Accrual-Based Deficits and Reducing Fund in Local Governments

An Empirical Study on Interperiod Equity

Abstract

　Local governments disclose financial statements based on uniform standards at the request of the Ministry of Internal Affairs and Communications. However, how we can use the financial statements is still an open question. Prior studies on public sector accounting indicated the possibility of interperiod equity by temporarily using the fund transfer instead of decreasing expenditures. This study focuses on the deficit in the financial statements on a uniform basis and expects that there is the positive relationship between the size of deficit and the fund transfer. The empirical analysis using data for 4,115 local governments from 2016 to 2018 shows that the positive relationship between the size of deficit and the fund transfer. Further, we also find that this relationship is strengthen in election years and depends on the increase in property cost. This study contributes to accounting research by providing evidence of the relationship between the accrual-based deficit and the fund transfer may undermine interperiod equity.