Real-time crisis management: Testing the role of accounting in local governments

Published in: Journal of Accounting and Public Policy

View of a city

Local governments (LGs) play a key role in public administration: they are the public authority closest to citizens, deliver national policies and proximity services such as social care, security, and education, and influence the functioning of local economies.

In an effort to improve accountability, transparency, intergenerational equity, efficiency, and effectiveness, but also resilience to financial crises, LGs have been subjected to management and financial reforms over the past 30 years, at the international level.

We have explored the role of accounting in dealing with global crises following recent reforms, that is in assessing LGs’ financial needs and designing measures to counteract the impact on LG finances.

The Covid-19 pandemic offers an interesting test ground to assess the solidity and appropriateness of recent reforms in the face of transboundary crises, i.e. events that cross geographical, sectoral, and policy boundaries, and hence multiply their impact, lead to the development of wicked problems and make responses much more complex.

The crisis induced by the pandemic on local finances is unprecedented in its depth and breadth as it has spread relatively fast and affected overnight not only financial markets but the real economy with the implementation of lockdown and social distancing measures.

Italian LGs represent an extreme case to assess the impact of the pandemic, since Italy was one of the first countries to be badly hit by Covid-19, so much that in late March 2020 it had the greatest number of deaths worldwide. Schools, offices, and all economic, cultural, and social activities, but indispensable ones, were shut down on March 9th, 2020, for at least 2 months. Non-essential travel was not allowed across municipalities, let alone across regions and abroad.

On the other hand, Italy has seen a comprehensive reform of its LG accounting system over the past 20 years, which was eventually implemented in 2015 and hence has had five years to consolidate. This makes Italian LGs an interesting choice to explore the role played by accounting in weathering a crisis.

Italy offers, therefore, an interesting case for assessing the role that different accounting systems play in real-time-crisis management.

For their assessment and policy considerations, stakeholders used the information they were most familiar with, which their audience could understand better, and which better served their immediate purposes.

Notably, different LG accounting rules and standards have been introduced over the past 20 years, yet no estimation has taken into consideration information based on accrual accounting because more consolidated accounting languages were preferred.

Five years after the reforms were implemented, accounting practices have not yet fully benefited from accrual-based tools, which, paradoxically, were introduced also to support decision-making at difficult times and avoid some of the distorting effects caused by other accounting systems on local finances.

Not using accrual information is contributing to potentially harmful myopia: emergency responses are furthering financial impacts and changing financial geographies, while the local financial imbalances caused by the pandemic have simply been deferred. Most resources were provided as debt, and capital debt installments have just been postponed by one year. One day these chickens will come home to roost.

Future research could therefore investigate whether accrual accounting will play a role in the post-crisis phase when such issues come to ahead. Ironically, during the pandemic, a new national standard body setter for another wave of accounting reforms was established: will this be it? Will accrual play a greater role in LG accounting? If so, then it may be confirmed not only that accounting plays a role during exceptional crises but also that crises have a role in reshaping accounting and can lead to unthinkable outcomes.

Read the full article

Authors at the Department of Management

Emanuele Padovani

Academic disciplines: SECS-P/07 Business Administration and Accounting Studies

Teaching areas: Management accounting

Research fields:  Public management and accounting: Financial management and analysis of the local public sector (local authorities, regions, agencies, subsidiaries) domestic and international; management control in local public administrations and health care; measurement and management of performance in the public sector; management of outsourcing in local public services.

Emanuele is an Associate professor of public management and accounting and Deputy coordinator Ph.D. in Public Governance, Management, and Innovation, at the Alma Mater. He is an expert in financial management and analysis of the local public sector at the national and international levels.