate because it is
part of the “Reinventing Government” movement, scholars and
practitioners may be wise to assess the benefits of GAAP-compliant
financial information. GAAP-compliant information enhances the
accountability and transparency of governments. It allows users to
evaluate the activities and financial weaknesses of governments.
Sunlight on governmental activities usually serves to build public
trust, not erode it, even when the public disagrees with the
government’s decisions. Thus, GAAP-compliant financial reporting
may improve public confidence in government and minimize the
244 PATRICK
waves created by reform movements such as “Reinventing

Government.”
The third reason for U.S. local governments to issue GAAP-
compliant financial information is to keep pace with their European
counterparts. A recent study shows that local governments in the
United Kingdom, Denmark, Germany, Netherlands, and Switzerland
currently use the accrual basis of accounting and issue GAAP-
compliant information (FEE, 2007). Only local governments in
countries such as Hungary and Italy are still using the cash basis of
accounting (FEE, 2007). These findings indicate that local
governments in the United States will have to issue GAAP-compliant
financial information and adopt the accrual basis of accounting, if
they wish to compete in the global bond market (Sacco, 2000). This
will require the adoption of GASB 34.
AREAS FOR FUTURE RESEARCH

This study looks only at whether local governments adopted GASB
34 (or not). It does not ask government administrators “why” they
adopted GASB 34. Nor does it seek knowledge about many aspects
of the adoption process. Researchers interested in this line of
research can define any accounting standard and administrative
innovation and use the diffusion of innovation theory to examine
adoption patterns (see Damanpour, 1991; Patrick, 2007; Rogers,
2003). Diffusion theory provides a framework for looking at the
adoption decision process, the attributes of the innovation, the
characteristics of would-be adopters, and the role of diffusion
networks, change agents, opinion leaders, and innovation champions,
as well as the consequences of adopting innovations.
Researchers examining the adoption decision process look at
“why” governments adopt innovations. These researchers look at why
governments decide to try new standards. They examine whether
would-be adopters learn about new standards but do not try them,
whether they try new standards and later abandon them, or try new
standards and keep them. These researchers sometimes look at the
obstacles encountered during the implementation process.
Researchers interested in how the innovation itself may influence
adoption patterns examine the characteristics of the innovation.
These researchers look at whether the innovation is complex, can be
tried or observed in advance of adoption, or can be unbundled.

Innovations are more likely to be adopted, if they provide the would-
be adopter with an advantage such as prestige or profitability, if they
are compatible with the adopter’s past practices, if they are simple
rather than complex, and if the adopter can try them prior to
adoption.
Researchers can also study the characteristics of adopters.
Researchers can examine the characteristics of individual adopters or
adopting organizations. Decisions in governments are usually made
by more than one person. Thus, studies of organizational
innovativeness are most appropriate for governments. These studies
often examine how the adopting organization’s structure, culture, and
interdependencies with the external environment are associated with
adoption. There are a variety of models to guide studies involving
organizational innovativeness (see Chan, Jones & Luder, 1996;
Patrick, 2007; Rogers, 2003).
Researchers can also examine the role of diffusion networks,
opinion leaders, change agents, and innovation champions. These
studies look at the role social networks play in the adoption process.
They focus on how the innovation is communicated to would-be
adopters and the role of influential community leaders. Opinion
leaders are influential people in the community. They are accessible,
possess high social status and are more innovative than their
followers. Change agents work for the organizations attempting to
diffuse the innovation to would-be adopters. They go out into the field
and diffuse new ideas and train would-be adopters on the use of new
innovations. Innovation champions are organizational sponsors that
facilitate implementation. They use their status and charisma to
maintain momentum and morale during the implementation process.
All of these approaches offer opportunities for research.
All innovations produce consequences. However, researchers of
innovation are often biased in favor of adoption and ignore the
consequences of adoption. They assume adoption is the best choice
for everyone and forget that there are always desirable and
undesirable consequences of adoption, direct and indirect impacts of
adoption, and intended and unintended results of adoption.
Inequalities are also often created by adoption. Identifying the
consequences of adoption is an under-explored area of research.
246 PATRICK
CONCLUSION
In 1999, the Government Accounting Standards Board issued
GASB 34 and expected local governments to adopt it by their
respective deadlines. This study shows that many local governments
are unwilling or unable to adopt it. This is particularly true in
Pennsylvania, where the State government does not require GAAP-
compliant financial reporting. Only Pennsylvania’s 67 counties are
required to adopt GASB 34. These counties represent 2.5% of
Pennsylvania’s 2,632 local governments. Many of Pennsylvania’s
large, urban, local governments adopted GASB 34 on a voluntary
basis, but most of its small, rural governments did not. Pennsylvania
has 2,430 small, rural, Phase 3 governments staffed by non-expert
municipal secretaries with limited resources and capacity. These
governments use the cash basis of accounting and municipal
auditors to prepare their annual reports. Eighty-one percent of these
governments did not adopt GASB 34 and have no apparent plans to
do so in the near future.
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J. OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT, 22 (2),250-271 SUMMER 2010
ACCOUNTING INNOVATIONS:
A CONTINGENT VIEW ON ITALIAN LOCAL GOVERNMENTS
Eugenio Anessi-Pessina, Greta Nasi, and Ileana Steccolini*
ABSTRACT. Accounting innovations, and especially the introduction of

