Portuguese governmental accounting has evolved from essentially a cash-based budgetary accounting system to an accrual-based fi nancial and cost accounting system.
Evidence from fi nancial reports shows a great level of diversity amongst municipalities’ voluntary compliance with the new accounting rules. Using a sample of Portuguese
municipalities in the year 2003 we calculate and analyse the levels of compliance with the practices required by law and document the diversity in compliance
across municipalities. The differences across municipalities are explained by some fundamental factors: size, fi nancial conditions, urban characteristics,
and diffusion across neighbouring municipalities. We show an unexpected effect of size. Larger municipalities comply less with accounting standards. Organizational
complexity, conservative practices, and aversion to change may explain this result.