Accounting change in Italian local governments: What's beyond managerial fashion?

Critical Perspectives on Accounting 17 (2006) 154–174

Accounting change in Italian local governments: What’s beyond managerial fashion? Laura Caccia ∗,1 , Ileana Steccolini 2,3 Bocconi University, School of Management, Public Administration, Health Care and not for Profit Division, via Bocconi n. 8, 20136 Milan, Italy Received 1 February 2002; received in revised form 1 April 2003; accepted 15 May 2003

Abstract During the last decade Italian local governments (LGs) have undergone a reform process, involving deep changes in their accounting system. The purpose of our longitudinal study is to analyse the development path of accounting tools in an Italian LG body over a decade and to answer the following research questions: is it possible to identify typical patterns of accounting renewal? Does a significant gap exist between the intended purpose and the actual effects of the change in accounting systems? What is the role of existing routines in constraining the processes of change and their effects? The analysis of the case shows that changes in the accounting systems proceed both in a revolutionary and incremental way. Radical and discontinuous events punctuate the process of change and often cause resistance. They are justified by external events, crisis and very often by law requirements but they hardly have an impact on routines. The latter are easier to be modified when the accounting changes proposed are consistent with traditional shared values, giving origin to a gradual diffusion of ideas of rationality and efficiency. © 2005 Elsevier Ltd. All rights reserved. Keywords: Local government; Accounting; Organizational change; Public sector reform; Managerial accounting; Public sector; Italian local government; Accounting change; Public sector accounting; Italian public sector reform

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Corresponding author. Tel.: +39 0258362088; fax: +39 0258366832. E-mail addresses: [email protected] (L. Caccia), [email protected] (I. Steccolini). 1 Laura Caccia is Adjunct Professor at the Bocconi University and Lecturer at the Bocconi University School of Management, Public Administration, Healthcare and Not for profit Division. 2 Ileana Steccolini is Junior Assistant Professor at the Bocconi University and Lecturer at the Bocconi University School of Management, Public Administration, Healthcare and Not for profit Division. 3 Tel.: +39 0258362087; fax: +39 0258366832. 1045-2354/$ – see front matter © 2005 Elsevier Ltd. All rights reserved. doi:10.1016/j.cpa.2003.05.004

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1. Introduction The implementation of various public sector reform initiatives over the last decades, generally labelled under the umbrella term “New Public Management” (Hood, 1991, 1995), is leading to significant changes within public organisations in many countries. Innovations in financial and accounting techniques represent a fundamental aspect of these reforms (Olson et al., 1998a, p. 18), providing the “technical lifeblood” of NPM. Moreover, accounting systems are considered as playing a central and constitutive role in New Public Management reforms, influencing the perceptions of organisational actors and contributing to the diffusion of a culture of quantification and rationalism in the public realm (Meyer, 1998). These systems can shape the vision of reality that organisational actors have, spreading concepts like value for money, accountability, efficiency, effectiveness, turning them into new shared meanings and values. At the same time, existing accounting routines and organisational inertia may hamper, constrain, shape the process of change (Nelson and Winter, 1982; Burns and Scapens, 2000), influencing the path of development of new accounting tools and procedures and their actual effects. NPM literature is generally focused on the expected effects of reforms (see Lapsley and Pallot, 2000, p. 215), but attempts at studying the consequences of reforms show that they often produce unintended results and that gaps exist between intended and actual changes (Olson et al., 1998b). During the last decade Italian Local Governments (LGs) have undergone many changes, prompted by several reform initiatives. One of the “pillars” of the reforms was represented by the change in the accounting systems. As a consequence, LGs gradually started to develop their accounting systems and have undertaken a continuous process of change and adaptation, through acceleration and slowing down phases. The purpose of our study is to analyse the development path of accounting tools in a LG body over a decade in order to (i) depict patterns of accounting change, (ii) identify the intended and unintended effects of changes in accounting systems, (iii) study how changes shape and are shaped by existing routines and practices. The analysis is based on the case study of an Italian LG. It investigates the evolution of its accounting systems over a 10 year period. The paper is organised into five sections. Section 2 provides a short background on Italian LGs and their accounting systems. Section 3 examines relevant literature and specifies the aim of the paper. Section 4 explains the methodology adopted. Section 5 describes the evolution of the accounting systems in the municipality under study, which is further discussed in Section 6. Section 7 draws some conclusions. 2. Background: local government and local government accounting in Italy During the last decade, Italian LGs have undergone a profound reform process, prompted by various legislative initiatives inspired by managerialism and marketisation principles and aimed (see also Mussari, 1997; Marcon, 1999) at (1) recognising greater organisational and financial autonomy to LGs; (2) increasing managerial autonomy and accountability; (3) contracting out and privatising activities.