accruals accounting, are often portrayed as fundamental aspects of public-
sector reforms. An increasing body of literature has been studying the
experiences of different countries and levels of government, often referring
to Lueder’s (1992) “contingency model” and its subsequent developments.
This model highlights a number of social, political, and administrative
variables that are likely to affect government accounting innovations. It
applies at a country-wide level and is mainly intended to describe and
compare the environments within which accounting reforms take place, as
well as the technical features of such reforms. Our paper, on the contrary,
tries to expand the contingency model by applying it to individual
organisations and by testing its explanatory power.
INTRODUCTION
Accounting innovations, and especially the introduction of
accruals accounting, are often portrayed as fundamental aspects of
public-sector reforms (Hood, 1991, 1995; Lueder, 1992;
-------------------------------------------
* Eugenio Anessi-Pessina, Ph.D., is a Professor, Department of
Management, Università Cattolica del Sacro Cuore (Italy). His research
interests include public sector accounting and accountability, accounting
reforms, and health-care management. Greta Nasi, Ph.D., is an Assistant
Professor, Department of Institutional Analysis and Public Management,
Università Bocconi (Italy). Her research interests include government
innovation, accounting reforms, e-government and e-health. Ileana
Steccolini, Ph.D., is an Associate Professor, Department of Institutional
Analysis and Public Management, Università Bocconi (Italy). Her research
interests include public sector accounting and accountability, accounting
reforms and change in the public sector.

ACCOUNTING INNOVATIONS: A CONTINGENT VIEW ON ITALIAN LOCAL GOVERNMENTS 251
International Federation of Accountants - Public Sector Committee,

1997; Olson et al., 1998; Lapsley, 1999). Many countries worldwide
have long been experimenting with accruals accounting for all or
some tiers of government (International Federation of Accountants -
Public Sector Committee, 1997): among them New Zealand,
Australia, the United Kingdom, Spain, Sweden, Canada, France,
Belgium, Ireland, and Finland. The European Union and the United
Nations have recently chosen to adopt accrual-based International
Public Sector Accounting Standards (IPSASs). “Official” discourse on
public-sector reforms generally praises the benefits deriving from
accruals accounting.
The introduction of accruals accounting in the public sector,
however, has not been without controversy. An increasing body of
literature has criticised it on both theoretical grounds (Oettle, 1990;
Ma & Matthews, 1993; McRae & Aiken, 1994; Guthrie & Johnson,
1994; Carnegie & Wolnizer, 1995; Lewis, 1995; Montesinos, Pina, &
Vela, 1995; Stanton & Stanton, 1998; Guthrie, 1998; Monsen &
Näsi, 1998; 1999, 2000; Christiaens, 1999; Ellwood, 1999; Monsen,
2002) and practical considerations (Guthrie, 1998; Stanton &
Stanton, 1998; Newberry, 2002; Carlin & Guthrie, 2003; Hodges &
Mellett, 2003).
Similar to New Public Management (NPM) in general, the
literature initially focused on accruals accounting’s technical features
and expected effects (Lapsley & Pallot, 2000, p. 215). More recently,
the emphasis has been shifting towards actual implementation and
impacts. In particular, several studies have been published that
compare the experiences of different countries and levels of
government (among others, see for example, Chan, Jones, & Lueder,
1996, and Lueder & Jones, 2003). One of the main findings of these
analyses is that “accruals accounting” is not a clearly defined and
unequivocal concept. Rather, like NPM itself, it is an umbrella term
designating a wide range of solutions. In some countries and levels of
government, accruals accounting replaces traditional budgetary
accounting, while elsewhere the latter remains firmly in place. In
between, a large variety of approaches exists, ranging from the
adoption of accrual-based reporting in conjunction with cash or
commitment-based budgeting, to the use of accruals data only for
management-control purposes, to the introduction of some sort of
accrual-based management accounting for specific classes of inputs
252 ANESSI-PESSINA, NASI & STECCOLINI
(e.g., supplies) within an otherwise traditional budgetary-accounting

