The use and perceived usefulness of public sector financial statements by politicians – evidence from Croatia

Financial statements as tools for improving accountability

According to the IPSASB, the purpose of financial statements in the public sector is to provide information about the financial position, financial performance and cash flows of public sector entities, which are useful to stakeholders for decision-making processes and for evaluating resource allocation decisions (IPSASB, 2014). Van Helden and Reichard (2019) emphasized that the two main roles of accounting information are accountability and providing support in the decision-making process. Accountability is the most important objective from which all other objectives must flow (Patton, 1992), especially in the public sector.

To function on various levels in the public sector, accountability must include transparent disclosure of information, including accounting information (Barton, 2009). That information forms the basis for constructive dialog with various stakeholders (Mulgan, 2000) and it is an important element of external oversight (Scott, 2000; Sinclair, 1995). Within the concept of accountability in the public sector, the availability and disclosure of accounting information is critical; however, there is also a requirement for that information to be (1) reliable and qualitatively satisfactory, (2) understandable, (3) accessible, (4) broadly disseminated and distributed (Coy et al., 2001). Following from the concept of accountability in the public sector and the role of financial statements in discharging that accountability, the shape and content of financial statements should also depend on users and their information needs. Financial statements should satisfy general and common information needs of their potential users. The range of users of financial statements in the public sector varies (Tagesson, 2015). The IPSASB (2014) identified three main groups of potential users: recipients of services or their representatives; providers of resources or their representatives; and other parties, including special interest groups and their representatives. In the literature, academics prefer to divide users into internal and external (Brusca, 1997; Steccolini, 2004; Tooley et al., 2010). While external users are citizens, auditors, banks, investors and academics, internal users are councilors and executive members, public managers and civil servants. According to Aversano et al. (2018), politicians are partly external users because they do not exert a direct impact on the preparation of financial statements. They are also partially internal users because they can exert an indirect impact over the management who prepare financial statements.

The concept of accountability is not just about providing information or answering questions, but extends to the activities that include setting goals, providing and reporting results and the visible consequences of conducted activities (Mulgan, 2000). Glynn and Perkins' (1997) study of market control and accountability in the British National Health Service identified six public sector responsibilities, including financial accountability. Financial accountability is increasingly in the focus of accounting information systems that are being redesigned and improved to expand the scope of information about financial costs and results for governments. Politicians are therefore expected to be accountable on how they use money, in accordance with the public purpose, so to assure the public that they do not abuse the power they wield on behalf of citizens (Behn, 2001). Financial statements are meant to assist in the process of financial accountability.

Studies on how politicians use financial statements as well as studies about perceptions of the usefulness of financial information emerged in the last decade in a number of international journals of accounting and public administration (Van Helden, 2016). In his literature review Van Helden (2016) suggests that the focus on financial statements' uses and usefulness is caused by changes that a number of countries implemented in their public sector accounting systems over the last decade and across different levels of government. Such changes were generally implemented under the umbrella of New Public Management (NPM), with the aim of better financial management in the public sector and, significantly, they included accounting, budgeting and reporting reforms (Bergmann, 2012). In order to improve the quality of information, changes were largely related to the transition from traditional cash accounting to accrual accounting. This is in accordance with previous studies (Bergmann, 2012; Hughes, 2013; Christiaens et al., 2015) providing evidence that financial statements prepared under cash accounting do not provide enough information for making quality decisions in the public sector. To that end, accrual accounting has been reported as providing higher quality information that improves planning, finance management and is better suited to making long-term decisions (FEE, 2007). Ismail (2022) researched the perceived usefulness of financial information prepared on accrual basis, in reference to accountability and decision-making process in public sector entities in Malaysia. Her results show that accountants consider accounting information prepared on accrual basis very useful for decision-making. Research by Nakmahachalasint and Narktabtee (2019) shows that after implementing accrual accounting in Thailand's public sector, the quality of financial statements overall enhanced accountability. Ezzamel et al. (2005) emphasized that new accrual accounting systems enable more appropriate management by providing high-quality key information needed in making decisions. Furthermore, a study by PwC (2013) showed that financial statements prepared using IPSAS or equivalent standards based on accrual accounting, are useful for politicians because they enable better understanding of public finance. As mentioned in the previous section, Croatia is transitioning towards full adoption of accrual accounting in the public sector, so this is a setting where modified accrual accounting is currently used. Similar to other countries in such transition, very little is known about how the information and financial statements prepared under these conditions and bases are of any use or usefulness to the intended users.

