Tribunal Superior de Justicia de la Ciudad de Buenos Aires
7. Por último, es dable señalar que el análisis y las conclusiones que anteceden no
Methodology
As we know, by definition the SFP-balance (B ) is determined by the difference between the operating revenues (R) and the operating expenses (E). Therefore, using a simultaneous equations model allows us to distinguish the respective determinants of operating revenues and expenses that eventually affect SFP-balance. The model can thus be modeled in two equations, one fore the operating revenues and the other for the expenses. The model is presented as follows:
Rit = αI + δRDepreciationit+ ϑRF undsit+ γREit+ βRWit+ Rit
Eit = αE + δEDepreciationit+ ϑEF undsit+ γERit+ βEZ + Eit
where R and E respectively refer to current revenues and expenses, αR and αE repre-
sent the intercepts, γ measures the marginal effect of expenses (revenues) on revenues (expenses), Wit and Zit are the set of control variables explaining operating revenues and
expenses and βRand βE are associated coefficients. Although they include the same set of
control variables, Witand Zit are still different as they each include the lagged dependent
variable of their respective equations. Then, R
it and Eit are the error terms. Lastly,i and t denote the Swiss canton “i” and the year “t”.
We have previously supposed that accounting manipulations allow governments to save money by restraining a high tax burden and by avoiding increases in operating expenses. We therefore include the variables Depreciation and F unds in both equations. Their associated coefficients are δ and ϑ. Then, according to the the foregoing, we assume that both variables increase operating revenues and decrease operating expenses. Con- sequently, we can assume that accounting manipulations tend to decrease deficits or to increase surpluses.
The simultaneous equations model discussed above will be tested with the Three Stage Least Square (3SLS) estimator developed by Zellner and Theil (1962). Then, het- eroskedasticity is taken into account by correcting error terms through the White proce- dure and cantonal fixed effects are included in the model. Finally, the 3SLS estimator also allows us to use instrumental variables for above mentioned endogenous regressors.
Results
Table 6 below reports results from the simultaneous equation model for SFP-balance. We note that not all explanatory variables are individually significant. Nonetheless, the joint statistic indicates that the coefficients are jointly significantly different from zero. Some independent variables are indeed strongly statistically significant.
Table 6: Results of the simultaneous equations model Revenue Expense Depreciation(-1) 0.231*** -0.335*** (0.079) (0.070) Funds(-1) 0.080 -0.058 (0.059) (0.055) Revenue(-1) 0.393*** (0.049) Expense(-1) 0.435*** (0.049) Revenue 0.463*** (0.055) Expense 0.604*** (0.059) Error -0.342*** (0.117) Growth 26.817*** -22.043** (9.207) (8.800) Unemployment -32.085** 67.015*** (14.257) (12.388) Government -165.733*** 126.597*** (48.210) (49.059) Coalition -2.746 92.797*** (39.232) (35.952) Concordance -18.346 -129.831 (129.008) (121.703) Departments 0.265 3.220 (12.281) (11.579) Election -11.263 10.271 (33.671) (31.660) Elderly -1.147 43.917** (20.148) (19.048) Initiative 110.501 -254.234** (122.737) (116.268) Referendum -13.229 92.597* (57.764) (54.900) Rules 24.075 -7.418 (53.788) (50.581) Interaction 0.080 -0.008 (0.113) (0.106) Constant 698.246 -237.891 (602.188) (569.946)
Cantonal FE YES YES
R-Squared 0.986 0.998
Joint 48396.52 55778.74
p-value 0.000 0.000
N 626 626
Parameter values appear without brackets and the standard deviation within. Asterisks denote the level of significance of parameter values: *** indicating significance at 1% level, ** at 5% level and * at 10% level. The R2 is the coefficient of determination. Results were computed with Stata 11 SE.
When focusing on the estimation of the revenue equation, results show that the coeffi- cient associated with the additional depreciation charges is strongly significant. Moreover, as expected, the coefficient has a positive sign. This first finding therefore indicates that
additional depreciation charges significantly increase operating revenues. That way, 1 additional CHF per capita accounted as additional depreciation charges tends to increase operating revenues by about 0.23 CHF per capita. Then, when we consider the expense equation of the model, the variable “Depreciation(-1)” is also strongly significant and has a negative sign. This result verify our hypothesis that additional depreciation charges tend to put operating expenses under pressure. More precisely, an increase of 1 CHF per capita as additional depreciation charges engenders a reduction of operating expenses of 0.33 CHF per capita. By consequent, when combining the respective effect of additional depreciation charges on operating revenues and expenses, 1 additional CHF per capita recorded as additional depreciation charges improves SFP-balance by about 0.56 CHF per capita. This is also consistent with the results obtained from the single equation model performed above. Nevertheless, the measured effect of the additional depreciation charges on public deficits is more precise in the simultaneous equation model. Indeed, such a model allows us to disentangle the respective effect of creative accounting operations on operating revenues and expenses.