system. As to actual impacts, they have often failed to meet
expectations (Guthrie, 1998; Monsen, 2002).
From a theoretical viewpoint, most comparative studies are
founded on Lueder’s (1992) “contingency model” and its subsequent
developments (e.g. Chan, Jones, & Lueder, 1996; Lueder, 1994;
Jaruga & Wojciech, 1996; Monsen & Nasi, 1998). The contingency
model highlights a number of social, political, and administrative
variables that characterise different countries and are likely to affect
government accounting innovations. The model thus applies at a
country-wide level and is mainly intended to describe and compare
the environments within which accounting reforms take place, as well
as the technical features of such reforms.
On the contrary, in this paper, we expand the contingency model
by applying it to individual organisations and by testing its explanatory
power. Our purpose is to contribute to a better understanding of
government accounting reforms (especially those oriented towards
accruals accounting) and of the factors that may explain their degree
of success. Our specific focus is on Local Government (LG)
accounting innovations in Italy.
The paper is structured as follows. In Section 2 we present the
contingency model of governmental accounting innovations. In
Section 3 we provide some background on Italian LGs and specify the
paper’s data and methods. In Section 4 we summarise the findings.
Finally, in Section 5, we discuss the results, draw some conclusions,
and suggest further research avenues.
THEORETICAL BACKGROUND: THE CONTINGENCY MODEL OF

GOVERNMENTAL ACCOUNTING INNOVATIONS
The contingency model of governmental accounting innovations
was initially proposed by Lueder (1992) in order to analyse the
transition from traditional governmental accounting to accruals
accounting, viewed as “a more informative system” (Lueder, 1992, p.
108), that is, a system that provides a more faithful representation of
a government’s financial position and performance for both internal
decision making and external accountability. The model was then
progressively adapted as other scholars used it to guide their own
analyses of government accounting reforms in different countries
(Lueder, 1994; Chan, Jones, & Lueder, 1996; Jaruga & Wojciech,
1996; El-Batanoni & Jones, 1996; Montesinos & Vela Bargues, 1996;
Bac, 1996; Likierman, 1996; Monsen & Näsi, 1998).
The contingency model is fundamentally an economic model in
that it assumes a market for governmental accounting information
(Chan, Jones, & Lueder, 1996). It is mainly composed of four
elements:
- Users of accounting information, e.g., citizens, members of
Parliament, etc., whose attitudes and behaviours are affected by
such “social structural variables” (Lueder, 1992, p. 99) as
socioeconomic status (e.g., income and education levels) and
political culture (e.g., degree of openness and participation by the
citizenry in public decision-making processes).
- Producers of accounting information, whose attitudes and
behaviours are affected by the “structural variables describing
the politico-administrative system” (Lueder, 1992, p. 99), that is,
by the features of both the political system (e.g., competition in
the market for votes, competition between the executive and
legislative bodies) and the bureaucracy (e.g., staff training and
background, recruitment criteria and procedures, administrative
culture).
- Stimuli, which may affect the interaction between producers and
users and trigger accounting innovations. Examples include fiscal
stress, financial scandals, incentives provided by capital markets,
accounting standard-setting by bodies external to governments,
professional interests.
- Implementation barriers, which may hinder the successful
introduction of accounting reforms (e.g., fragmentation of
financial management functions, features of the legal system,
qualifications of accountancy staff, size of jurisdiction).
So far, the utilisation of this model has been characterised by the
following features. First, the model has been used at a country-wide
level, that is, to analyse and compare the accounting reforms of
whole countries or, at most, of entire tiers of government within
countries. Second, the model has been used more to describe the
technical features of accounting reforms than to explain their causes
and effects. Third, to the extent that the model has been used with
explanatory purposes, to predict or justify the degree of success of

accounting innovations, this has been done in a purely qualitative
way, without resorting to measured variables and statistical
techniques.
In this paper, on the contrary, we take an explanatory and
quantitative approach to analyse the determinants of successful
implementation within individual public-sector organisations.
CONTEXT, DATA AND METHODS

To operationalise the model and apply it to individual
organisations, we focused on Italian Local Governments, translated
the model’s four components into a wider range of measurable
variables and conducted a regression analysis.
Context: Local Government Accounting in Italy

In the early 1990s, Italian LGs were involved in the modernisation
of the public sector, which was led by the objectives of
decentralisation, downsizing, introduction of managerial concepts
and techniques.
The 1995 reform of LG accounting introduced new requirements
(in particular, to publish an accrual-based financial statement) and
tools (e.g., management control systems) to meet the needs of
internal decision makers for readable information, to support
outsourcing decisions, and to serve external accountability purposes.
However, the reform also required LGs to maintain their
traditional cash- and commitment-based systems. Moreover, it did
not require accrual-based accounting, but only accrual-based
reporting. More specifically, the budget is still structured according to
the commitment basis of accounting; financial reports must include a
balance sheet and an operating statement as a supplement to the
traditional cash- and commitment-based statements; double-entry
bookkeeping, however, is not mandatory. In this last regard, in fact,
Italian LGs have been given the opportunity to opt out of accruals
accounting and simply derive their balance sheets and operating
statements from their (cash- and commitment-based) budgetary-
accounting statements through a complex system of year-end
adjustments. LGs can thus be classified into two groups according to
whether or not they have introduced double-entry accruals-based

bookkeeping.
Operationalisation of the Model

In order to apply the contingency model to individual LGs, the
dependent variable (configuration of the accounting system, CONFIG)
was defined as a dummy for whether or not the LG introduced
double-entry, accrual-based bookkeeping. The following measures
were identified for the model’s four components.
User Related Variables: Social and Economic Variables

