Is political competition a driver of financial performance adjustments? An examination of Swedish municipalities

ABSTRACT: Recent academic literature has addressed whether adjustment of reported financial performance (i.e. earnings management) occurs in municipalities. However, although this is a highly political environment where incentives for such manipulation are likely to exist, the majority of previous studies have neglected political explanatory factors. This paper extends the literature by examining the relationship between political competition and adjustments of reported financial performance in Swedish municipalities. IMPACT: This paper demonstrates that subjectivity in accrual-based financial reporting may be problematic, because this allows politicians to manipulate the information which is presented to voters and other stakeholders. Hence, in order to ensure that accrual-based accounting systems provides complete and reliable information, the appropriate level of specificity in rules and regulation needs to be carefully considered by standard setters.