Financial statements use and perceived usefulness

Given the fact that financial statements are recognized as the main tool in improving accountability and they are key in decision-making (Mack and Ryan, 2006; Ezzamel et al., 2004), the research focus by some academics has been to ascertain whether politicians actually do use financial statements prepared by public sector entities (Yamamoto, 2008; Christiaens et al., 2015; Caruana and Farrugia, 2018; Jorge et al., 2019). The conclusion in these previous studies is that usage of such accounting information by politicians is limited.

Stecollini (2004) tried to determine the real role of local government's financial statements in discharging accountability to potential users. Her results show that information disclosed in the statements is largely used to discharge responsibility towards internal users (councilors and managers) and not as a communication tool with external users (citizens). Although financial statements are generally considered to be the primary medium of accountability (Mack and Ryan, 2006), some previous studies found that there is little demand for the information disclosed in such financial statements (Jones and Pendlebury, 1996), or that the statements do not contain all relevant information for supposed user needs (Jones et al., 1985).

Researching the usage of annual financial statements by Maltese parliament members, Caruana and Farrugia (2018) show that usage is indeed limited. They identify the reasons for no use, the primary one being that financial statements might not be the main avenue to discharge accountability by politicians. In addition, information characteristics of public sector financial statements such as the technical jargon, their late publication, highly detailed reports and the lack of summaries also have negative impact on politicians using public sector financial statements. Some politicians emphasized that they used financial statements but not in their decision-making process because statements are often published late, and this does not assist in prompt decision-making.

Some authors researched the perceived usefulness of financial statements and disclosed information prepared under different accounting bases in the decision-making process (Brusca, 1997; Liguori et al., 2012; Kober et al., 2010; Brusca and Montesinos, 2013; Nogueira et al., 2013; Liguori et al., 2012; Nogueira and Jorge, 2016; Haustein et al., 2021; Gomes et al., 2023). In general terms, these studies present mixed results. They show that in some instances cash-based reporting is useful for decision-making, while on the other hand, there is a perception that information prepared on accrual bases is more useful.

Previous studies also show that there is a difference between the use and the perceived usefulness of financial statements (Van Helden, 2016). Liguori et al. (2012) researched how politicians and managers in local government appreciate budget information based on cash accounting, as well as information based on accrual accounting. Buylen (2014) researched the same items of financial information among Flemish local councillors, observing the use of that information in annual meetings. The comparison of those two studies shows that there are differences. While Italian councillors highly appreciate information prepared on a cash basis and they approve the accounting information prepared on accrual basis, in Belgium the real usage of accounting information based on cash accounting is very low while the usage of accounting information prepared on accrual accounting basis almost did not exist. Subsequently, Van Helden (2016) explained that these differences exist because the Italian study researched perceived usefulness, while the Flemish study researched real usage. Van Helden (2016) concluded that the perception of usefulness was greater than the real usage of financial statements by politicians. Moreover, Van Helden (2016) emphasized that prior studies about usage and usefulness were mostly based on accounting statements such as the balance sheet and income statement – the statements most likely to be impacted by legislation in the transition from cash to accrual accounting in the public sector.

Yamamoto (2008) researched how politicians used financial statements based on cash and accrual accounting in the process of creating policies. He found that there is limited usage of financial statements by the Japanese government, and the author concluded that although some politicians read and understand financial statements, they do not consider information prepared under accrual accounting to be more useful than information prepared on a cash accounting basis. Buylen and Christiaens (2016) confirmed these findings.