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More specifically, since 1990 LGs have been recognised more autonomy in levying taxes and determining fees for services and have witnessed a steady reduction in the amount of transfers from higher levels of government. They have also been encouraged to spin off their activities to (a) separate entities without legal autonomy, (b) separate legal entities with budgetary autonomy, (c) consortia of LGs, or (d) joint-stock corporations with private and public stockholders. At the same time, 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” (Borgonovi, 1996; Anselmi, 1995; Mussari, 1994) 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 consequence of the “mani pulite” and “tangentopoli” events—concerning cases of financial scandals and corruption) and for increasing accountability for the quantity and the quality of the services provided to citizens. - The 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. In 1995, a decree reforming LG accounting was introduced. In Italy, the requirements for government accounting, reporting and auditing are set by national legislation. Before 1995, Italian LG accounting had traditionally been on a cash and obligation basis and focused on compliance with budget. At the beginning of the nineties, a law had encouraged (but not made it compulsory) the adoption of accrual accounting, but the chance had not generally been taken by LGs to change their accounting system. The 1995 law is more incisive. It requires LGs: - To maintain the traditional cash- and obligation-based system. Its pivotal role in the LG information system is confirmed since budgeting, accounting and reporting continue to use it as a basis. Furthermore, not only must LGs elaborate a “bilancio preventivo” (budget) on a cash and obligation basis, approved by the Council, but they are also expected to prepare a “Piano Esecutivo di Gestione” (Executive budget) derived from the budget and approved by the Cabinet and a triennial Strategic Plan. The Executive budget shows objectives, financial (on a cash and obligation basis) and non financial resources assigned by the Cabinet to managers. - To publish an accrual-based financial statement consisting of a balance sheet and an operating statement. This does not imply the introduction of double-entry bookkeeping, that is not mandatory. A LG can derive its balance sheet and operating statement from its budgetary accounting statements through a complex system of year-end adjustments. A “prospetto di conciliazione” (reconciliation statement) must be included in the overall year-end financial report to reconcile the cash- and obligation- based accounting statements with the balance sheet and the operating statement. - To adopt managerial control systems.

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As a consequence of the 1995 decree, LGs gradually started to design new accounting systems, trying to comply with the new law requirements. New LG reform initiatives were recently adopted. More specifically, the Legislative Decree 286/1999 reorganised public sector control systems, introducing the principle of separation between controls on compliance, managerial and strategic controls and personnel performance evaluation. Some analyses (Anessi Pessina and Steccolini, 2003; Caperchione, 2002) concerning the implementation of accrual-based reporting in LGs show that: (i) they have generally prepared their accrual-based financial statements but few adopt a double-entry bookkeeping system; (ii) most LGs do not seem to pay enough attention to their accrual-based reports and perhaps they view accrual-based reporting as an unnecessary nuisance; (iii) the accrualbased financial statements contain frequent inconsistencies; some items are often omitted while others have unexpectedly large values; the quality of disclosure is rather poor; (iv) cash- and obligation- based information still plays a fundamental role in LG accounting and reporting. A study on Italian LG managerial accounting system best practices shows that LGs are making an effort to adopt managerial accounting techniques and tools (see Mussari, 2001), such as “management accounting”4 and performance indicators. Most of them are currently experimenting, changing and adapting them. What is not clear yet is the actual use of the new tools by managers, councillors, cabinet members.

3. Theoretical notes and research questions Our paper is aimed at gaining a better understanding of the processes of change in accounting systems in the context of public sector reforms. Such changes are taking on divergent features in each country (Hood, 1998; Olson et al., 1998a; Barzelay, 2001) and are likely to follow differentiated patterns and produce contrasting effects in different public organizations. Moreover, gaps between intended and actual effects of the changes often emerge (see for example, Bowerman, 1998, p. 400; Olson et al., 1998b), as the result of (i) gaps between the formal design of change and its actual development and (ii) gaps between the expected and the actual uses of accounting tools (Ter Bogt and van Helden, 2000). Accounting changes in public sector reform processes have been investigated under different theoretical approaches (see Lapsley and Pallot, 2000). In this paper, the processes of change in accounting tools and their effects on the organization are studied drawing on the institutional perspective (Scott, 1987, 2001; Powell and DiMaggio, 1991b). Change processes in organizations can be originated both by internal and external stimuli and their patterns and effects are shaped by internal and external forces. Whereas some institutional approaches, and notably, neoinstitutional sociology (Powell and DiMaggio, 1991b), focus on the importance of environmental forces in shaping and constraining the organizations, others (notably, the “institutional economics”, see Scott, 2001, pp. 28–33, Burns 4 In spite of its name and common meaning, management accounting in Italian LGs often consists of obligationbased, rather than accrual-based, accounting by responsibility centre. This is obviously a contradiction in terms, caused by the prevalence of obligation-based accounting in the overall LGs’ accounting system.