Socio-economic status supposedly affects the basic attitudes of
information users towards more informative forms of public-sector
financial reporting. Social factors include racial and religious
heterogeneity, education, immigration, and household composition.
Economic determinants include unemployment, poverty rates, and
income levels (Putnam, 2000; Norris & Moon, 2005; Alexander,
2007). Most of these variables, however, are not adequately
measured at the local level, at least in Italy. In this paper, we thus
used per capita added value (PCADDEDVALUE) to capture economic
factors, and the percentage of people aged 19 and above and holding
at least a high-school degree (EDU) to capture social factors. Per
capita added value is a measure of the additional value generated in
the production process by the institutions operating in a given
context; it has been proposed to reflect the local capacity to react to
stimuli (Porter, 1998). The percentage of people aged 19 and above
and holding at least a high-school degree is viewed by the National
Statistical Institute (ISTAT) as a reliable measure of above-mandatory
education, since the Italian minimum legal requirement for education
is set at secondary-school diploma.
In addition, we introduced a measure of social capital. Social
capital refers to the institutions, relationships, attitudes and values
governing the interactions within a community and contributing to the
community’s economic and social development (Iyer, Kitson, & Toh,
2005). It depends upon social and economic determinants as well as
some demographic characteristics. In this paper, the amount of social
capital was measured by a dummy variable (UNI) for the presence of
universities in the LG’s territory. This is an admittedly gross proxy, but
the economic and social determinants that are commonly discussed
in the social capital literature are not adequately measured in the

Italian context, at least at such a detailed level as individual LGs. The
expected sign for all three variables (PCADDEDVALUE, EDU, and UNI)
was positive.
Furthermore, in the Italian context, significant regional differences
exist across a wide range of features, including the communities’
willingness and ability to react to stimuli. Existing research shows that
Northern Italy is usually keener on innovation than the rest of the
country (Putnam, et al., 1993). In addition, some studies (Nasi &
Frosini, 2007) have hinted that political orientation may also matter,
with left-of-centre administrations keener on managerial innovations
than right-of-centre ones. We thus introduced a dummy variable
(POLATT) for the LG having a left-wing (0) or right-wing (1)
administration. We then used three further dummy variables to reflect
the National Statistical Institute’s classification of geographical areas:
North-West (baseline), North-East (NORTHEAST), Centre (CENTRE),
and South (SOUTH). The expected sign was negative for both POLATT
and SOUTH.
Producer Related Variables: Politico-Administrative System Variables

Producer-related variables cover the features of both the political
system and the bureaucracy. With respect to the political system,
political competition is generally expected to increase the attention
towards a more informative system of accounting. In this paper, we
used a dummy variable (POLSTAB) for whether the LG’s
administration had changed its political orientation (left or right-of-
centre) over the last two mandates. The expected sign was positive.
As for the bureaucracy, staff training and recruiting criteria were
omitted, mainly because they are invariant across LGs since
personnel policies are highly regulated at the national level. This
omission implies that the findings of this study apply only to highly
regulated environments.
In terms of administrative culture, we focused on the attitudes of
Chief Financial Officers (CFOs) towards accruals accounting
(MYCONFIG). In the literature, the perception by key individuals of
particular needs and potential advantages is often identified as an
important determinant of innovation adoption (Nedovic-Budic &
Godschalk, 1996; Heintze & Bretschneider, 2000), although per se
insufficient to ensure that the innovation is actually implemented
(Kanter, 1992). In the Italian context, where LGs are structured as

