Preparación de materiales

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One must first keep in mind that the finance minister has to be differentiated from spending ministers since he is the only one who has a personal interest in sound public finance. Indeed, his prestige and hence his personal benefits (i.e. his reelection chances) mainly rely on his capacity to reach such a target (Hallerberg and Von Hagen 1997). In other words, the level of public deficits and indebtedness, partly ensuing from creative accounting operations, are observed by voters and are used by these latter to assess the incumbent finance minister’s performance. That way, the more efficient a finance minister is, the higher his chances are of being reelected.24 _{That way, due to their divergent interests, finance ministers may}

have strong incentives to resort to creative accounting in order to alleviate the spending ministers’ appetite for higher public spending and thus ensuring sound public finance.25

This argument is notably supported by Jiraporn et al. (2008) who read that, in the private sector,“misalignment of managers’ and shareholders’ incentives could induce managers to use the flexibility provided by the Generally Accepted Accounting Principles (GAAP) to manage income opportunistically, thereby creating distortions in the reported earnings”.

In the context of more or less unorthodox accounting practices, it does not appear realistic that the incumbent finance minister will highlight creative accounting operations as a signal to voters to express his competence and therefore to enhance his reelection probability. Quite the contrary. Although such practices are legal in the light of cantonal legislation (at least additional depreciation charges and special funds), they could be questioned by citizens notably since they are in opposition with international accounting standards. Moreover, it cannot be ruled out either that citizens have greater preferences for higher public services 24_{This point of view is consistent with words maintained by Dafflon and Rossi (1999) who read that“for a politician}

seeking reelection the probability of staying in office may heavily depend on his or her budgetary responsibility”.

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Conversely, the reelection chances of the spending ministers and the deputies strongly rely on the financial means they have to implement public policies. That way, if they are also deprieved of funds in the short run, their field of action is automatically reduced and at the same time their reelection chances. This therefore highlights that finance

consumption (or lower taxes) in the short and medium term. As such accounting gimmicks deprive them of higher public services (or lower taxes), we may reasonably expect that citizens would reject these practices if they were aware about it. This would therefore certainly lead to lower confidence in the finance minister’s behavior and to lower reelection chances.

However, it does not seem realistic that citizens look at additional depreciation charges and cookie-jar reserves to assess the finance minister’s competences. It is indeed highly unlikely that the median voter (as well as the media, to some extent) has sufficient accounting expertise to detect these accounting tricks. And even if it were the case, it would also require a strong technical knowledge regarding the concept of “true and fair view” of public accounts to consider these accruals as creative accounting. Almost the same argument may be maintained regarding the finance minister’s strategic behavior vis-à-vis the spending ministers and the deputies. Indeed, as previously depicted, the finance minister enjoys an information asymmetry in the budget process that allows him to manipulate the information reported in public figures.26

In light of the above, we may reasonably argue that for finance ministers, the cost of resorting to creative accounting (i.e. the probability to be caught by stakeholders of the budget process or citizens) is lower than the cost of not being reelected. For that reason, incumbent finance ministers will resort without any doubt to such practices in order to ensure fiscal soundness and ultimately their position.

Nevertheless, in such a context, everything being equal, it is first of all the probability to report a surplus in the statement of financial performance (see stage 3 in Figure 5) that determines whether or not finance ministers resort to creative accounting. Knowing that the main accounting gimmick at the finance ministers’ disposal is asymmetric, i.e. may only be used to artificially increase operating expenses, the occurrence of such a practice is unlikely when a deficit is expected. At the same time, there is strong reason to believe that finance ministers may (only) have incentives to artificially lower reported surpluses since it is expressly recommended by the accounting guideline (HAM1) and most of the

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Somehow, we may assert there is a principal agent relationship between the finance ministers and the deputies as well as the citizens (Brouard 2010). That way, if there is a serious agency conflict (i.e. stakeholders’ interests are drastically opposed), we may reasonably assume that finance ministers will resort even more actively to creative

cantonal financial laws. Moreover, it appears realistic to assume that a finance minister will make every effort to avoid any tax decrease or public spending increase because of the so- called irreversible ratchet effect. That way, in line with the discussion mentioned above, we formulate the second testing hypothesis (H2) as follows: This is the probability to report a positive balance of the statement of financial performance that will ascertain the necessity to resort to creative accounting. Moreover, the greater the surplus before reporting, the larger the resort to creative accounting will be.

The use of accounting gimmicks by finance ministers is thus expected to mainly depend on the government’s financial performance, i.e. the probability to report a surplus and also the size of this surplus. Moreover as also already mentioned, finance ministers, independently to their characteristic traits, have the common objective to ensure fiscal soundness if they want to increase their reelection chances. It may hence reasonably be expected that finance ministers, as well as their respective personal characteristics have no incidence on the way to manage public finance. In other words, it would be the position and the tasks to be fulfilled that would lead the finance ministers’ behavior. As a consequence, all of them should embrace the same strategy as for their use of creative accounting.

