Earnings management in local governments under a soft control regime
Journal of Public Budgeting, Accounting & Financial Management
ISSN: 1096-3367
Article publication date: 5 December 2023
Issue publication date: 4 July 2024
Abstract
Purpose
This study explores whether hard regulatory control decreases the level of earnings management in local governments. The implementation of a new regulatory approach by Norwegian authorities provides the opportunity for an empirical study.
Design/methodology/approach
The authors adopt a two-stage strategy to investigate the existence of earnings management, using the Jones (1991) and modified Jones (Dechow et al., 1995) models to construct a random-effects model.
Findings
The authors test the hypothesis that, given decentralisation of control, there will be an increase in opportunistic financial reporting. This study's findings suggest that this is not the case, thereby indicating that a soft control regime does not diminish discipline in municipalities.
Practical implications
This study has practical implications for policymaking in the public sector. Its findings suggest that municipalities do not engage in more earnings management under a soft regulatory regime. Hence, other authorities should consider adopting a soft regulatory approach to controlling local governments and their financial reporting systems.
Originality/value
This study contributes to a growing body of literature regarding earnings management by local governments. The authors investigate a hypothesis previously untested in the literature by comparing the degree of earnings management under different regulatory control regimes.
Keywords
Citation
Haugdal, A., Kjærland, F., Gårseth-Nesbakk, L. and Oust, A. (2024), "Earnings management in local governments under a soft control regime", Journal of Public Budgeting, Accounting & Financial Management, Vol. 36 No. 3, pp. 277-295. https://doi.org/10.1108/JPBAFM-10-2021-0144
Publisher
:Emerald Publishing Limited
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