Nogueira et al. (2013) researched the usefulness of financial statements for internal decision-making in Portuguese municipalities, after public sector reforms were conducted and accrual accounting was implemented in that jurisdiction. They analyzed the perceptions of internal users including politicians. Their results show that financial statements in their current form and content were perceived as highly useful in the decision-making process in that jurisdiction. Paulsson (2006) researched the use of accrual accounting-based information by the Swedish Central Administration and concluded that the information prepared on accrual basis was used more by managers than by politicians. Kober et al. (2010) conducted a study on perceived usefulness of financial statements in the Australian public sector and showed that accounting systems based on a cash basis were not appropriate for managing the public sector in Australia, while accounting systems based on accrual accounting were perceived as the most useful by internal and external users in that setting. Most recently, Haustein et al. (2021) researched the usefulness of financial statements at the local level in Finland and Germany. Both countries evaluated the usefulness of financial statements as positive. Finally, Gomes et al. (2023) researched the usefulness of accounting information in the context of local government in Portugal and Spain. Their research shows that information about budget and budget execution is perceived as more useful for public management and in decision-making process, as chief financial officers are more oriented to use of information prepared on cash basis and the budgeting information. This is an important explanation of the lower use and usefulness of accounting information prepared on accrual accounting basis compared to cash basis, especially in the Spanish context. Comparing the results between Portuguese chief financial officers' use and usefulness of information prepared on different accounting basis to similar Spanish users, the Portuguese were more optimistic about the use and usefulness of information prepared under the accrual accounting basis. In conclusion, it is evident that there is mixed evidence about the usefulness of accounting information prepared on different accounting bases. There are positive results on information usefulness when it is prepared on accrual bases, according to the perceptions of politicians (Kober et al., 2010; Liguori et al., 2012). Equally, however, there is evidence that the use of accounting information prepared on accrual accounting basis is low (Buylen and Christiaens, 2016; Yamamoto, 2008). Furthermore, Budding and Van Helden (2022) conclude that although accounting information is considered potentially important to politicians, its actual use seems to lag behind its perceived usefulness. Lapsley (2022) also reports a negative attitude towards the use of accounting information by politicians and believes that accounting information is not perceived as useable by politicians because it is not relevant for them. Finally, Budding and van Helden (2022) raise the question of the relevance of information given to politicians and considers that accounting information is crucial for the supervisory function of the legislature.

Although research on the use and perceived usefulness by different categories of users does exist in the context of a number of different countries, there is little evidence from the Croatian setting. Croatia represents an interesting research setting as it is a country that is in a transitional period of adopting full accrual accounting and it is currently applying modified accrual accounting. It is a member state of the EU, and it is a country that represents the Southeast region of Europe. That region has had challenges in the implementation of public sector reforms and the related transition to accrual-based public sector accounting and reporting. In addition, there are very few studies conducted in that region on the usefulness of financial statements by public sector managers and public sector accountants, while politicians have never been researched in this empirical context. Research by Poljašević et al. (2021) about public managers' perception of accounting information usefulness in decision-making processes shows that public managers consider both cash and accrual-based statements very useful for making decisions. That is, the report on revenue, expenses, receipts and expenditure has been rated by public mangers as the most useful and both the report on budget execution and the report on liabilities had a high average usefulness evaluation in that study.

Therefore, the aim of this study is to explore if politicians use financial statements in the decision-making process and how they perceive the usefulness of the financial statements at their disposal. We also investigate whether there are any differences between the use and the perceived usefulness of those financial statements.

In light of previous research that indicates mixed results on the use and perceived usefulness of accounting information disclosed in financial statements prepared on different accounting bases, in this study we outline three research questions:

Do politicians use the financial statements prepared by public sector entities?

In order to provide the answer to our first research question, we asked the politicians if they were familiar with prescribed financial statements as well as with budgetary reports. This question was important given the fact that budgetary reports are in the domain of politicians' accountability and have been shown in previous research to be more used than the financial statements (Moretti, 2016). In addition, prior research also shows that politicians' interests are in prioritizing policy and achieving a balanced budget (Van Helden and Reichard, 2019). In this study 87% of respondents (according to Figure 1) reported that they were familiar with prescribed financial statements, while 13% of respondents were not familiar with them. In the case of budgetary reports, 91% of respondents answered that they were familiar with budgetary reports, while 9% of respondents were not familiar with them.

The question as to whether the politicians use financial statements was a closed-ended question. The respondents had an option to choose 1 if they never used the financial statements, 2 if they sometimes used them and 3 if they often used them. Although politicians were mostly familiar with financial statements produced by public sector entities (87%, according to Figure 1), 13% of respondents were not familiar and 25% of respondents overall responded that they never used them. These respondents were then precluded from answering further questions about the perceived usefulness of financial statements. As Table 2 shows, out of 505 politicians, 379 or 75% of respondents answered that they use financial statements, and they, therefore, comprise the final sample for this study. From those users, 60% responded that they used them sometimes, while 40% used them often.