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and Scapens, 2000, and specifically, “evolutionary economics”, as proposed by Nelson and Winter, 1982) are concerned with the importance of existing internal rules and routines in shaping processes of change. Neoinstitutional theory emphasises the role of extra-organizational institutional rules in shaping organizational forms and processes. Institutional rules are seen as shared norms and expectations held by members of a society and they function as myths to which organizations conform in exchange for legitimacy, irrespective of efficiency considerations (Meyer and Rowan, 1991). Powell and Di Maggio (1991a), in trying to explain why organizations adopt practices, assert that the introduction of structural changes occurs as the result of processes to make organizations more similar (isomorphism) without necessarily making them more efficient. The nature of isomorphism can be not only competitive (involving the adoption of practices on the basis of a rational assessment of their benefits in terms of efficiency) but also institutional. Institutional isomorphism can take on three forms: (1) coercive isomorphism, which occurs when an organization is subject to pressures from other organizations, for instance through requirements imposed by law, governments, etc.; (2) mimetic isomorphism, which refers to the adoption of practices used by organizations defined as successful and is likely to take place in contexts of ambiguity and uncertainty; (3) normative isomorphism, which occurs as a result of shared valued and ideas about appropriate behaviour, often diffused through professional networks and education. For example, tendency to conformity can be stimulated by a management fashion, defined by Abrahamson (1996, p. 257) as “a relatively transitory collective belief, disseminated by management fashion setters, that a management technique leads rational management progress”. By following a management fashion, managers create the appearance that they are conforming to shared norms of rationality and progress. Modifications in accounting systems help shape organisational and cultural change, contributing to the diffusion and sharing of new symbols and meanings (Nahapiet, 1988; Dent, 1991; Carruthers, 1995; Chua, 1995), which become institutionalised. Actors can use accounting tools and routines to promote, consolidate, change shared values, perceptions (Burchell et al., 1980; Covaleski and Dirsmith, 1988a, 1988b; Dent, 1991; Chua, 1995; Ogden, 1995; Ogden and Anderson, 1999) and also power relationships (Covaleski and Dirsmith, 1986, 1988a, 1988b, 1995; Oakes et al., 1988). However, accounting systems and practices constitute organizational rules and routines (Scapens, 1994) and they can both shape and be shaped by the institutions which govern organizational activity. In designing and implementing new accounting systems organisational actors are constrained by past and current accounting routines, which incorporate old habits and meanings and which can be interpreted as “truces”, reducing conflict potential and divergences of interests among them (Nelson and Winter, 1982). Organisational (and, more specifically, accounting) routines incorporate and mirror power relationships (Covaleski and Dirsmith, 1988a) and can be considered as representing “rules of the game”, stemming from and contemporaneously constraining social actors’ interactions (Friedberg, 1993), political processes and implicit and explicit negotiations. Any “new” behaviour, trying to change the existing rules and routines, can be seen as a threat to the truce, breaking the stability and the current configuration of power relationships, and it is likely to find opposition, resistance against innovation (Nelson and Winter, 1982).

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Resistance to change can be driven by (Burns and Scapens, 2000): (1) formal and open rejection due to competing interests; (2) lack of capability (knowledge and experience) to cope with such change; (3) “mental allegiance” to established ways of thinking and doing, embodied in existing routines and institutions. However, when change takes place, its effects and its patterns of development will be influenced by existing institutions. Combining external and internal forces, truces and resistance, the process of change can be evolutionary (influenced by path dependence) or revolutionary (radical) (see Nelson and Winter, 1982). Evolutionary change is incremental with only minor disruption to existing routines and institutions. Revolutionary change involves a fundamental disruption to existing routines and institutions. As Burns and Scapens (2000, p. 7) put it, “Rules are normally changed only at discrete intervals; but routines have the potential to be in a cumulative process of change as they continue to be reproduced. However, the extent to which specific routines are modified may depend on other rules and routines. . .”. In studying the model of change and its effects, it is useful to distinguish between formal and informal change. Formal change occurs by conscious design, usually through the introduction of new rules and/or through the actions of a powerful individual or group (see Rutherford, 1994). Informal change occurs at a more tacit level and can follow a different path from formal change. Finally, change can be intentional (expected, wanted) and unintentional (Burns and Scapens, 2000). The aim of our paper is to gain a better understanding on the accounting system change processes in the context of public sector reforms by focusing on the organizational level of analysis and studying the development path of accounting tools in a LG body over a decade. More specifically, the paper is aimed at gaining a better understanding of the following issues: - Is it possible to identify typical patterns of accounting renewal? - Does a significant gap exist between the “declared” purpose and the actual effects of the changes in managerial accounting systems? And between “planned” accounting practices and “implemented” ones? - What is the role of existing routines in constraining the processes of change and their effects?

4. Methodology The analysis is based on the case study of an Italian medium-sized municipality whose accounting tools have been involved in a significant process of change during the last decade, following the general trend towards managerialism that has affected Italian LGs. It is focused on a municipality, starting from a financial crisis and becoming a central actor of the “managerialist fashion” and where the Financial Department plays a fundamental role in introducing and shaping accounting changes. The municipality will be called Girotondo (the Italian word for ring a ring o’ roses) and it was chosen because of the following marks: (1) it has often been selected to take part in “best practice projects” and “excellence awards” promoted by the Italian Government. Last nomination occurred in 2001 for the new citizens’