silo organisations (Rebora, 1983), with individual departments
developing their own culture and working methods and pursuing their
goals under a function-centric approach, CFOs embed the
professionalism of their role and function, decide for their own group,
are often more sensitive to their profession’s norms and judgements
than to their organisations’ needs and expectations, and react to calls
for innovations and to institutional pressures. Therefore, if CFOs
declare their support for the replacement of budgetary accounting
with accruals accounting (MYCONFIG=1), we can expect the adoption
of innovative accounting tools by the relevant LGs to become more
likely. The expected sign was positive.
Stimuli
Fiscal stress refers to governmental financial conditions and the
sustainability of public debt. To capture it, we used the per capita
cumulated surplus/deficit (CUMSURPLUS), which is the official
bottom line for Italian LGs, as measured by traditional budgetary
accounting (“risultato di amministrazione”). The relevant data are
available at the Department of the Interior’s website. The expected
sign was negative in that poorer results should mean greater stress
and thus the need for more comprehensive financial disclosure.
Financial scandal concerns cases of significant waste of financial
resources. For Italian LGs, a valuable proxy could be the status of
“bankruptcy” or “structural financial deficit” as defined by legislation,
but the relevant data sets have not been made public by the
Department of the Interior (no Freedom of Information Act in Italy,
unfortunately). The variable has thus been omitted. This omission,
however, may not be particularly critical in that “bankruptcy” and
“structural financial deficit” are simply the final phases of increasing
financial stress, so much so that they are declared on the basis of
financial stress parameters exceeding given thresholds: therefore,
the data on fiscal stress should suffice.
The need to access capital markets is also expected to increase
LGs’ likelihood to adopt accruals accounting (see also Stalebrink &
Sacco, 2003). As accruals accounting is generally recognised to
provide better information than budgetary accounting (Lueder, 1992),
access to capital markets should be facilitated by its adoption. In this
paper, access to capital markets was measured by two dummy
variables: one (RATING) for whether the LG had been rated by at least
one major rating agency (Moody’s, S&P, Fitch), as reported in the
agencies’ websites; the other (BONDS) for whether the LG had issued
bonds, as reported by the Department of the Interior. The expected
sign was positive for both variables.
Other potential stimuli, such as external standard-setting and
professional bodies’ interests, are invariant across Italian LGs and
were consequently omitted.
Implementation Barriers
In the contingency model, the fragmentation of financial
management functions is expected to hinder the development of
consistent accounting innovations. In this paper, we focused on the
absence of separate offices for budgetary / financial accounting and
management control functions (POSITIONMCO). The expected sign
was positive.
In the original contingency model, size was viewed as reflecting
system complexity and thus supposedly hindering accounting
innovations. In our paper, we considered it as a proxy for both
organisational complexity and external visibility. Similar to system
complexity, size as organisational complexity may impede accounting
innovation. At the same time, as organisations become larger, they
need to handle and provide greater quantities of information, which
leads to more detailed control tools and should thus favour the
introduction of more advanced accounting solutions (Khandwalla,
1972; Child & Mansfield, 1972; Burns & Waterhouse, 1975;
Merchant, 1981; Anderson & Lanen, 1999; Haldma & Lääts, 2002).
As a proxy for external visibility, on the other hand, size implies that
larger organisations will pay greater attention to the adoption of
administrative techniques which are considered desirable and
innovative. In organisational terms, size was measured by the LG’s
number of employees (EMP). As a proxy for visibility, it was defined as
the LG’s population (POP), as reported in the 2001 census by the
National Statistical Institute. The expected sign for POP was positive,
while EMP could not be signed a priori.
The legal system is invariant across Italian LGs and its features
were consequently omitted. The qualification of LG accountants is
certified by formal recruitment policies and was omitted for lack of
variation as well as, once again, for absence of publicly available

