Financial Accountability & Management, 20(3), August 2004, 0267-4424

IS THE ANNUAL REPORT AN ACCOUNTABILITY

MEDIUM? AN EMPIRICAL INVESTIGATION INTO
ITALIAN LOCAL GOVERNMENTS

ILEANA STECCOLINI*

INTRODUCTION

Traditional public sector accountability codes and channels are undergoing

profound changes, which emphasise the role of accounting systems in meas-
uring and evaluating both financial and service performance, promoting
disclosure and communicating results to stakeholders (Olson et al., 1998;
and Guarini, 1999). As a consequence, in many countries, external reporting
is being transformed with the aim of making it more consistent with the new
need for accountability.
The role of the annual report in rendering government accountable is
often emphasised (for example, Ryan et al., 2000; Taylor and Rosair, 2000;
and Coy et al., 2001) and sometimes questioned (for example, Jones et al.,
1985; Jones, 1992; and Priest et al., 1999). The existence and identity of
annual report users are debated, while the actual use of the annual report by
readers is not clearly known.
In Italy, the word ‘accountability’ does not have a specific translation and
was virtually unknown until recently, but it has become increasingly com-
mon in public sector reform discourse (for example, see Caperchione and
Pezzani, 2000), inspiring accounting and reporting reforms over the last
decade. One of the main provisions of local government accounting reforms
was the redefinition of the content of the annual report.
The purpose of this paper is to gain a better understanding on the actual
role played by the local government annual report as a means of discharging
accountability to potential users. To this end, an empirical analysis was
conducted on a sample of Italian local governments in order to investigate
the actual categories of users of the annual report, the degree of users’

* The author is Assistant Professor at the Bocconi University and Lecturer at the Bocconi
University School of Management, Public Administration, Healthcare and Not for Profit
Division. She wishes to thank the anonymous referees and the participants at the EIASM
Conference on Accounting and Auditing in Public Sector Reforms which was held in Dublin in September
2002, for their helpful comments.
Address for correspondence: Ileana Steccolini, Bocconi University, Via Bocconi 8, 20136
Milan, Italy.
e-mail: ileana.steccolini@sdabocconi.it

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interest in the annual report as perceived by preparers, the actual use of

‘term statements’ or alternative means of communicating results to users,
and the amount and the mix of information disclosed in the annual reports.
The results of the analysis show that annual reports are seemingly used to
discharge accountability to ‘internal’ users, even if it is not clear if they are
actually read. At the same time, they have no significant role in commu-
nicating to external users. Most local governments do not use alternative
tools to account for their performance to their stakeholders. Moreover, they
simply comply with legal requirements in preparing their annual reports,
often producing poor quality reporting, in which accrual-based results
and service performance evaluation still have a marginal place. As a con-
sequence, the actual role of the annual report and the overall degree of
accountability of Italian local governments should be questioned.
The paper is organised into five further sections. The next section pro-
vides a short background on Italian local governments and their accounting
and reporting systems. The third section briefly examines relevant literature
and specifies the aim of the paper. The fourth section explains the method-
ology adopted. The fifth section illustrates the results of the analysis and the
final section discusses the results and draws some conclusions.

BACKGROUND: LOCAL GOVERNMENT AND LOCAL GOVERNMENT

ACCOUNTING AND REPORTING IN ITALY

During the last decade, Italian local governments have undergone a profound
reform process, prompted by various legislative initiatives inspired by manager-
ialism and marketisation principles and aimed (see also Mussari, 1997; and
Marcon, 1999) at (i) recognising greater organisational and financial autonomy
to local governments; (ii) increasing managerial autonomy and accountability;
(iii) contracting out and privatising activities.
More specifically, since 1990, local governments have been given more auton-
omy in levying taxes and determining fees for services, have witnessed a steady
reduction in the amount of transfers from higher levels of government and have
been encouraged to spin off their activities. During the same period:
* the ideas of managing by results, of ‘letting the managers manage’, of the
separation between elected roles and administrative ones, of introducing a
‘managerial culture’ and a ‘managerial model’ as opposed to the traditional
and prevailing ‘bureaucratic model’ (Mussari, 1994; Anselmi, 1995; and
Borgonovi, 1996) in the Italian public sector have been publicised in
conferences, books, articles and by schools of management and universities.
* the Italian public sector has been subjected to a general claim for
higher transparency in the use of public resources (also as a con-
sequence of cases of financial scandals and corruption) and for greater