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charter project; (2) it was the first Italian municipality to adopt an ERP system (SAP) (Italian municipalities currently using ERP systems are a very limited, though increasing, number); (3) the Chief Financial Officer—CFO is well known among colleagues and academics and he is often invited to present the experience of his organization at conferences (i.e., SAP conventions, meeting for public sector professionals), lectures (university classes and executive programmes) and to publish articles on practitioners’ journals.5 He is sometimes asked by other LGs to support them in their accounting innovation process. Multiple data collection methods have been combined. The primary method has been represented by in-depth semi-structured interviews with key actors: the “Segretario Generale/Direttore Generale” (Town Clerk/Chief Executive Officer—CEO), the Chief Financial Officer and three colleagues from his staff, the Public Works and Maintenance, Urban and Environmental Planning Manager and an employee from his staff, two employees from the “Servizi alla persona” (Services to Citizens) Department. Both interviewers took part in the interviews, which were tape-recorded and transcribed in full. They were aimed at: (i) gaining knowledge of the history of accounting changes as seen by the actors involved in such processes and of their perception of the events; (ii) ascertaining the effects of introduced changes on the day-by-day activities; (iii) verifying the actual implementation and use of accounting tools; (iv) evaluating the impact of the new tools on the ideas, meanings and values shared by people working in different departments. The analysis also required original documents to be gathered in order to collect background data and to trace the organisational and accounting history of Girotondo over the last decade. This was useful in reducing the risk of relying merely on people’s memories and ex-post rationalisations and allowing interviewers to gain a better understanding of the interpretations of events as seen by the key actors. More specifically, the interviews were completed by both primary and secondary sources (organisational charts, reports, letters, conference presentations, master and undergraduate dissertations). Obviously, a single case is not sufficient to generalise on pattern of changes in Italian LG accounting systems under managerialist reforms, but it can represent a first effort to formulate some hypotheses to submit to further verifications through the analysis of new cases. To this end and in order to widen the possibilities of generalisation, it could be useful to find other “polar type” LGs (Eisenhardt, 1989) (for example, where the Financial Department’s role is weaker in promoting change or the initial financial situation is better, etc.) in order to widen the possibilities of generalisation.

5. The case study Girotondo is a town of about 20.000 inhabitants, situated in an Italian island. The municipality of Girotondo employs 153 people. Its current budget amounts to about 15 millions euros and its organizational structure is shown in the chart below (see Fig. 1). The Financial Department, which employs 19 people, is responsible for providing procurement and Information Technology services to the other Departments, bookkeeping,

5

To guarantee anonymity, the articles are not quoted.

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Fig. 1. Girotondo municipality organisational chart.

preparation of budgets and annual reports, asset management, collection of taxes and charges and monitoring of payments made by taxpayers. The history of Girotondo will be divided into three periods: 1992–1994, 1995–2000, 2001–today. 5.1. 1992–1994: from financial crisis to recovery During the eighties and at the beginning of the nineties the municipality of Girotondo – as all LGs in Italy – had a cash and obligation accounting system, designed to comply with very detailed law requirements and to ensure the formal respect of the annual budget. No managerial control tools were used, because no law had ever required them. At that time, the Girotondo information system was based on the use of a mainframe (IBM S34, later updated to IBM S36). It supported, without providing links among the different procedures, cash and obligation accounting and budget procedures, tax and charge registers, demographic and electoral services. In 1990, a law (L. 142/90) reforming LGs was passed. It was aimed at increasing LG organisational and financial autonomy, affirming managerial autonomy and accountability, encouraging contracting out and privatisation. In 1992 a new mayor was elected. After a two-year vacancy, in June 1992 a young Chief Financial Officer passed the public selection process and was recruited. A graduate in Law, he had worked in a private business as Organisation and Human Resources Manager and, as he affirmed, he was willing to do “something new”. He wanted to experiment the work in a public organisation and to apply what he had learnt in his previous experience to a new context. The situation he had to face was serious (see Table 1): - Previous financial reports (containing the detailed list of actual revenues, inflows, expenditures and outflows) had been closed with huge deficits. As a consequence, the financial situation was severe and the municipality had difficulties in satisfying cash needs.

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Table 1 Girotondo in 1992 and 2000: data comparison

Staff No. of existing loans in 1992 No. of loans obtained during the period 1988–1992 Total amount of long term liabilities (loans) Total amount of loans obtained during the period 1988–1992 Short term receivables (+Current revenues − current expenditures − repayments of borrowings) Cash Cash and obligation-based result (+cash − obligations still to be paid + receivables)

1992

2000

227 111 64 14,022,837.72 13,429,945.20 9,522,948.76 −299,908.59 −30,987.41 −320,131.49

152 57 4 4,612,476.57 1,105,734.22 8,090,813.78 175,078.89 2,641,677.04 2,035,873.10

- Expenditure for personnel and for interests on borrowings, which are considered to be the most “rigid” (not compressible) items, represented a very high percentage of total current expenditure. - The municipality had often recourse to bank overdraft in order to cover everyday current expenditures. This practice contributed to increasing the cost of borrowing (interest rates on overdraft being higher than on long term borrowings). - Relations with suppliers were strained because of frequent payment delays. This habit, added to the practice of evaluating a restricted number of offers, helps explain higherthan-average prices for the goods bought by the municipality. - To support councillors’ investment decisions several loans had been obtained. Because of cash deficit, their repayment was slow, while their total amount was becoming higher and higher. - Recovery of short term receivables was slow and difficult and the tax evasion rate was high. After checking the financial position of the municipality and trying to find out its major causes, the CFO decided to react immediately. He realised that before his arrival the role of the CFO had been one of “recorder” of financial data. He wanted to play a more proactive role. He proposed several initiatives to the Giunta (the Cabinet) in order to improve Girotondo financial situation. The proposal of these actions was quite new and unexpected to the Cabinet and the Council, which considered it unpopular. The CFO tried to point out that Girotondo did not have any alternative but to accept a radical change and gained the support of the Mayor and the Town Clerk. As a first step, he tried to convince the Cabinet and the Town Clerk to prepare a “prudential” budget, without over-estimating revenues or underestimating expenditures (such practice was quite common in the past). As a consequence, the need for expenditure cuts and for an increase in taxes and charges became evident: that was the only way to workout a balancing budget. The Council adopted such measures. At the end of 1993, the annual report showed a cash surplus. During the same year, the CFO identified some colleagues from other departments and asked them to join an informal “steering committee”, whose expected task was to spread managerial culture inside the