Finally, when focusing on the variables “Funds(-1)” and “Interaction”, results show no significant influence neither on operating revenues nor on operating expenses. These results also corroborate with those obtained with the single equation model.
These findings therefore confirm our expectations that additional depreciation charges reduce public deficits by generating higher tax revenues and by lowering the level of operating expenses.
7
Conclusion
In the current paper, we propose to empirically investigate the determinants of the balance reported in the statement of financial performance (SFP-balance) by paying a particu- lar attention to the role played by creative accounting operations. In this research, we consider a SFP-balance to be the difference between operating revenues and operating ex- penses. Hence, when operating revenues are bigger than operating expenses, we talk about a surplus. And conversely when we refer to a deficit. The present study therefore aims
to test the potential relationship between some specific creative accounting operations and the balance reported the statement of financial performance, i.e. either surpluses or deficits. More precisely, we assume that local governments may have incentives to resort to financial tricks in order to hide surpluses. That way, by artificially reducing the balance reported in the statement of financial performance, creative accounting operations should allow local governments to put operating expenses under pressure and maintain higher tax rates than needed. In turn, these high tax rates should generate additional cash-flows that could be used in order to repay debt or to bail out cookie-jar reserves. Considering the latter point, we formulate the hypothesis that money accumulated into these reserves could be used in order to smooth the balance of the statement of financial performance over time. In other words, we expect that creative accounting operations reduce public deficits. Additional depreciation charges and special funds are considered as the creative accounting operations in this research since they have no economic reality with regards to the IPSAS norms and are discretionarily recorded by Swiss cantons.
In order to identify the determinants of public deficits as well as testing our hypothesis, we use a panel data about the 26 Swiss cantons over the period 1980 - 2010. Then, two different models of public deficits are performed. The first one is a single equation model of the SFP-balance whereas the second one is a simultaneous equations model where the level of operating revenues and operating expenses is simultaneously estimated. This latter approach allows to disentangle the respective effect of creative accounting operations on revenues and expenses and therefore provides more precise estimations than the single equation model.
Results ensuing from both models highlight, to some extent, that creative accounting operations have a significant positive impact on the balance reported in the statement of financial performance. However, whereas it is brought out that additional deprecia- tion charges significantly decrease public deficits, we do not reach the same conclusion when we pay attention to the special funds. Furthermore, results provided by the si- multaneous equations model show that additional depreciation charges allow to generate supplementary operating revenues and to reduce operating expenses. That way, these results confirm our hypothesis and therefore support creative accounting as an efficient policy to curb public deficits.
In addition, results ensuing from this research may have some interesting political implications. First, as demonstrated by Chatagny and Soguel (2012), Swiss cantons tend to largely underestimate tax revenue during the budget process. Authors also highlight a significant negative relationship between this phenomenon and the level of the the balance reported in the statement of financial performance. In other words, their findings demonstrate that underestimating tax revenue during the budget process allows Swiss cantons to decrease public deficits. Interestingly enough, we arrive at the same conclusion. Consequently, as Swiss cantons tend to collect higher tax revenue than budgeted, they should have the incentive to hide this surplus through the use of creative accounting. Rose and Smith (2012) show such a relationship in their research devoted to the use of Rainy Day Funds by U.S. States. And in the view of our results, there is every possibility that Swiss cantons would resort to the same manipulation.
Then, as previously mentioned, budget rules were initially implemented in order to restrain public deficits and debt (Bohn and Inman 1996; Feld and Kirchgässner 2008; Bodmer 2012). Nevertheless, some authors advocate that these fiscal constraints would not be effective since some States have resorted to accounting manipulations in order to achieve budget rules targets. That way, there are strong reasons to believe that these budget rules are not an advice allowing to put public deficits under pressure. Conversely, they would be more likely to be seen as an objective in itself. This is also what our results appear to indicate since the variable “Rules” does not show any statistical significance. That way, it would not be the budget rules that would allow to reduce public deficits but the amounts accumulated into cookie-jar reserves. Besides, Luechinger and Schaltegger (2011), who highlight that budget rules reduce the occurence of public deficits in Swiss cantons, conclude their research by mentioning that they cannot rule out that, at least partially, deficits have been reduced through creative accounting operations or window- dressing measures. Nevertheless, although these results provide a first insight into the relationship between the use of creative accounting and the budget rules in Swiss cantons, further investigations are still needed to assert these results.
