The Influence of Elections on the Accounting Choices of Governmental Entities

Abstract

This paper investigates whether gubernatorial elections affect state governments’ accounting choices. We identify two accounts, the compensated absence liability account and the unfunded pension liability account, which provide incumbent gubernatorial candidates with flexibility for manipulation. We find that, in an election year, the liability associated with compensated absences and unfunded pension liabilities are both systematically lower. We also find that the variation in these employment-related liabilities is correlated with proxies for the incumbent's incentives and ability to manipulate their accounting reports. Jointly, these results suggest that state governments manipulate accounting numbers to present a healthier financial picture in an election year.