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organization and to support the CFO’s change decisions. Moreover, an “Internal Audit Office”, situated in the Financial Department, was created and became responsible for the recovery of efficiency and the reduction of expenditure in the whole municipality through the monitoring and rationalising of expenditures, the reduction of waste, the promotion of innovation in the accounting system and its information technology support, the promotion of changes in procedures where necessary. The activity of the Internal Audit Office was based on the use of cash and obligation data and no new accounting information was produced as a consequence of its creation. The design of the accounting systems remained unmodified, but new databases were put in place and new control procedures were adopted. Spending procedures were reengineered. The innovations consisted in: (1) the definition of a maximum price for calls in the tender process; (2) the creation of a price and cost databank; (3) the preparation of a suppliers’ register; (4) the presence of the internal auditor at the opening of bids; (5) the introduction of an order note, when asking for goods and services from the suppliers. Buying procedures were also subjected to new controls, in order to ascertain the comprehensiveness and the existence of the facts recorded and to ensure that goods were supplied at satisfactory conditions for the municipality. The property inventory was drawn up and assets assessed. Some profitable real estates, which were not used, were sold. The changes induced by the Financial Department were not painless. Confrontation and clashes between the Financial Department and the other Departments and the Cabinet occurred. The actions of the CFO and of the Internal Audit Office were seen as an undue disturbance in other Departments’ decision making processes. The CFO was acting no longer as a mere “recorder”. Some people started to think that he was invading other managers’ autonomy. To reduce the potential conflict some controls ceased after the first period of experimentation. During this period the accounting system frame, consistent with law requirements, had remained virtually unchanged. 5.2. 1995–2000: consolidating the recovery In 1995, a legislative decree (D.Lgs 77/95) reforming LG accounting was passed (see Section 2). As a consequence, Girotondo was expected to adopt accruals accounting in 1999, as well as to implement managerial control systems. According to the CFO, the accounting reform represented another opportunity to enforce the innovation process (“The Legislative Decree 77/95 was the key to open up the change process”, CFO). Meanwhile, the recovery process was producing the desired effects, ensuring an improvement in the financial position of the municipality, allowing the Council to reduce the tax burden as a consequence of the decrease in tax evasion rates. While evaluating the adoption of the accounting system needed to comply with the new law requirements, the City Council and the Cabinet also decided to change the existing information technology which was no longer responding to the organization’s needs. In 1996, the organisation acquired a client-server network system and adopted Microsoft Windows NT. The introduction of the new technology was paralleled by a training programme for

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the employees. The new system could support the use of integrated databases, accrual and managerial accounting and the budgeting process. Initially, only the cash and obligation-based budgeting, accounting and reporting systems were developed. The Financial Department, before 1995, had already elaborated a very analytical cash and obligation based document, which detailed the revenues and the expenditures shown in the budget approved by the Council. During the following years, the executive budget became the basis for the preparation of the cash and obligation budget. Since the middle of the year, each manager was required to communicate to the Financial Department the following year annual objectives, expected revenues and expenditures for his/her Department. The Financial Department was responsible for aggregating and making compatible objectives and cash and obligation data in order to prepare the Executive budget and to derive the budget from it. The budget followed the format made compulsory by the law and was a more synthetic document. During the year, managers’ spending decisions were to be consistent with the Executive budget. Accrual accounting and managerial control tools were not introduced until 1999, the first year when Girotondo was required to prepare an operating statement and a balance sheet. Pressed by the necessity to comply with law requirements, the Cabinet and the City Council approved the adoption of accrual accounting, on which basis cost accounting was expected to be built. A project team was created, composed of persons coming from different Departments and offices. It was called “Accrual and Cost Accounting Group” (ACA Group). An “Accounting Referent” was named in each Department. The objective of the project was to develop an integrated accounting system, linking the existing cash and obligation system with accrual accounting, cost accounting, inventory and asset records. The choice of an integrated accounting system was due to the fact that cash and obligation accounting played such an important role in the decision making process that no other data and information were taken into consideration seriously at that period. It seemed to be convenient to derive other information from cash and obligation data. The ACA project was expected to represent an occasion to start devolving some accounting procedures from the Financial Department to the others. To this end, the ACA group worked closely with the Accounting Referents in each Department. They were the traitd’union between the Financial Department and the other Departments. The implementation of the system was entrusted to a School of Management, well known by the CFO. He had attended several executive programmes at the School, he had often contacts with its lecturers and he was developing some projects in cooperation with them (such as the “Citizens’ Charter Project”). Thanks to its innovative accounting project and its professional links, the name of Girotondo was beginning to be known among LG professionals and some LGs contacted the CFO to obtain help in improving their accounting systems. After six months, the ACA project team had drawn up a chart of accounts, the list of profit and cost centres, the document describing the links between cash and obligation accounting items and accrual accounting ones and between the moment of recognition of expenditures and expenses and revenues in the two different accounting systems. The team also proposed changes in the structure of the Executive budget, which became a more aggregated document (from the initial 1.807 items to 393 items). This would increase