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 ITALIAN LOCAL GOVERNMENT ANNUAL REPORT 329
accountability for the quantity and the quality of the services provided
to citizens.
* European Union countries were expected to comply with the Maastricht
Treaty requirements. As a consequence, stress on improving the public
sector financial situation was very high in Italy.
Before 1995, Italian local government accounting had traditionally been on
a cash and obligation basis and focused on budgetary compliance. In 1995,
a decree reforming local government accounting was introduced, requiring
local governments:
* to maintain the traditional cash- and obligation-based system. Its pivotal role
in local government budgeting, accounting and reporting is confirmed.
* to publish an accrual-based financial statement consisting of a statement of
financial position and an operating statement. This does not imply the
introduction of double-entry bookkeeping, which is not mandatory. A local
government can derive its statement of financial position and operating
statement from its cash accounting statements through a complex system
of year-end adjustments. A specific reconciliation statement must be included in
the overall year-end financial report to reconcile the cash-based accounting
statements with the statement of financial position and the operating state-
ment.
* to adopt managerial control systems.
As a consequence, local governments are now required to prepare an annual
report, that contains the traditional statement, showing compliance with the
cash- and obligation- based budget, as well as the financial statement. Some
standard compulsory efficiency and effectiveness indicators are imposed,
while no specific requirements exist for popular reporting or service effort
and accomplishment evaluation. Local governments are also encouraged
to prepare a ‘term’ statement, showing the achievements and actions of the
Council over the elected term, whose structure and contents are not speci-
fied. An external Audit Committee, appointed by the Council, is charged
with auditing the budget and the annual report.
Some analyses (Anessi Pessina and Steccolini, 1999; and Caperchione,
2003) concerning the implementation of accrual-based reporting in local
governments show that: (i) local governments have generally prepared their
accrual-based financial statements but few have adopted a double-entry
bookkeeping system; (ii) most local governments do not seem to pay enough
attention to their accrual-based reports, and perhaps view accrual-based
reporting as an unnecessary nuisance; (iii) accrual-based financial statements
contain frequent inconsistencies; some items are often omitted while others
have unexpectedly large values; the quality of disclosure is rather poor;
(iv) internal decision making is still inspired by cash- and obligation- based
information.

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Recently, the Commission for local government finance and accounting,

charged with the diffusion of accounting standards for local governments,
has started to issue local government budgeting, accounting and reporting
standards. The first document, concerning the purpose and general princ-
iples of accounting standards, was issued in July 2002 and a second one,
concerning budgeting, followed in July 2003.

THEORETICAL NOTES AND RESEARCH QUESTIONS

This section reviews the relevant literature on the concept of accountability,

the role of the annual report as an accountability medium and the users of
the annual report. Finally, it specifies the purpose of the paper and the
research questions addressed.

Accountability: A Multifaceted and Evolving Concept

An increasing body of literature has attempted to define the concept of
accountability in the public sector (for example, GASB, 1987; Staats, 1990;
Patton, 1992; Caperchione and Pezzani, 2000; and Taylor and Rosair,
2000), to capture its multiple facets (Stewart, 1984; Gray and Jenkins,
1985 and 1993; Sinclair, 1995; Johnston and Romzek, 1999; and Guarini,
2000) and to describe the evolution that codes and channels of accountability
are undergoing in the context of public sector reforms and change processes
(Cochrane, 1993; Ogden, 1995; Rubin, 1996; Parker and Gould, 1999; and
Anessi Pessina and Borgonovi, 2000).
Accountability involves ‘being obliged to explain one’s actions, to justify
what one does’ (GASB, 1987) and may be viewed in terms of a setting, where
one party (the accountor) is accountable to another party (the accountee) for
an action, process, output or outcome (Patton, 1992; and Degeling et al.,
1996). The accountor must account and report to the accountee, who has
the right to obtain information and to use it in order to evaluate the
accountor. Consequently, accountability involves both the giving of infor-
mation (to account) and the evaluation of the information obtained in order
to judge (to hold to account) (Stewart, 1984, pp. 14–15). Accounting
provides one important, though not the sole, component of the ‘account
element’. A comprehensive concept of accountability requires not only the
availability of information, but also that the information is (i) reliable, and
qualitatively satisfying; (ii) understandable; (iii) accessible; (iv) in a wider
view, it is diffused, distributed and disseminated (Herzlinger, 1996; and
Coy et al., 2001). Finally, accountability requires a judgement from the
accountee, and the possibility of a feedback and a sanction.
Accountability is a multifaceted and complex concept. Consequently, it is
necessary to specify who is accountable, to whom, why, through which

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means (Patton, 1992; and Mussari, 1996, p. 167), and it is possible to identify
different ‘types’ of accountabilities. Table 1 summarises some of the ‘classifi-
cations’ of the concept.
Accountability has been approached historically in different ways (Rubin,
1996) and the prevailing idea of public accountability changes over time as a
consequence of changes in the social, cultural, political context (Cochrane,
1993; Ogden, 1995; and Degeling et al., 1996). The last decades have
generally witnessed shifts in the idea of accountability diffused in the public
sector: for example, from a concern for ‘fiduciary’, or probity- and process-
accountability, focused on compliance, to an emphasis on ‘managerial’ or
performance and programme accountability, focused on effectiveness and
efficiency, outcomes and outputs. At the same time, as Guthrie (1993) and
Parker and Gould (1996) point out, public sector reforms have often meant a
shift from ‘parliamentary’ accountability to a regime of accountability which
is more ‘market- and customer-oriented’.
The changes in accountability codes influence and/or justify the features of
the tools used to account and the type of information given (Stewart, 1984;
and Sinclair, 1995). Paralleling the changes in public accountability patterns
and regimes, local government accounting and measurement systems have
been generally interested by profound changes, which can be summarised as
follows (Guthrie et al., 1998, p. 18; Guarini, 1999; and Caperchione, 2000): (i)
introduction of accrual based-accounting systems; (ii) adoption of tools for
measuring non-financial performance and assessing public organisations’
efficiency and effectiveness; (iii) adoption of alternative tools for commun-
icating effectively to the stakeholders, such as popular reporting.