Nonetheless, this approach may also be contested since there is a growing evidence that particular public policies are deeply spread through the decision-makers’ influence (president, prime minister, finance minister, central bankers, etc.). We may thus first wonder whether finance minister’s political ideology matters. We may indeed expect that the political ide- ology is seen by citizens as a proxy for the politicians’ competence. This is particularly true in coalition governments where left-wing ministers are generally in charge of social af- fairs, environment and culture whereas right-wing ministers are mainly responsible for the ministries of economy or finance. Consequently, we may reasonably assume that left-wing finance ministers could be seen as less competent (i.e. less able to avoid public deficits) than right-wing ones since they have to take charge of a ministry which is not in their usual bosom. It therefore appears all the more essential for left-wing finance ministers to reach fiscal soundness since they presumably suffer a lack of confidence from citizens. That way, probably conscious of this lack of confidence, left-wing finance ministers could have stronger

incentives to resort to creative accounting in order to report a better financial performance. This would constitute a reassuring signal sent to electors in order to ensure their reelections. In accordance with the recent findings of Chatagny (2013) who pays attention to the tax revenue budgeting errors, the hypothesis regarding the impact of the finance minister’s po- litical ideology on the use of creative accounting (H3) is as follows: In order to make sure they will achieve fiscal soundness, left-wing finance ministers would resort more actively to creative accounting (i.e. would accumulate more money through the use of additional depreciation charges and special funds) than right-wing ones.27

The political experience may also be, without any doubt, a key determinant of the finance minister’s behavior and of his way of managing public finance. The literature has besides demonstrated that policians’ experience may influence fiscal outcomes (e.g. Feld and Schal- tegger 2010). Regarding our field of interest, more experienced finance ministers are expected to be more comfortable with accounting practices and more aware about all the gimmicks at their disposal to manipulate public figures. Moreover, a more experienced finance minister should be more aware of political snares and therefore should have higher capacities to cope with them. Such a political experience should therefore allows finance ministers to increase the information asymmetry existing between themselves on the one side and the spending ministers (as well as other stakeholders) on the other side. The hypothesis impact of political experience on the use of creative accounting (H4) may be formulated as follows: Finance ministers with a greater tenure are expected to possess deeper knowledge than inexperienced ones, what should provide them greater capacities to resort to cre- ative accounting. More experienced finance ministers are therefore expected to be associated with higher amounts of creative accounting.

Finally, attention is paid to finance ministers’ educational background. According to our point of view, it is reasonably arguable to consider that education may affect the people’s identity. Consequently, the finance minister’s behavior would be, at least partially, led by his

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This hypothesis is also in line with the results of Hendrick (2006) who demonstrates that more left-wing gov- ernments are in general more risk averse and therefore accumulate more reserves in order to be able to cope with

own beliefs and convictions accumulated through his training.28 In this study, although we

control for several sort of training, we expect that trained economists are more reluctant to report public deficits than other finance ministers. That way, they would be more willing to make everything possible to avoid such situations. Furthermore, trained economists are sup- posed to have a stronger expertise in accounting what should provide them greater abilities to manipulate reported figures. Better knowledge in accounting also supposed a greater infor- mation asymmetry between the finance minister and the spending ministers. The hypothesis surrounding the expected effect of the finance minister’s educational background (H5) may thus be formulated in this manner: An education in economics should strengthen the finance ministers’s aversion for public deficits and improve his knowledge in ac- counting. Finance ministers having a university degree in economics are thus expected to be associated with higher amounts of creative accounting.

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5

Main Accounting Elements

In the current section, we offer a discussion about the Harmonized Accounting Model for Swiss cantons and municipalities. Mainly, we present the cantonal chart of accounts, as well as the similarities and differences with IPSAS since both are accrual-based accounting models. Finally, after having provided a new definition of creative accounting, we present both accruals we consider as being the two main accounting tricks used by Swiss cantons in detail.

5.1 Introduction

For a long time, several public accounting systems coexisted in Switzerland at the cantonal level. Thus, it is, among other things, the need of harmonization at the end of the 1970’s that pushed the Conference of Cantonal Finance Ministers (CDF) to express a recommendation for the Swiss cantons and municipalities.29 This recommendation is expressed through a

public accounting handbook (CDF 1981) and is now known by the abbreviation HAM1 for Harmonized Accounting Model of the first generation. This appellation reflects reality as the financial statements of Swiss cantons and municipalities went through a movement of harmonization for the first time. Nevertheless, the HAM1 is only a recommendation. The Conference of Cantonal Finance Ministers does not have the power to impose its decisions on Swiss cantons. The implementation of the HAM1 is consequently very laborious. Every canton has to introduce the recommendations of the CDF into its own financial laws in order for those recommendations to have legal force. On the one hand, the introduction is not always faithful to the recommendations. Thus, some disparities may exist between Swiss cantons relative to certain norms. And on the other hand, the HAM1 implementation largely depends on the political agenda of each canton and municipality. For these reasons, one must wait until the end of the 1990s for every canton to apply the HAM1 in one form or another. The HAM1 provides a presentation of the public accounting handbook that contains a long list of norms, principles and objectives. Then, the HAM1 also presents a chart of accounts

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Each Swiss canton has, among the members of the cabinet, a “minister”, a “state councilor” or an “executive councilor” in charge of finance. That way, the 26 members of cabinets in charge of finance gather at this conference

and a model-law for cantonal finance. Among the principles discussed in the accounting handbook, the following may be considered fundamental. As we previously mentioned, one of the main objectives of the HAM1 for Swiss cantons was to harmonize the framework of cantonal and municipal finance. This willingness to harmonize should allow observers to perform precise comparisons across cantons. At the same time, the HAM1 should allow for better control, management and decision support for financial analysts, and it could be used as a tool for forecasting (CDF 1981: 6).