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managerial autonomy, reducing the number of approvals for variations to the Executive budget made by the Cabinet during the year. The design of the new integrated accounting system by the ACA group contributed to the emergence of the shortcomings of the current software and information technology solutions. The current software allowed the preparation of the statements required by law, but it did not support the preparation of an accrual budget and did not provide a flexible reporting system. Although managers and politicians did not express any specific information need, the software did not satisfy the CFO’s ones. Finally, the current software was not flexible enough to allow the definition of different levels of cost centres and the attribution of costs to final cost objects. This reduced the number of available alternatives in designing the managerial control systems. The reengineering of data processing and procedures seemed to be unavoidable. After a careful selection of the IT solutions sold on the market, the ACA group decided that SAP R/3 would represent the right answer to the Girotondo municipality’s needs. By 2000, Girotondo had radically reduced both the amount and the number of long term borrowings, found new sources for financing investments (thanks to the attention paid by the public works manager), improved its capacity for cash receivables, improved its cash situation and its cash- and obligation-based results (see Table 1). Anyway, the double-entry bookkeeping system implemented was not used to prepare the operating statement and the balance sheet at the end of the year, which were obtained by “filling in the blanks” of the reconciliation statement (see Section 2), translating cash and obligation items into accrual ones. Cost accounting was derived from cash and obligation accounting, but no report (apart from the annual report, required by law) was prepared or delivered to the Council, the Cabinet, the Managers. 5.3. 2001–now: the SAP era At the end of 2000, the opportunities offered by ERP systems were presented to the Council, which approved the “SAP project”, due to begin in 2001. SAP is a very well-known and widespread ERP system in the private sector in Europe, but it was not so diffused in the public sector when Girotondo decided on the SAP project. Introducing SAP meant Girotondo becoming a pioneer in Italy. As its project was a pilot one, Girotondo managed to obtain a favourable price for the design and the implementation of the system. The implementation pattern was the ASAP (“Accelerated SAP”) method. A new project team was formed to manage the process of introduction. It was composed of employees coming from different Departments. Attention was paid to publicising the new integrated system to the employees. The project goals, phases, methods and tasks were presented to the organization by the team members. The SAP system of Girotondo was also presented at SAP conventions and conferences. The declared and expected advantages of the new system should be: - The full integration of the different accounting systems (cash and obligation, accrual and cost accounting).

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- The creation of a single database, regularly and systematically updated, which should increase the reliability and the quantity of information shared by the structure. - The logical inversion in the relationship between cash-obligation and accrual accounting. In the previous system accrual data were obtained from cash and obligation records. SAP should assure the predominance of accrual and cost accounting on cash and obligation systems. The former should inspire decision making process, while the latter should formally comply with law requirements. - The reorganisation of procurement services, eventually doomed to extinction. Through the use of SAP, decentralised offices can gain access to procurement procedures and buy directly the goods needed. Cash and obligation accounting results will no longer be the starting point for inflows and outflows estimates. Official cash and obligation budget will derive from the accrual budget (showing revenue and cost forecasts disaggregated for profit and cost centres). The traditional cash and obligation accounting system will be brought back to its original purpose and it will decrease its weight in managerial decision making processes. The change in the information system will cause a further aggregation in the Executive budget, whose structure will tend to coincide with the annual budget and which will be derived from the operational budget (specifying actions and objectives), from the investment budget and the accrual-based budget. Managers will be responsible for preparing their budgets, from which the Executive budget (approved by the Cabinet) and the cash and obligation budget (approved by the Council) will stem. At the beginning of 2002, SAP R/3 is not yet operating. Data entry is still going on. Users in the various Departments agree that the new system should lead to the diffusion of a managerial culture, focused on cost control, efficiency and effectiveness and responsiveness throughout the organisational structure. This will result in an improvement in efficiency and effectiveness in the provision of services to citizens. SAP is also expected to contribute to the improvement in the skills and the competencies of employees and to the creation of new professional profiles. According to the CFO, it should also increase the interaction between and within Departments and the diffusion of a process-oriented vision of the municipality, helping in devolving activities from the Financial Department to the others. Girotondo change process recently seems to live a pause . . . but according to the CFO and his staff: “some new dark clouds are looming on the horizon!”. They are afraid of a worsening financial situation, caused by (1) strong cuts on cash outflows requested by the Italian Government in order to comply with the Maastricht Treaty (2002 Domestic Financial Act), (2) too low public service fares which are insufficient to cover running costs, (3) difficulties in the collection of prices and fares, (4) growing inefficiency in some services and departments (such as transport, water supply, sport facilities and kindergartens). The financial department is already developing a recovery plan and thanks to the SAP reporting system, they already know how to react: spinning off transport and water supply services, reorganizing the “service to citizens” department, closing public kindergartens and letting non profit organizations provide the service, . . .

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As the CFO’s assistant said: “We are warning everybody about financial troubles and we are waiting! Sooner or later, other department managers will realize that there are some problems and will decide to react. When they do, they will come to us and ask for help. And we’ll be there with our recovery solutions!”