The Role of the Annual Report in Discharging Accountability

The annual report, although not reporting on the overall accountability of a
governmental entity, is generally considered as being a primary medium of
accountability (for example, Boyne and Law, 1991; Ryan et al., 2000; Taylor
and Rosair, 2000; Coy et al., 2001; and Mack et al., 2001). Nevertheless,
some dispute the ability of annual reports to discharge accountabilities and
question their value and usefulness, whereas others underline the use of
other communication tools by public organisations.
Those who underline the weaknesses of the annual report as a disclosure
tool point out that there is little demand for the information it provides
(Jones and Pendlebury, 1996), that the number or users is likely to be small
(Jones, 1992), that the annual report may not contain all the relevant
information that users seek, that the information may be presented in too
complex a format and the reports may not be directly available and access-
ible to potential users (for example, Jones et al., 1985).
Priest et al. (1999), who conduct a survey on potential and actual users of
local government annual reports in Western Australia, find that 15% of

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Table 1
Accountability as a Multifaceted Concept

Authors ‘Types’ of Accountability

Stewart (1984) A ‘ladder’ of accountability (from accountability by

standards to accountability by judgement):
* accountability for probity and legality

* process accountability

* performance accountability

* programme accountability

* policy accountability

Gray and Jenkins Three different codes of accountability result from the
(1985; 1993) combination of different ‘rationalities’ (legal, economic,
technical, social, political):
* financial accountability (combining legal and economic

rationality and emphasising probity, compliance, efficiency)

* managerial accountability (influenced by legal, economic

and technical rationality; it is focused on responsibility for

organisational integration, for the regularity, consistency and
efficiency in service provision)
* professional accountability (social rationality is combined

with legal and technical rationality, emphasising the

responsibility for the accessibility, the appropriateness
and the quality of the services provided, for the
attention to client needs)

Sinclair (1995) The author distinguishes:

* public accountability (answering public concerns

about administrative activity)

* political accountability (linking public servants to the CEO,

who is accountable to the elected body, which, in turn,

is accountable to the electorate)
* managerial accountability (focused on monitoring inputs,

outputs, outcomes)
* administrative accountability (focused on monitoring

input transformation processes)

* professional accountability (refers to the sense of duty of a

member of a professional group)

* personal accountability (fidelity to personal conscience)

Rubin (1996) The author distinguishes:

* responding to bureaucratic or hierarchical authority

(demonstrating compliance with law)

* reporting to the public (how their money was spent)

* holding elected officials responsible for budget outcomes

and the quality of financial management

* direct citizen control or influence over the formation of

the budget, the allocation process, and priorities in the budget

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Table 1 (Continued)

Authors ‘Types’ of Accountability

Johnston and On the basis of the degree of autonomy of the accountor

Romzek (1999) (low v. high) and of the source of expectations and/or control
(internal v. external), they distinguish:
* hierarchical accountability (low degree of autonomy;

internal source of expectations)

* legal accountability (low degree of autonomy; external

source of expectations)
* professional accountability (high degree of autonomy;

internal source of expectations)

* political accountability (high degree of autonomy;

external source of expectations)

Guarini (2000) On the basis of the measurement object (viability of the

single local government v. viability of the web of
organisations converging on the local government)
and of the information users (internal v. external)
he distinguishes:
* managerial accountability (viability of the

local government; internal users)

* partnership accountability (viability of the

web of organisations; internal users)

* public accountability (viability of the

local government; external users)

* governance accountability (viability of the

web of organisations; external users)

Taylor and They distinguish:

Rosair (2000) * fiduciary accountability (which deals with

compliance matters)
* managerial accountability (which involves

efficiency and effectiveness).

respondents declare that they are not interested in their council’s annual
report and about a half indicate that they do not read it, mainly because it is
inaccessible. Brusca Alijarde (1997) carries out a study on the degree of
usefulness that auditors and finance directors of Spanish local governments
assign to financial statements and to their items. She concludes that financial
reporting in Spanish local governments can be useful for finance directors,
management, Audit Offices and lenders, but the information provided is not
used to its maximum.
As far as alternative channels and forms to disclose performance informa-
tion are concerned, Ryan et al. (2000), who interview preparers of Australian
public organisations’ annual reports, find that preparers consider the annual

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report as being an important tool for the discharge of accountabilities, but,

in some cases, they feel that alternative forms of communication are more
suitable to satisfy the information demands of stakeholders. According to
Kloot and Martin (2000), Australian local governments adopt alternative
forms of communicating results to constituents, such as publishing articles in
local newspapers, transmitting information during radio programmes and
sending reports to taxpayers.