After the respondents provided answers on whether they often or sometimes use financial statements, they were asked to rate the prescribed financial statements that they used on a Likert scale from 1 (never use) to 5 (often use). The results are presented in Table 3. From Table 3, it is evident that politicians mostly use the statement on revenue, expenses, receipts and expenditure (Mean = 3.75), while all other prescribed financial statements are only sometimes used (Mean < 3.5).

Following the respondents' answers on which prescribed financial statements they use, we asked about the information disclosed in the financial statements that they use the most. The information ranked by the respondents as the most used is on operating expenses, followed by operating revenue (not tabulated in Table 3). Much less used is the information on total liabilities, balance of liabilities at the end of the reporting period, as well as the information on deficit/surplus of revenue and receipts, information on total assets and information on own sources. The reported use of any other disclosed information is negligible.

These results are consistent with the answers on the most used statement of revenue, expenses, receipts and expenditure. In the statement on revenue, expenses, receipts and expenditure there is a combined recognition of those items based on both accrual and cash bases. This is because revenue is recognized in the period in which it is available and it can be measured, expenses are accrued under modified accrual accounting in Croatia, while receipts and expenditure are recognized purely under cash accounting bases. The fact that a balance sheet as a part of the financial statements is used less, as well as the detailed information disclosed within the balance sheet, leads to the conclusion that politicians are mostly interested in financial performance of public sector entities as reported on a modified accrual basis and are not primarily interested in the entities' financial position. These results are also consistent with Tooley et al. (2010) who concluded that information disclosed in the income statement is rated the most useful, while information disclosed in the balance sheet ranked the lowest. Research by Van Helden and Reichard (2019) has further shown that understandability is a factor that influences usage and usability. Understandability takes into account the format of the information as specified in an accounting document and the channels through which it is available (Van Helden and Reichard, 2019:489). The fact that the balance sheet is focused on the value of assets and liabilities without a possibility for users to observe the liquidity of such assets and changes in the net assets can be a factor that influences the lower use of the balance sheet. The reason for the lower use of a balance sheet in this study can also be found in the fact that the Budget Act in Croatia defines the politicians' responsibilities for the adoption of budgets and the adoption of budget execution reports. Those reports do not contain information on assets and liabilities, which thus remain outside of politicians' legislated responsibility and presumably also outside of their interest.

We can also report from our results that although politicians are mostly familiar with prescribed financial statements, about a quarter of the respondents expressed that they do not use prescribed financial statements, while three-quarters of the respondents expressed that they use those statements, but only sometimes (see Table 2).

We then asked the politicians how they use budget execution reports. We found that they use budget execution reports more than all the financial statements (see Table 3). We explain these results as a consequence of politicians' responsibilities as defined in the Budget Act. The Budget Act, article 42, states that the Parliament, or the representative body of the local entity, adopts the budget and gives its consent to the proposal of the financial plan of extra-budgetary use together with budget adoption. Furthermore, according to article 89, the Ministry of Finance, i.e. the administrative body for finance in Croatia, prescribes that the budget execution is submitted to the Parliament. The same report on budget execution is also submitted by a mayor of a city (or a municipality/county) to their councils for adoption. We therefore deduct that the budget and the related reports are objects of political priorities. The politicians have to ensure that budgets and related plans and reports are executed in accordance with the law and the consequent political priorities are key for politicians' accountability in the public sector (Van Helden and Reichard, 2019). In other words, politicians' responsibilities determine the use of these reports. However, we point out here the important limitation when it comes to the first research question. The limitation stems from the possible risk of bias in the responses, i.e. there is a difference between claiming that someone uses financial statements and finding that they actually do. This risk can only be mitigated through further research and observations (Van Helden, 2016).

What are the reasons for politicians using or not using financial statements?