6. Discussion Girotondo is a municipality which, starting from a severe financial crisis, has undergone a profound process of recovery and development, becoming, after a decade, the first Italian LG introducing an integrated information system based on the SAP platform. The development path of managerial accounting tools in Girotondo is summarised in the table below (see Table 2). Apparently, Girotondo experiences a significant financial improvement and a successful shift towards rationality and efficiency and accounting and information technology tools represent fundamental drivers of change in this process. The Chief Financial Officer takes on the features of the innovator, leading the transformation of the financial and accounting techniques adopted but also the culture of the organisation. But how deep has been this transformation? How has accounting changed the organisation? Has resistance arisen to stop and constrain the accounting change process? What is the gap between expected and actual effects of the changes? What is the role of old routines and practices in shaping new accounting tools and their use? Table 2 Evolution of management culture, processes and tools

Accounting system

First period 1990–1995

Second period 1995–2000

Third period 2000–. . .

Cash accounting

Accrual and Managerial accounting since 1999

Integrated system with predominance of accrual accounting (expected)

Predominance of cash accounting Cash-based annual budget derived from executive budget

Executive budget

Absent

Managerial control system

Occasional and specific cost analysis

Implementation

All managerial control tools

Budget

Cash

Cash

Accrual-cash

Programming process: Result

Cash budget Incremental and top down Politicians and CFO

Executive budget and cash budget Incremental and bottom up CFO and managers

Accrual budget, executive budget and cash budget SAP-driven process CFO and managers

Comply with rules and execute

First steps of MBO (no performance measures)

Process management (efficiency and performance measures possible)

Method Actors Management culture

Executive budget derived from operational budget

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6.1. The pattern of change process The process of change of accounting systems which has taken place over the last decade is punctuated by discontinuities and develops according to the pattern described below. Each discontinuity corresponds to a shake in the accounting system of the municipality. It is made recognisable by visible decisions, such as the recovery initiatives and the preparation of a prudential budget in 1993, the creation of an Internal Audit Office, the institution of the ACA group, the appointment of Accountant referents, the SAP project. These visible accounting changes, adopted by the CFO, are formally justified and legitimated by events that are “external” or recognisable from outside, such as the crisis, the introduction of new laws, the diffusion of ERP systems, the collaboration with the School of Management. The innovations and the radical changes adopted by the Financial Department, incorporated in visible structures (a document, an office, a new software, etc.), become symbols of a permanent modification. They are messages sent to the organization to force it to change, to show that a new approach to management is needed and even the external environment requires it. A further analysis focusing on the Financial Department shows that, next to the discontinuous and formal change process, there is a slower and continuous one concerning accounting tools and procedures. Inside the Financial Department, cash/obligation and accrual accounting routines do not stay still, they slowly evolve contributing to shape the features the accounting system will take on in the future. These changes are less visible outside, but they impact strongly on the activity of the Financial Department employees and contribute to modify their competencies and behaviours. The CFO is able to anticipate managerial fashion and to find new techniques to apply to his organization and he involves his staff in the careful preparation of innovations and new projects. He waits for the right event which can justify the adoption of the “readymade” solution and presents it to the other organisational actors, encouraging politicians and other Department employees to see the opportunities offered by the new solution. While every innovation is prepared and discussed in advance in the Financial Department (originating, inside this structure, an incremental accounting change process), the other Departments can only perceive the visible results of the decision and are suddenly forced to face the unexpected innovations. As a consequence, the changes induced by the CFO are not painless. They cause fear and anxiety throughout the organisation, where they represent a threat to old habits, values, rules and routines (“mental allegiance”) and to the consolidated configuration of power, decision making roles and degree of autonomy (“competing interests”). Moreover, people working in Departments different from the Financial do not always have the competencies and capabilities required to cope with the new tools. This situation provides leverage for the CFO’s “tension strategy”. When an external contingency makes a change necessary, people must let him work and follow him; otherwise, they would be obliged to find a solution by themselves. The result is that the change is felt as imposed. The organisation tries to stop the process and, if possible, some steps backward are made in order to reduce the tension. Anyway, the signal has been sent. In Girotondo, the discontinuous change process which takes place at the municipality level can be described as a top down and revolutionary one. Burns and Scapens (2000)

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affirm that revolutionary change is likely to be possible only as a result of major external changes and that top down change will impact directly on formal rules, but is likely to have only an indirect impact on informal accounting routines. In Girotondo, external events and pressures become pretexts which justify formal innovations and the introduction of new tools is legitimised, rather than constrained, by these events and by the existence of external coercive forces. In a different way, inside the financial department, mimetic and normative forces do lead to the search of conformity with external best practices. The Financial Department tries to reproduce practices which are adopted by successful public organizations and are seen as optimal by other accountants, although this does not always guarantee an improvement in efficiency. The process which takes place in the Financial Department is evolutionary, building on existing competencies and routines and gradually changing them. 6.2. The expected and unexpected effects of the changes An analysis of the effects of the accounting system changes occurred over the past decade shows that in the long run a tangible modification in the culture of the organisational actors has taken place. But, in the short run, the “newer” accounting tools are not actually used, while the “tension strategy” seems to produce rejection and isolation of the Financial Department. After a 10 year period of changes, actors throughout the organisation seem to agree on the usefulness of the measures adopted to reduce the deficit and save Girotondo from the bankruptcy, the need for the availability of richer information, such as the one offered by cost accounting, the importance of using an ERP system. They are proud to tell stories about their past and to list the number of advantages SAP will bring to their activities. Organisational actors have witnessed the various changes and the various “signals” sent by the Financial Department, and this has resulted in an increasing awareness of the necessity of opening their mind to a managerial culture, to the ideas of efficiency, effectiveness, accountability. All people interviewed affirm that in the last decade there have been improvements in the efficiency and effectiveness in the service provision, but nobody can quantify such improvement. But, in the past, facts signalling discontinuities had the immediate result of causing other Departments to reject the decision or to be submitted to a shock. Moreover, today, managerial control systems and double-entry bookkeeping, whose design started in 1999, are not used yet. They do not currently have an impact on decision making. The ERP system is still being implemented, but it is not currently in use. Performance indicators are still being designed and their measurement will be possible only in the future. Decisions which improved the LG’s financial situation were adopted on the basis of the (poor) information provided by the traditional cash accounting system and by drawing inspiration from managerial best practices. Still now, decisions are made relying mainly on traditional cash and obligation data. This lack of effects, which the CFO expected to be brought by each new accounting tool, produces a continuous need for improving and changing the accounting systems. In trying to find the reasons explaining the gap between expected/declared purposes and actual effects of the changes it can be noted what follows.