The Users of the Annual Report

There is a huge body of literature on the actual and potential users of public sector
reporting. Some authors identify potential users from a normative perspective (for
example, Anthony, 1978; Coopers and Lybrand, 1978; Holder, 1980; Drebin
et al., 1981; Jones et al., 1985; Hay, 1994; Anessi Pessina and Borgonovi, 2000;
and IFAC-PSC, 2000, p. 13). Other authors try to identify the actual users of
public organisation reporting through an empirical research. For example, Butter-
worth et al. (1989) and Coy et al. (1997) placed cards in the annual reports
requesting users to respond to a questionnaire. Atamian and Ganguli (1991)
submitted a questionnaire to account preparers in order to collect information
on annual report potential users. Mack et al. (2001) analysed Queensland local
government annual report distribution lists to identify the actual recipients of
annual reports, finding that there are differences in the distribution pattern of
urban and rural councils.
Nevertheless, the various empirical and normative studies have failed to
reach a consensus as to the identity of the users of annual reports and their
information needs (Jones, 1992; Hay, 1994; and Ryan et al., 2000).
Some of the categories of potential users for a local government which are
generally identified can be summarised as follows:1
* ‘External users’: (1) citizens (and their representative organisations) as
consumers of public services, taxpayers and ratepayers; (2) firms using
public services; (3) upper levels of government; (4) oversight agencies;
(5) auditors; (6) other local governments; (7) banks and lenders; (8) foreign
investors, analysts, rating agencies; (9) researchers.
* ‘Internal users’: (10) councillors and executive members; (11) public
managers; (12) government employees; (13) public sector trade unions.

Research Questions
The purpose of the paper is to analyse the actual role played by the annual report
as a medium of accountability to Italian local government stakeholders. According
to a virtuous ‘accountability cycle’, comprehensive, understandable and reliable
(financial and non-financial) information should be not only accessible but also
diffused, providing the basis for the evaluation of the public organisation’s actions

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 ITALIAN LOCAL GOVERNMENT ANNUAL REPORT 335
and results and feeding the budgeting process. Does the Italian local government
annual report satisfy such conditions?
In order to gain a better understanding on such issues, the paper makes an
attempt to answer the following questions:
(i) Do significant numbers of Italian local government annual report
recipients exist? If so, who are they?
(ii) How do preparers perceive the interest of (potential) groups of users
in the annual report?
(iii) Is the annual report distributed? Which means of communicating
financial and non-financial results are used by Italian local govern-
ments?
(iv) What is the extent of the information provided by the annual report?
And its mix (financial v. non-financial information; cash-based v.
accrual-based information)?
(v) Is it possible to identify different patterns of accountability (with
specific reference to ex-post reporting on financial and non-financial
performance) in local governments with different features (size; type
of local government – municipality v. province)?

METHODS

In order to pursue the study’s objectives, a stratified random sample of 30

local governments with a population of at least 3,000 were sent a question-
naire and asked to provide their 2000 annual reports. The sample, the
questionnaire and the checklist used to analyse the annual report are
described in the following sub-sections.

The Sample
The sample was drawn from all local governments with a population of at
least 3,000, totalling 3,555 entities (3,452 municipalities and 103 provinces).2
The local governments were classified according to three criteria: (i) type
(municipality v. province); (ii) geographical area (Northern v. Central v.
Southern Italy); (iii) size (as measured by their population). The composition
of the sample is shown in the Appendix.
The sample was extracted on the basis of the following criteria: (1) the
total number of 30 local governments composing the sample was divided
into two groups: 24 municipalities and six provinces; (2) each population
stratum of municipalities should consist of a fixed number of six
entities, while each population stratum of provinces was expected to be
composed of three entities; (3) within each population stratum, local
governments were classified according to their geographical area and

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were randomly extracted. These choices stem from the necessity to

have a manageable number of local governments to analyse (in order
to allow reasonable cost and time for the collection and elaboration
of data) and, at the same time, to ensure the consideration of a suf-
ficient number of local governments coming from groups with different char-
acteristics. The analysis was based on 29 completed questionnaires and
26 annual reports.3

The Questionnaire
The questionnaire was sent to the Financial Departments of local govern-
ments and aimed at:
* ascertaining which means (if any) the local governments had adopted to
communicate their performance to external stakeholders for the year
ended 31 December, 2000, and whether they had prepared term state-
ments over the previous 5 years (or if such documents were, at the time
of completion of the questionnaire, under preparation).
* finding out the number and the categories of users to which the annual
reports were delivered, or by whom they had been requested. The
following user groups were listed in the questionnaire: (1) councillors,
mayor/president, cabinet members; (2) CEO, directors, managers; (3)
other employees; (4) libraries; (5) research institutions; (6) other public
sector entities; (7) investors/banks; (8) suppliers; (9) individual citizens;
(10) others.
* gaining a better understanding on how preparers perceive the interest
of actual and potential users. Preparers were required to express a
judgement about the degree of interest the various categories of users
may have in the annual report. While the previous questions refer to
‘objective’ data, preparers’ perceptions and opinions are, of course,
influenced by their culture and may convey a biased vision of the actual
interest of the various categories of stakeholders. However, comparing
perceptions and actual data on the number of users can help in under-
standing which kind of stimuli (if any) preparers are subject to when
preparing the annual reports.
The questionnaire contained eight questions (including tables to be filled in)
and it required no additional explanation to be given to respondents, who
were granted anonymity in order to enhance questionnaire return. The
questionnaire was sent by fax after a preliminary phone contact and phone
calls were repeated to ask for responses. Twenty-nine completed question-
naires had been returned by the end of the third month following the first
contacts.

