To manage or reserve accruals? Evidence from abalanced-budget requirement reform

In 2013, an accounting reform permitted Swedish municipalities to voluntarily adopt a system withaccrual reserves that was designed to increase flexibility in meeting budget requirements anddecrease regulatory incentives to engage in earnings management. However, since a system withaccrual reserves imposes potentially undesirable transparency from the perspective of politicians,it is unclear whether the (regulatory) benefits of adopting accrual reserves are perceived to exceedthe (political) costs. The authors found that municipalities with higher levels of earningsmanagement were less likely to adopt a system of accrual reserves, and they attribute this topolitical incentives to avoid transparency.