data.
Sample and Analysis

The study sought to examine all 286 Local Governments
(municipalities and provinces) with populations greater than 40,000.
The population threshold was chosen to include all LGs that were first
involved in the process of accounting reform in 1997 (LGs with
populations above 100,000) and 1998 (LGs with populations
between 40,000 and 100,000). Italian provinces are “intermediate-
level” local authorities whose main functions relate to regulation of
economic activities (including agriculture, hunting, and fishing),
highways and transport infrastructures, environmental protection,
and education and cultural activities. They do not generally provide
services directly to constituents. Municipalities are the lowest tier of
government and thus the one that is closest to the citizens. They
provide local public services in the fields of social care and
assistance, local transport, urban planning and security, waste
disposal. They also perform the basic administrative tasks connected
to civil rights (e.g., registry of births and deaths) and commercial
activities.
Data gathering was composed of (a) a primary data collection,
conducted through phone interviews to LGs’ CFOs, and (b) the
collection of background information from official sources. In this last
regard, demographic data were drawn from the most recent (2001)
census by the National Statistical Institute; political and financial data
were gathered from the Department of the Interior; rating information
was collected from major rating agencies such as Moody’s, S&P, and
Fitch.
For the telephone survey, the final return rate (Table 1) was 83%
(237 LGs out of 286), with slightly higher percentages for
municipalities (86%: 158 out of 183) than for provinces (77%: 79 out
of 103). Overall, the sample of respondents seemed to sufficiently
match the universe of LGs under study in terms of type, size, and
geographical area. The model was tested using logistic regressions.
The results proved robust to different specifications, including the
introduction of a dummy variable to distinguish between the two
types of LGs (provinces and municipalities) and even the
identification of separate logistic regressions for the two types of LGs.
TABLE 1
Characteristics of the Respondents
Total Type of Local Governments
Types of Accounting Municipalities Provinces
Basis Number % Number % Number %
Total LGs Responding 237 100 158 66.7 79 33.3
Cash- and 108 42.6 79 33.3 29 12.2
commitment-based
accounting
Accruals accounting 129 57.4 79 33.3 50 21.1
RESULTS
Of the responding LGs, 57.4% had introduced double-entry,
accrual-based bookkeeping, with higher rates in the following areas:
- For provinces (63%), compared to municipalities (50%).
- In the North-East (66%) compared to the Centre (60%), the
North-West (57%), and especially the South (43%).
The regression results are summarised in Table 2. Some user-
and producer-related variables seem to be actually affecting the
adoption of accruals accounting, and so do some implementation
barriers, although sometimes with unexpected signs. The relevance of
stimuli, on the contrary, is seriously questioned. At 0.16, the R-
squared is rather low.
Among producer-related variables, CFOs are shown to play a
fundamental role in influencing accounting innovation, since their
attitude towards the substitution of accruals for the traditional cash
and commitment bases (MYCONFIG) is strongly and positively
associated with the introduction of double-entry, accrual-based
bookkeeping. On the contrary, political stability/competition
(POLSTAB) does not seem relevant in explaining innovation.
Among user-related variables, geographic location is
unsurprisingly shown to matter in that the coefficient for SOUTH is
negative and borderline significant. LGs with left-of-centre
administrations, moreover, are confirmed to be keener on innovation
than right-of-centre ones (POLATT negative and significant at 5%).
TABLE 2
Logistic Regression
LR chi2(15) = 32.69
Prob > chi2 = 0.0052
Log likelihood = -85.451587 Pseudo R2 = 0.1605
Config Coeff. Std. Z P>|z| 95%
Err. Conf.
Interval
Pcaddedvalue -.0000275 .0000538 -0.51 0.609 -.000133 .000078
Edu -.0616818 .0372865 -1.65 0.098 -.134762 .0113984
Uni .2898872 4347859 0.67 0.505 -.5622774 1.142052
Polatt -.8725955 .4459433 -1.96 0.050 -1.746628 .0014374
Northeast -.2640337 .6015665 -0.44 0.661 -1.443082 .915015
Centre -.65853 .6405405 -1.03 0.304 -1.913966 .5969064
South -1.417066 .756685 -1.87 0.061 -2.900141 .0660095
Polstab .3340595 .4573013 0.73 0.465 -.5622346 1.230354
Myconfig .6772076 .2963337 2.29 0.022 .0964042 1.258011
Cumsurplus -.0051409 .0031598 -1.63 0.104 -.0113341 .0010522
Rating .077352 .5200429 0.15 0.882 -.9419133 1.096617
Bonds -.2940979 .4424388 -0.66 0.506 -1.161262 .5730663
Positionmco -.8230872 .4465912 -1.84 0.065 -1.69839 .0522155
Pop 9.86e-07 8.89e-07 1.11 0.267 -7.56e-07 2.73e-06
Emp -.0002202 .0001276 -1.73 0.084 -.0004703 .0000299
Cons 2.660234 1.691304 1.57 0.116 -.6546614 5.975129
Nevertheless, the regression also shows some unexpected if not

counterintuitive results: the community’s level of education (EDU) is
weakly (p=.098) but negatively related to the presence of accruals
accounting, while the measures for economic development
(PCADDEDVALUE) and social capital (UNI) are statistically
insignificant. A possible explanation for these results is that the
contingency model posits a market for governmental accounting
information, but such a market may still be largely underdeveloped,
at least for Italian LGs. Previous research (Steccolini, 2004) shows
that there are no significant numbers of external users of annual
reports in Italian LGs. The only party that seems truly interested in
LGs’ financial conditions is the Central Government, since it must
constitutionally ensure that a minimum level of services is
guaranteed throughout the country, it may have to pick up LGs’
deficits, and it must comply with the European Monetary Union’s
“stability and growth pact”, whose thresholds and constraints apply to