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 ITALIAN LOCAL GOVERNMENT ANNUAL REPORT 337
The Analysis of the Annual Report’s Contents
The analysis of the contents of the Italian local government annual reports was
conducted using a checklist developed on the basis of the literature on disclosure
and accountability indices. There are several studies measuring the degree of
disclosure of financial reporting in the private sector (for some examples, Cerf,
1961; Buzby, 1974; Barrett, 1976; Chong and Wong-Boren, 1987; Cooke, 1989;
and Meek et al., 1995). Public sector disclosure indices are more recent and less
numerous. In some cases, they are used to compare the reporting practices of public
organisations in different countries (Jones and Pendlebury, 1982; Pina and Torres,
1996; and Coombs and Tayib, 2000). Other studies (Ingram, 1986; Boyne and
Law, 1991; and Taylor and Rosair, 2000) are aimed at measuring the degree of
disclosure and accountability of reporting, at pointing out weaknesses or strengths
in reporting practices, at finding correlations with other variables, such as the type
and size of government (for example, Ingram et al., 1988; and Ryan et al., 2002).
The checklist applied to Italian local government annual reports was
developed with the purpose of analysing the extent and the mix of informa-
tion disclosed, but not of ‘rating’ local governments according to the quality
of their disclosure. It is divided into seven sections: Overview, Actual to
budget comparison, Indicators and analysis on cash- and obligation-based
data, Financial position information, Financial performance information,
Service performance information, and Other information. For each section,
a list of relevant items likely to be found in the annual report were identified
on the basis of previous studies (Anthony, 1978; Drebin et al., 1981; Pina and
Torres, 1996; IFAC-PSC, 2000; and Ryan et al., 2002).
Two parallel indices were developed: (1) a simple index, calculated by
adding 0 when the item was absent and 1 when it was present; (2) a weighted
index, rating present items according to their clarity, comprehensiveness
and comprehensibility (the scores were: 0¼absent; 1¼poor; 2¼sufficient;
3¼very good). The scores were, for each section, expressed as a percentage
of their maximum possible amount.
Finally, since the index was developed to explore the information mix of
the annual report, weights were not assigned to reflect the importance of
items. Rating the items would have required the expression of a subjective
judgement on their importance4 (however, indices are intrinsically subjective
– Marston and Shrives, 1991).

RESULTS

Users of Italian Local Government Annual Reports

The local governments contacted are not always aware of their annual
report’s users. More than one third of the respondents declared that they

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were not able to identify the recipients of their 2000 annual reports and,
when required to forecast the number of their future annual report’s users,
the great majority preferred not to answer.
Table 2 summarises the results of the analysis carried out on the local
governments which were able to identify their annual report’s users. It shows
the number of people/institutions (by category) which required or received
the local government’s 2000 annual reports.
The most important groups of users are councillors and cabinet members,
to whom all local governments deliver their annual reports, and CEOs and
managers. The number of employees who receive the annual report is not
very high, especially if compared with the number of managers who receive
it. Employees, however, may easily access them on an informal basis.
Since the size of a local government influences the number of its elected
representatives (the larger the local government, the higher the number of
elected representatives) and is likely to influence the number of managers,
the decrease in the number of councillors, cabinet members and managers
from bigger to smaller local governments is not surprising (moreover, smaller
municipalities are not always likely to have a CEO and managers). However,
‘internal’ users remain the most considerable category of recipients of the
annual reports in all local governments, while citizens are generally a neg-
ligible group of recipients in large and small municipalities, and never
required their province’s annual report (this seems to be consistent with
the view that provinces are more ‘distant’ from their constituents than
municipalities).
Suppliers are never found to be annual report users, while research
institutions, other local governments, other public sector entities and
banks/lenders, which account for a very small number of recipients, prefer
to ask for the annual report of provinces or large municipalities. In fact, the
latter more often have access to financial institutions to fund their invest-
ments, and their annual reports are more likely to be analysed by research
institutions or other local governments, which perhaps consider them as
benchmarks.
The perceptions of preparers (see Table 3) seem to confirm these results.
According to preparers, internal recipients are the most interested users in
the annual report, irrespective of the type of local government and its size.
More specifically, the mayor/president (who are directly accountable to
their electorate) and the executive members, who, together with the CEO,
are strongly involved in the strategic (but also, in smaller municipalities, in
the day-by-day) decision making, are considered as being the most interested
group of annual report users. Other employees and councillors are the other
categories of users who are judged as being quite interested in the annual
report. On the contrary, external stakeholders, such as other local govern-
ments, lenders, suppliers and citizens are not felt to be strongly interested in
the local government reports. It must be noted, however, that, in larger local

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 Table 2
Number of Users of Italian Local Government Annual Report

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Councillors/ CEO/ Other Research Other Other Public Banks/
LGs (Population) Executive Members Managers Employees Libraries Institutions LGs Sector Entities Lenders Suppliers Citizens Others Total

