Discussion of the Influence of Elections on the Accounting Choices of Governmental Entities

24 Pages Posted: 7 Jan 2012

See all articles by Laurence van Lent

Laurence van Lent

Frankfurt School of Finance and Management

Date Written: January 6, 2012

Abstract

Kido, Petacchi and Weber [2012] investigate whether the occurrence of a state gubernatorial election is important to understanding the accrual choices of preparers of the state’s comprehensive annual financial report. Central to the authors’ argument is the idea that voters do not like budget deficits. Politicians, in response, have incentives to use accounting choices to mask deficits in the period before elections. Focusing on a specific accrual, the changes in compensated absences liability, the authors find evidence that the discretionary part of this accrual is smaller in the period before an election, which is consistent with politicians attempting to improve the picture of the state’s financial health. In addition, the authors show that accrual manipulation is positively associated with the vote share of incumbent governors in elections. In my discussion, I ask two questions: (1) how strong are governors’ political incentives to manipulate accruals in the run-up to elections? (2) Can the association between discretionary compensated absence accruals and elections be explained by forces other than politically motivated accounting manipulation? I argue that the incentives to manipulate accruals might well be weak given strong disciplinary mechanisms that induce politicians to transparency. What’s more, I document that elections might produce patterns in state employment. As the compensated absences liability is linked to the payroll, election-induced changes in state employment might be reflected in this accrual. Evidence of an association between the compensated absences accrual and elections, then, does not necessarily imply that politicians manage accounting numbers. To further illustrate this point, I show empirically that gubernatorial elections have little explanatory power for state financial reporting choices that are unaffected by state employment.

Keywords: Gubernatorial elections, Accounting manipulation, Transparency

JEL Classification: H70, H72, M41

Suggested Citation

van Lent, Laurence, Discussion of the Influence of Elections on the Accounting Choices of Governmental Entities (January 6, 2012). Available at SSRN: https://ssrn.com/abstract=1980697 or http://dx.doi.org/10.2139/ssrn.1980697

Laurence Van Lent (Contact Author)

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

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