There is also nowadays a growing international pressure aiming at implementing the IPSAS norms into the public sector. The main objective of these norms is to guarantee
the transparency of public accounts. In other words, if fully applied, these norms should provide a true and fair view of public accounts, which should facilitate the decision- making process. Furthermore, the IPSAS norms should act as a barrier against the creative accounting. However, although these targets may appear legitimate, notably in countries facing an unhealthy financial situation, we may call their relevance into question in our particular case. Indeed, in Swiss cantons, creative accounting operations seem to represent an elbow room allowing Swiss cantons to save money in order to reduce public deficits over time. Without this loophole we may wonder if Swiss cantons would be able to sustain such a good financial situation. Moreover, although citizens suffer higher tax rate or lower public services provision because of the creative accounting, their situation would be perhaps worse if they had to pay higher taxes to cover public deficits. This is the tradeoff which Swiss cantons have to deal with.
As a conclusion, in order to cope with the above mentioned drawbacks, we may wonder if it would not be relevant to implement formal rainy day funds as it is widely done by US States. Indeed, by defining legal rules with regard to the amounts to be allocated and withdrawn from special funds, it will make almost impossible for politicians to dis- cretionarily manipulate tax rates and public expenses. Moreover, such rainy day funds would allow local governments to provide more transparent financial information com- pared when they use creative accounting operations. As a consequence, Swiss cantons would therefore tend to reach the requirements of the IPSAS norms that aims at improv- ing the true and fair view of public accounts. Finally, due to their legal characteristics, rainy day funds would make sure that surpluses would be saved in order to ensure a counter cyclical budgetary policy and not for some eventual electoral reasons.
8
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9
Appendices
A - Endogeneity
Table 7: Covariance between the potentially endogenous covariates and the instruments
Variables Error Referendum Initiative Rules
Instrument Error(D1) Referendum(-2) Initiative(-2) Rules(-2)
Covariance 0.5648 0.9275 0.969 0.8607
(-2) denotes the second lag value of the variable whereas (D1) refers to the first difference of the variable
Table 8: Validity of the instruments (2SLS First stage F-stat)
Variables Error Referendum Initiative Rules
Instrument Error(D1) Referendum(-2) Initiative(-2) Rules(-2)
F-stat 96.98 163.20 180.50 145.54
p-value 0.000 0.000 0.000 0.000
(-2) denotes the second lag value of the variable whereas (D1) refers to the first difference of the variable. F-stat higher than 16.85 reveals a valid instrument (Stock and Yogo 2005)
B - Heteroskedasticity
Table 9: Breusch-Pagan / Cook-Weisberg test for heteroskedasticity Chi2 p-value Balance 113.87 0.000 Revenue 341.27 0.000 Expense 1340.32 0.000 H0: No heteroskedasticity C - Autocorrelation
Table 10: Wooldridge test for autocorrelation of order one F-stat p-value
Balance 18.681 0.000 Revenue 22.179 0.000
Expense 9.130 0.005
H0: No autocorrelation of order one
Table 11: Arellano-Bond test for autocorrelation of order one and two
AR(1) AR(2)
z-stat p-value z-stat p-value
Balance -3.250 0.001 1.870 0.062
Revenue -1.030 0.305 2.950 0.003
Expense -2.970 0.003 0.960 0.338
AR(1) refers to autocorrelation of order one whereas AR(2) denotes autocorrelation of order two. H0: No autocorrelation
D - Fixed effects
Table 12: Breusch and Pagan Lagrangian multiplier test for random effects Chi2 p-value
Balance 0.140 0.710 Revenue 0.020 0.896 Expense 0.030 0.871
H0: RE not necessarily appropriate
Table 13: Hausman test for random vers fixed effects Chi2 p-value
Balance 21.66 0.117
Revenue 21.6 0.087
Expense 36.07 0.001
H0: Difference in coefficients not systematic
E - Multicolinearity
Table 14: Variance inflation factor (VIF) for the regressors Fixed effects No fixed effects
Variables VIF 1/VIF VIF 1/VIF
Initiative 37.31 0.026 1.9 0.525 Referendum 8.86 0.112 1.85 0.541 Elderly 6.21 0.161 1.13 0.884 Coalition 5.32 0.161 1.31 0.762 Rules 4.20 0.237 1.24 0.809 Departments 3.61 0.276 1.35 0.743 Government 2.66 0.376 1.28 0.78 Unemployment 2.13 0.468 1.65 0.607 Depreciation(-1) 1.93 0.519 1.39 0.721 Interaction 1.67 0.599 1.36 0.732 Balance(-1) 1.65 0.606 1.46 0.686 Concordance 1.44 0.692 1.15 0.869 Error 1.32 0.758 1.13 0.882 Funds(-1) 1.23 0.81 1.11 0.903 Growth 1.11 0.901 1.08 0.922 Election 1.05 0.954 1.03 0.972 Mean VIF 4.74 1.34