Provinces > 100,000 48 4 2 0 1 0 0 1 0 0 1 56

Provinces 29 12 7 0 0 0 1 2 0 0 0 34
(40,000; 100,000)
Municipalities 42 39 9 0 2 2 4 2 0 2 0 103
> 100,000
Municipalities 33 2 0 0 0 0 0 0 0 0 0 44
(40,000; 100,000)
Municipalities 18 4 0 0 0 0 0 0 0 0 0 29
(5,000; 40,000)
Municipalities 13 0 0 0 0 0 0 0 0 0 0 41
< 5,000
ITALIAN LOCAL GOVERNMENT ANNUAL REPORT

Mean 30 10 3 0 1 0 1 1 0 0 0 51

Note:
LG ¼ Local Government.
339
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Table 3
The Interest of Various Stakeholders in the Local Government Annual Reports as Perceived by Preparers

LGs Executive Mayor/ Other Other Lenders/

(Population) Councillors Members President CEO Managers Employees LGs Banks Suppliers Citizens

Provinces > 100,000 1.67 1.67 2.00 2.00 1.67 1.00 0.33 1.00 0.00 0.33
Provinces 2.00 2.00 2.00 2.00 2.00 1.33 0.50 1.50 0.00 0.50
(40,000; 100,000)
Municipalities > 100,000 1.20 1.80 1.80 2.00 1.00 0.60 0.80 1.00 0.40 0.80
Municipalities 1.67 2.00 2.00 1.33 1.17 0.83 0.33 0.50 0.17 0.50
(40,000; 100,000)
Municipalities 2.00 2.00 2.00 1.60 1.67 0.67 0.83 0.67 0.00 0.50
STECCOLINI

(5,000; 40,000)
Municipalities > ¼ 5,000 1.33 1.83 2.00 1.33 1.50 0.33 0.20 0.33 0.00 0.50
Mean 1.64 1.88 1.97 1.71 1.50 0.79 0.50 0.83 0.09 0.52

Notes:
Preparers were required to rate the degree of interest of various user groups as follows: High ¼ 2; Low ¼ 1; Nil ¼ 0; LG ¼ Local Government.

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 ITALIAN LOCAL GOVERNMENT ANNUAL REPORT 341
governments (municipalities with at least 100,000 inhabitants; provinces),
lenders are generally considered to be slightly more interested.

The Use of Alternative Means to Communicate Results to Stakeholders

The use of alternative means to communicate results is not very common in
Italian local governments (Table 4). Only two local governments (a large
municipality and a province) insert their annual report in their website,
while less than 20% send a mail report to their constituents. The most
important medium for communicating results, used by more than half
respondents, is the press. This is probably due to Law 67/1987, requiring
local governments with a population of at least 40,000 to publish an extract
of their cash based- budget and results in newspapers. In fact, not always do
local governments comply with such law (see also Guarini, 1999): while all
the provinces declared to publish their results, not all the largest munici-
palities, though expected to, did the same.
Finally, term statements are adopted mainly by the largest provinces and
municipalities, while they are less common in smaller local governments.

Analysis of the Annual Report’s Contents

The results of the analysis of the annual report’s contents can be summarised
as follows (see Table 5):
* Annual reports generally contain scant introductory information. No
information on the local government’s characteristics and organisation
can generally be found in the annual reports, which often lack an over-
view on the local government’s performance.

Table 4
Use of Alternative Means to Communicate Results to Stakeholders

LGs (Population) Newspapers Website Mail Report Total Term Statement

No. % No. % No. % No. % No. %

Provinces > 100,000 3 100 0 0 0 0 3 100 2 67

Provinces (40,000; 100,000) 3 100 1 33 1 33 3 100 0 0
Municipalities > ¼ 100,000 1 20 1 20 2 40 3 60 2 40
Municipalities(40,000; 100,000) 4 67 0 0 0 0 4 67 3 50
Municipalities (5,000; 40,000) 2 33 0 0 1 17 2 33 1 17
Municipalities < 5,000 1 17 0 0 1 17 2 33 1 17
Total 14 56 2 9 5 18 17 66 9 32

Note:
LG ¼ Local Government.

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Table 5
Analysis of the Information Content of Local Government Annual Reports

Provinces > ¼ Provinces Municipalities > ¼ Municipalities Municipalities Municipalities Mean

100,000 (40,000; 100,000) 100,000 (40,000; 100,000) (5,000; 40,000) (3,000; 5,000)

Information Content S% W% S% W% S% W% S% W% S% W% S% W% S% W%

Overview 17 13 11 7 13 10 17 12 20 12 11 8 14 10
Actual to budget 100 100 100 100 100 100 100 100 100 100 100 100 100 100
comparison
Indicators and 93 79 57 44 69 56 71 62 71 57 61 42 69 55
analysis on cash
and obligation
based data
Financial position 6 4 4 4 7 4 9 6 7 5 4 3 7 5
information
STECCOLINI

Financial 35 18 17 14 15 12 18 14 24 15 10 10 19 14
performance
information
Service 0 0 24 11 31 18 17 9 9 5 11 10 17 10
performance
information
Other information 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Total 22 17 16 13 20 15 20 16 20 15 14 11 19 14

Note:
S ¼ simple index; W ¼ weighted index.