the financial position and performance of the public sector as a
whole. The Central Government, however, looks only at cash and
commitment-based data. Consistently, the goals and constraints it
imposes on LGs and their constituents (e.g., balanced budgets) are
expressed in terms of cash and commitments.
This lack of user interest, in turn, is probably part of a larger
picture. Most likely, Italian LGs are not yet sufficiently accountable for
their financial conditions to really matter to them and their
constituents. Central government bail-outs, for instance, continue to
be rather widespread. This is also consistent with the descriptive
results of the survey in that, ten years after the reform, nearly half of
all LGs are still choosing not to introduce proper accruals accounting
and continue to derive their balance sheets and operating statements
from cash and commitment accounting by means of year-end
adjustments. These considerations would also help explain the
apparent irrelevance of the stimuli-related variables (CUMSURPLUS,
BONDS, RATING), none of which turns out to be statistically
significant.
The apparent irrelevance of exposure to capital markets (RATING
and BONDS) also suggests that lenders do not put any pressure on
LGs to actually introduce proper accruals accounting. This is probably
due to a certain disenchantment with the reliability of accruals-based
reports in Italian LGs (Anessi Pessina & Steccolini, 2005, 2007),
combined with a consolidated habit and ability to rely on traditional
budgetary accounting statements. An additional argument is that, for
subnational governments, liquidity and solvency have two key
determinants that would not show up in LGs’ balance sheets and
operating statements: the LG’s ability to raise additional taxes and
the likelihood of a bail-out from an upper tier of government. Besides
reliability, this remark calls into question the relevance of current
accruals accounting frameworks for the public sector. Perhaps, even
when reliable, existing accruals-based reports have not been
adequately designed to capture the peculiarities of financial position
and performance in public sector organisations.
When one considers implementation barriers, population (POP) is
statistically insignificant, whereas the number of LG employees (EMP)
is weakly but inversely related to the adoption of accounting reforms.
This finding is plausible, although not fully expected. In the
interpretation, one should keep in mind that the smallest LGs (i.e.,
those with populations < 40,000) were excluded from the analysis. It
is at that scale, however, that size may be particularly beneficial for
accounting innovation. In our sample, a negative coefficient for EMP
implies that medium-sized LGs (rather than small ones) are more
likely to introduce accruals accounting than large LGs. Beyond a
certain scale, in other words, the need for more and better
information is apparently offset by the greater inertia that inevitably
comes with size.
The absence of separate offices for budgetary / financial
accounting and management control functions (POSITIONMCO) is
weakly significant, but unexpectedly negative. In the original version
of the contingency model, the fragmentation of administrative
functions was seen as a weakness. However, one may argue that
fragmentation could strengthen the development of specialised
competencies and encourage fruitful, innovation-oriented competition
among professionals within the same organisation. In the specific
context of Italian LGs, moreover, most financial accounting offices
tend to stick to traditional budgetary accounting, for reasons of both
skills (they are more familiar with cash and commitments than with
accruals) and power (traditional budgetary accounting gives them the
power of the purse). Existing research (Nasi & Steccolini, 2008) has
shown that many LGs use traditional budgetary accounting to derive
not only their balance sheets and operating statements, but even
their management accounting data. Specialised management
accounting offices, on the contrary, pay more attention to accruals
accounting, since their mission is to investigate the actual use of
resources by individual organisational units.
Finally, the low figure for the R-squared implies that much
variation has been left unexplained. This probably indicates that, to
be effectively applied at the micro level, Lueder’s model needs to be
enriched with further variables that capture individual organisations’
peculiarities.
CONCLUSIONS
The purpose of this paper is to gain a better understanding of
government accounting reforms and the factors that affect their
success. To this end, Lueder’s (1992) contingency model is applied to
the individual government level and its explanatory potential is
verified through the use of statistical methods. The context for the
analysis is the subset of Italian LGs with populations above 40,000.
Of these, only 57% have introduced accruals accounting (in the full-
fledged form of double-entry, accrual-based bookkeeping) as a
consequence of the 1995 reform.
In trying to explain this degree of implementation, our results
show that user and producer attitudes seem to be captured by such
variables as geographic location, political orientation, and especially
CFOs’ own preferences; that size is in fact an implementation barrier,
while some forms of administrative fragmentation may unexpectedly
play a positive role; that the stimuli highlighted by the contingency
model are apparently of little relevance. To sum up, accounting
innovations are more likely in middle-sized LGs, located no more
southerly than Rome, with left-of-centre administrations, and whose
CFOs declare a preference for accruals accounting and must deal
with another organisational unit in charge of management control.
Altogether, these results point to the limited accountability of
Italian LGs. Most likely, Italian LGs are not yet sufficiently
autonomous and accountable to appreciate the full benefits of better
information for internal and external purposes. At this stage, there is
no real need or incentive for Italian LGs to use accruals-based
information for decision making, for raising money, or for increasing
consensus among the electorate.
In terms of the contingency model, stimuli do exist, but they are
filtered by users and producers. Users tend to downplay these stimuli
because LG financial conditions do not matter much and, to the
extent they do, they matter only in their cash and commitment-based
expressions. Producers are certainly more active and influential,
especially with reference to accountants, much less so to politicians.
This proactivity, however, is seemingly induced by personal and
professional motivations much more than external incentives. In fact,
producers often end up amplifying the stimuli to pursue accounting
innovations that they would regardlessly deem appropriate, based on
their own personal beliefs or on the norms of their professional
networks. Even some of the supposedly “user-related” or
“implementation-barrier” variables (namely geographic location,
political orientation, administrative fragmentation) may in fact reflect
or affect mostly the producers’ attitudes.
At the same time, the current configuration of accruals