Previous research indicates that some of the reasons for non-use of prescribed financial statements are due to information characteristics (Yamamoto, 2008; Caruana and Farrugia, 2018). To that end, this study endeavored to address, through the second research question, what the reasons are for the non-use of prescribed financial statements. The question about the reasons for non-use was posed to the respondents who answered that they never used financial statements (the 126 respondents). They needed to select 3 most common reasons for non-use. The results are presented in Table 4. It is evident from that table that the main reason for the non-use of financial statements is the respondent's perception that they do not need the financial statements. The second significant reason stated by these respondents is that financial statements are not in their area of interest. The third reason stated by the respondents is that other statements are their focus and their priority and the fourth reason is that financial statements contain too many technical terms. Finally, the fifth reason mentioned by respondents is that the use of financial statements is optional for them. A small number of politicians (only 9) reported that their reason for non-use of financial statements lies in the information characteristics of the statements, which are not helpful in their decision-making. Politicians gave some other reasons for not using the financial statements in the survey, but we present the 5 most commonly stated reasons. These findings are consistent with Caruana and Farrugia (2018) who concluded that the fact that financial statements might not be in the domain of accountability for politicians is the main reason for their non-use. In our study, it is also evident that politicians did not use prescribed financial statements because they characterized them as not needed. Besides understandability, research by Van Helden and Reichard (2019) shows that relevance is the key for the use or non-use of accounting information. Relevance, in principle, means that the type of information provided in the accounting document is to be aligned with what users need for their decision-making or for discharging their accountability. According to the Croatian Budget Law public managers in Croatia are responsible for preparing financial statements by local and regional self-governing units and presenting them to budgetary and extra-budgetary users. On the other hand, politicians have responsibility for the adoption and execution of budgets and policy related matters. However, the publication of the prepared financial statements as required by the ordinance on financial reporting in budgetary accounting does not extend to the obligation to adopt financial statements at the parliamentary level and the local and regional self-governing unit level. So, the question remains as to who those financial statements are prepared for and for what purpose. Presumably they are another means to promote accountability. Our evidence, however, clearly shows that where reporting does not have a clear legislative purpose and does not assist in discharging legislatively mandated responsibilities and accountability, it is less likely to be used by intended users.

In addition to finding the reasons for not using financial statements, we were also interested in what are the reasons for their use (see Table 4). The respondents needed to select 3 most common reasons for use. Our respondents who indicated that they use financial statements stated that making decisions on budget approval and budget spending was the primary reason. The second reason politicians use financial statements is to compare current results with those of previous periods and the third reason is to compare actual financial results with the adopted budget. Those reasons apparently affect their financial decisions. These responses confirm that politicians are by and large concerned with the budget and the budget execution because budgets are in their domain of responsibility. Financial statements are a secondary source of information for politicians in Croatia who do not hold responsibility for financial statements. These results reinforce our previous claim about the legislative purpose and the related legislated responsibilities that influence the use of the reports. Politicians gave some other reasons for using financial statements, but we presented in Table 4 the 5 most common reasons provided by our respondents.

Is the perception of the usefulness of financial statements by politicians greater than their actual use?

Previous research shows that there is a difference between the use and the perceived usefulness of financial statements (Van Helden, 2016). Our third research question addresses how politicians evaluate usefulness of each type of financial statement and whether there is a difference in use and perceived usefulness. Respondents were asked to evaluate the usefulness of each type of statement on a Likert scale from 1 (not at all useful) to 5 (completely useful).

The results are presented in the Table 5. It is evident from this table that the respondents evaluated the statement on revenue, expenses, receipts and expenditure as most useful, while all other statements are evaluated as less useful. When we compare these results with the actual use in Table 3, it is obvious that the perceived usefulness of all financial statements was rated as greater than the actual use of those statements; that is, the politicians mostly used the statement on revenue, expenses, receipts and expenditure while all other financial statements are only used sometimes. We also observe that a balance sheet is lower ranking for perceived usefulness (Mean = 4.07), and it is in the fourth place for its use. This result is not consistent with Liguori et al. (2012) who concluded that just 6% of respondents evaluate the balance sheet as very useful. In our case, it seems that after the statement on revenue, expenses, receipts and expenditure, the balance sheet is also perceived as useful. Interestingly, the statement on liabilities that was in the last place when we asked about its use is also considered useful. It appears to be perceived as useful, but it is not used. Respondents were also asked to rate the usefulness of the budget execution report. We find that the annual budget execution report is rated as more useful than all of financial statements. Furthermore, the perception of the usefulness of the budget execution report is greater than its actual use.

This evidence provides answers to our third research question about the perceived usefulness of financial statements and whether it is greater than the actual use. Our findings are also consistent with Van Helden's (2016) findings that there is a difference in the use and usefulness and that usefulness is generally perceived greater than the actual use.