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 ITALIAN LOCAL GOVERNMENT ANNUAL REPORT 343
* Cash accounting is used not only to show compliance with budget
(such part plays a leading role in the annual report), but also to elaborate
indicators, tables and graphs which are not specifically required by the
law and are the richest form of voluntary disclosure in the report.
* On the contrary, information on financial performance and financial
position is very poor. It is generally limited to the operating statement and
the statement of financial position (which are compulsory), while, with the
exception of a couple of local governments, no financial indicators, graphs
and tables are generally added to improve disclosure. Notes to the financial
statements are not generally inserted in the annual report. When notes are
added (four local governments), they generally consist of explanations concern-
ing legal requirements, year-end adjustments made to cash data in order to
obtain accrual-based results, and specific items. It must be observed, however,
that local governments never disclose the criteria adopted to evaluate assets and
liabilities (no local government disclosed such information).
* Service performance information is generally scant. Local govern-
ments mainly rely on compulsory efficiency and effectiveness indicators,
but they do not generally comment on them nor develop ad hoc indicators.
About half insert detailed programme information, which is generally
very long and descriptive. Only three (the largest local governments) use
voluntary effectiveness indicators in their annual report.
Finally, it must be noted that, apart from the use of voluntary effectiveness
indicators by the largest local governments, no other significant differences
emerge in the analysis of annual report’s content pattern of the various
groups of local governments.

DISCUSSION AND CONCLUSIONS

Public organisations are being subjected to an increasing demand for

accountability in many countries. The role of the annual report in rendering
government accountable is often emphasised and sometimes questioned.
According to a virtuous ‘accountability cycle’, comprehensive, understand-
able and reliable (financial and non-financial) information should be not
only accessible but also diffused, providing inputs to the evaluation of past
results and to the budgeting process.
In Italy, as a consequence of the processes of public sector reforms, local
government reporting and accounting were reformed by law in 1995 and
the Commission for local government finance and accounting is currently
elaborating local government budgeting, accounting and reporting standards.
This study, by conducting an empirical analysis, is aimed at gaining a
better understanding of the role of the annual report as an accountability
medium in the context of Italian local government reforms.

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344 STECCOLINI

The results are quite discouraging and strongly cast doubts on the actual
role of the annual report as an accountability medium in the Italian local
government panorama, in accordance with those authors (Jones et al. 1985;
Jones, 1992; Jones and Pendlebury, 1996; and Priest et al., 1999), who focus
on the actual shortcomings of such document.
Normative literature lists both internal and external potential users of the
annual report (see the section headed Theoretical Notes and Research
Questions). In Italian local governments the annual report is the only official
and public report. Thus, it might be expected to be addressed both to
internal and external users and, perhaps, to be specially important in com-
municating performance information to the latter, who virtually cannot rely
on any alternative mandatory report.
In fact, the results of the present analysis show that in Italian local
governments, the most important recipients of the annual report are ‘inter-
nal’ users, while there are not considerable numbers of external stakeholders
who require or receive it. These results are coherent with preparers’ percep-
tions. According to most annual report preparers, Councillors, Mayors/
Presidents, CEOs and Executive Members are likely to be highly interested
in reading the annual report, while citizens are not. It must be observed,
however, that internal users might be interested in more specific and
frequent information (for example, a monthly or quarterly report referred
to a specific department/service) and are also in a position to require it.
Moreover, it is not clear if they actually read the reports they receive and
whether they use them to support their decision-making processes (on the
elusive links existing between information, decision and action see, for
example, Hogheim et al., 1989).
If Italian local governments showed their results on their website or sent
reports to citizens, we could conclude that external stakeholders do not
receive/require the annual report because they can have access to information
anyhow. But they do not. Local governments are not very active in communi-
cating their results to their stakeholders. Publishing reports in newspapers is the
preferred medium used to communicate performance by larger municipalities and
provinces, but it is also the one which is required by law.
Local governments simply comply with the law also in preparing their
annual report, often producing poor quality reporting, in which accrual-
based results and service performance evaluation still occupy a marginal
place. On the contrary, cash- and obligation- based information plays a
leading role in the preparation of reporting, and it is also used to develop
voluntary indicators in an effort to (approximately) evaluate efficiency and
effectiveness. This is consistent with the findings of the analyses carried out
by Anessi and Steccolini (1999) and Caperchione (2003).
On the basis of such results, it must be observed that the annual report
does not seem to play the role of a ‘general purpose’ report, satisfying
the information needs of the generality of potential users, nor the role of