accounting standards for LGs is also called into question. The lack of
interest on the part of lenders, in particular, may be partially due to a
vicious circle of limited user interest and poor reliability. At least to
some extent, however, it also stems from two major design faults: the
coexistence of accruals accounting with traditional budgetary
accounting, on the one hand; the adoption of private-sector
accounting standards with only marginal and superficial adjustments,
on the other.
From a theoretical viewpoint, our results call for a two-fold
revision of the contingency model, at least for applications to
individual governments as opposed to entire government systems. In
general terms, further developments of the model may want to
investigate the interactions between contextual socio-economic and
political variables on the one hand, user- and producer-related
variables on the other, to better predict the impact of these elements
on accounting innovations. With specific respect to the model’s four
sets of variables, such sets could be expanded to capture a greater
share of variability: for application at the micro level, the variables
that are invariant across individual governments must be omitted;
conversely, the model should be enriched with further variables
capturing individual organisations’ peculiarities. Legal provisions and
mandates, for instance, are an important source of stimuli, at least in
the Italian public sector (Panozzo, 2000): although invariant, they
may be differently filtered by different organisations. External stimuli,
moreover, should be supplemented by organisational stimuli, such as
leadership, interdepartmental competition, and other human factors.
With respect to user-related variables, in light of the apparent
absence of actual external users for LG accounting information, an
extended model could consider users’ attitudes directly and not only
through the contextual variables that may affect them. Similarly, for
producers, additional variables could include the presence and
effects of rivalry, competition, and networking among professionals
within organisations.
In terms of policy implications, the most immediate is that CFOs
and their networks can significantly affect the successful
implementation of accounting reforms. Consequently, they must be
involved in policy formulation and reassured about their potential role
under the new system of accounting. Another important implication is
that change cannot be achieved merely by introducing innovative

legislation: other variables must be taken into account, including the
competencies, abilities, perceptions, and overall willingness to
change of managers and politicians. This, in turn, posits two
requisites. On the one hand, LGs and individuals within them must be
given proper incentives, starting from greater accountability for the
LG’s financial position and performance. On the other hand, accruals
accounting standards must be developed that pay due attention to
public-sector peculiarities and provide actual and effective guidance
to LG accountants.
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JOURNAL OF PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT 2010
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JOURNAL OF

PUBLIC BUDGETING, ACCOUNTING & FINANCIAL MANAGEMENT

Volume 22, Number 2, Summer 2010

PrAcademics Press (www.pracademics.com)

Governmental Accounting Editorial Board

CONCEPTUALIZING FINANCIAL CONDITION IN LOCAL GOVERNMENT

ABSTRACT. While the passage of Statement No. 34 by the Governmental

Copyright © 2010 by PrAcademics Press

The local official is faced with two fundamental problems. First,

occurred when a small municipality in North Carolina implemented

REVIEWING THE FINANCIAL REPORTING MODEL

of the model before receiving data on financial condition. The first is

the value of capital assets and the amount of long-term debt

DEFINING FINANCIAL CONDITION

Management Association (ICMA). Financial condition is defined as a

and expenditures (expenses) of an organization. Focusing on

SELECTING FINANCIAL DIMENSIONS AND INDICATORS

Brown (1993) created the ten-point test as a model to

including funds when conducting financial condition analysis is that

stakeholders decreases, and more organizational capacity and

Flow and Stock of Economic Resources

aspects of resource flow. The total margin ratio—which is used to

for why operating statements exist. An analogy would be a water tank,

water level contained in the tank changed as a result of net water

unrestricted net assets divided by total liabilities.7 Leverage, as

Flow and Stock of Financial Resources

in state laws, which dictate the percentages in which this indicator

INTERPRETING FINANCIAL CONDITION

The financial ratio of fund balance as a percentage of

COMMUNICATING FINANCIAL CONDITION

governmental funds for Capital City. Again, five-years of historical

VILLAGE OF PINEHURST, NORTH CAROLINA

resource flow and stock, on the most recognized financial dimensions

many smaller local governments use only a general fund to

framework elements for conceptualizing financial condition rather

Governmental Accounting Standards Board (1987). Concept

Mead, D. M. (2006). “A Manageable System of Economic Condition

Appendix A: Financial Condition at Government-Wide Level

Governmental Activities Business‐Type Activities Primary Government

10% 10% 10%

20% 110% 80%

10% 10% 10%

1.00 1.00 1.00

0.40 0.40 0.40

0.75 0.75 0.75

Appendix B: Financial Condition for Enterprise Funds

Water and Sewer Fund Electric Fund

Appendix C: Financial Condition for Governmental Funds

Key: Capital City Benchmark Group

General Fund Total Governmental Funds

Financing obligation 10% 10%

WHAT HATH THE GASB WROUGHT? THE UTILITY OF THE NEW

ABSTRACT. Results from a national survey of local government finance

Copyright © 2010 by PrAcademics Press

fixed asset depreciation and entity-wide statements, as well as

inform future managerial behavior (Simini, 1978; Monahan, 2001;

Table 1 contains the descriptive statistics regarding our

In terms of community demographics, our survey respondents

numerous efforts to simplify government financial statements have

agreed that implementation was increasing reliance on fees and

plant. Table 3 findings also indicate that sizable majorities (77.0%

more on capital replacement,” “increased use of cost accounting

organizational levels. Nearly two-thirds of our respondents (61.0%