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 ITALIAN LOCAL GOVERNMENT ANNUAL REPORT 345
an ‘external’ report. It is rather a report which is prepared in order to
comply with very detailed legal requirements and which is mainly delivered
to internal stakeholders. At the same time, alternative means to communi-
cate results are not very common, raising questions as to (i) if and (ii) how
Italian local governments give account for their performance to their stake-
holders.
The relationship between users and local government annual report pre-
parers seems to be subject to a vicious circle:
* the latter currently do not generally perceive a strong interest from
users, especially external ones. This can discourage preparers from
improving annual reports, from introducing voluntary disclosure and
service performance descriptions and indicators, and also from producing
alternative reports.
* it is possible that users do not generally perceive the usefulness of
annual reports, and this may depend on their poor content and scant
readability.
As far as differences between provinces and municipalities and larger and
smaller local governments are concerned, it is quite difficult to depict well-
defined different accountability patterns. While the reporting content is
quite poor in every group of entities, larger local governments seem to be
slightly more open to external stakeholders and stimuli and perhaps slightly
more innovative in the adoption of means to communicate results and in
developing non-financial measurement systems, but this should be subjected
to further verification.
In conclusion, Italian local governments are perhaps in a transitional
phase of development, where the idea of accountability is still ‘new’, ‘man-
agerial’ tools are still being implemented and communication towards
external stakeholders is being redefined and revised. Perhaps they are still
climbing the ‘ladder’ towards higher levels of accountability and in a few
years the annual report will play a more significant role in discharging
accountability towards stakeholders.
However, some issues must be raised. With specific reference to the Italian
context, ‘contingent’ problems are not likely to be the only explanation for
the results of the analysis. Italian public sector reforms are being approached
in a ‘bureaucratic’ fashion, with new ‘managerial’ and ‘professional’ notions
of accountability being enacted by law (Panozzo, 2000, p. 368). Accounting
changes are enforced by legislative norms and accounting and reporting tend
consequently to be interpreted as administrative procedures to be complied
with. Such bureaucratic and formal approach to ‘managerial’ reforms tend
to endorse uniformity in behaviour and conformity with law, rather than
fostering initiative and innovativeness or encourage efforts in designing
accounting and reporting systems which respond to the specific needs of
the users. In fact, rather than in differences in the size and the type of

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346 STECCOLINI

government, reporting and communication practices seem to find their

explanation in legal requirements and old habits. The leading role of cash-
based information in annual report contents (and its use in elaborating
voluntary indicators) is an example of the influence of the law (which con-
firms the importance of such accounting basis) on accounting practices,
combined with organisational inertia (cash accounting has been used for
years by Financial Departments, which perhaps are not yet accustomed to
service performance measurement and accruals accounting – see also Caccia
and Steccolini, 2002).
From a general and normative point of view, the preparation and com-
munication of the annual report is considered as being in the public interest.
Reforms driven by managerialist and marketisation principles focus on the
production of better results, but they require the development of forms of
democratic accountability (Behn, 1998). The annual report might represent
a fundamental medium to ‘close’ the accountability cycle, by allowing
stakeholders to monitor and evaluate governmental activities and results
and to involve them in the definition of governmental goals. The issue at
stake becomes not ‘if’ the annual report is a medium of accountability, but
‘how’ it can be designed or supplemented in order to make it become a real
accountability medium. This requires an effort, both from practitioners and
researchers.
The former can contribute in bridging the gap between potential and
actual users of the annual report by adopting a proactive behaviour and
developing forms of effective performance measurement and communication
(also exploiting the Internet potential), popular reporting, participative
budgeting. The actual users which emerge from the empirical analysis may
not be (and probably are not) the only people and institutions which are
likely to be interested in the external communication of local governments.
More specifically, rather than focusing on legal requirements or managerial
fashions, practitioners should take into account actual internal and external
users’ needs, competencies and skills.
On the other side, researchers should try to better understand (i) which
(other) means (if any) are used to render local governments and other public
organisations accountable, (ii) whether, with reference to such means, it is
possible to identify different patterns of accountability in different public
organisations and factors explaining such differences (such as size, type of
government, level of competition, geographical area, etc.). Furthermore,
(iii) the differences in the meaning taken on by the accountability concept
(especially when ‘imported’ from abroad) and their consequences on the
configuration of reporting systems could also be observed in a comparative
setting. Finally, (iv) the actual functions of the annual report, the use of
financial and non-financial reporting and the actual needs of internal and
external users as a consequence of public sector reforms require a further
investigation on the field.

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 ITALIAN LOCAL GOVERNMENT ANNUAL REPORT 347
APPENDIX
Composition of the Sample of Italian Local Governments

Municipalities Provinces

Population Northern Central Southern Total Northern Central Southern Total

Italy Italy Italy Italy Italy Italy

> ¼ 100,000 3 1 2 6 1 1 1 3
(40,000; 100,000) 2 1 3 6 1 1 1 3
(5,000; 40,000) 3 1 2 6 – – – –
(3,000; 5,000) 3 1 2 6 – – – –
Total 11 4 9 24 5 2 5 6

NOTES
1
Some studies prefer to identify a small number of user groups, whereas others tend to present
a very detailed list of users. Different criteria to select relevant users (restricting or widening
their number) can be adopted.
2
Smaller local governments were excluded because they were not required to produce
accrual-based financial statements until 2004 and their annual reports would not have
been comparable with the others.
3
In principle, local governments’ annual reports are a matter of public record. In practice,
however, they must be obtained directly from the relevant local governments, which may
sometimes prove uncooperative. Sending their annual reports generally requires local gov-
ernments to photocopy hundreds of pages and to mail them. It was not surprising, then, that,
while 29 local governments returned their completed questionnaire, the annual report was
provided by 27 local governments. Another annual report was not used because it was
produced by a local government placed in a region where the introduction of accrual-
based reporting had been postponed.
4
The judgement could have been validated by asking users. But this would have required to
previously identify the latter or to rely on the judgment of a specific group (preparers, auditors, etc.).

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