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First of all, the CFO and his staff adopt an isomorphic behaviour by following managerial fashions and showing conformity to norms of rationality and progress. The new techniques they adopt follow the prescriptions of the handbooks and the managerial literature which have started to become widespread in Italy since the beginning of the nineties. But they do not stem from a need expressed by the people working in the municipality, who often lack awareness of their information needs. The revolutionary changes imposed to the organization remain at a formal level and do not seem to impact profoundly on widespread routines and behaviours. This seems to be consistent with the claim (for example Hood, 1998) that “NPM” reforms tend to be based on “recipes” and standardised technical solutions and that sometimes they become solutions in search for problems (Cyert and March, 1963). While innovating the accounting systems and the financial management of the municipality, the CFO is also asking for recognition of his results outside Girotondo in order to gain external legitimacy and, by obtaining it, to increase the internal one (see the “vicious circle” in the following subparagraph). Therefore the risk run by the CFO is to adopt managerial techniques without their being consistent with organisational needs and with the context in which they are introduced (see also Olson, 2001). This may result in the adoption of tools that are not used or whose actual effects are different from the declared ones. In the case of Girotondo, the tools which are actually used and seem to affect people’s way of working are not the “managerial” ones, but the traditional ones, based on the “old” cash and obligation accounting. The latter, by virtue of their function (appropriation of resources, formal control of the respect of the budget), still leads decision making processes because (1) their importance is recognised by the law; (2) they are the tools on which attention by councillors, cabinet members and managers is stronger because they are the instruments that have been traditionally employed and to which they are accustomed; (3) they underwent a slow and incremental change process, which did not turn existing habits and routines upside down and did not “shock” the organisation. It is interesting to observe that the incremental and evolutionary process of change is less visible to the organisational actors but it is strongly modifying the role of politicians and of the bureaucracy in the decision making process. This confirms the idea (Burns and Scapens, 2000) that accounting change process which is consistent with existing routines is easier to achieve than change which challenges old habits, relations, stability. In conclusion, in Girotondo experience, “declared” and “desired” purposes of the changes rarely took place, especially when their justification was found in managerial disciplines and fashions rather than in law requirements or organisational needs. 6.3. A “vicious circle” A “collateral” and unexpected effect of the change process started by the CFO is the isolation of the Financial Department from the rest of the organisation. In the long run the organisational actors have become more and more aware that the world is changing and they must adapt to it. The Financial Department has been perceived as the link to the “new world” but, at the same time, it has been isolated from the rest of the organisation.

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On the other side, the Financial Department tends to set itself alone, even in a tangible way. For example, the Financial Department is situated in a tidy and newly restructured building, separate from the other (older) buildings of the municipality. As the Department can control and influence the budget and the expenditure process, it sees itself (and it actually is!) an “autarchy”. People who work there affirm that “they do not need” the others’ services. Consequently, the Financial Department can support its strategy, even the strategy of shaking and putting the organisation under stress. Because of their following the forefront management fashions, they feel sure to be on the right way towards modernisation. Based on these last remarks, a vicious circle can be observed. First, the CFO needs both an excuse and the necessary legitimacy to introduce an innovation. He finds them by following “managerial fashions”, represented by managerial control systems, accrual accounting tools, SAP, etc., and/or by waiting for an external constraint (i.e. the law, the risk of bankruptcy—even twice! etc.). Then, he proposes a change by introducing a “hard” and tangible symbol of newness and by provoking tension and stress in the structure. The organization shows its sudden refusal. Thanks to his autarchy he can react ignoring others’ complaints and setting itself apart in his “forefront oasis”. But to go on driving the innovation process he needs to maintain his position and acknowledgement: he goes out into the “changing world” and asks for recognition for his being a pioneer, for his ability to conform to progressive and rational norms of management change. By gaining external recognition, he also acquires the necessary internal legitimacy, autonomy and power (and new solutions, too!) to introduce new projects in the organisation.

7. Conclusions Our study aimed at gaining a better understanding of the processes of organisational and accounting changes in Italian LGs over the last decade. It is focused on a LG, starting from a financial crisis and becoming a central actor of the “managerialist fashion”. It tries to offer an interpretation of the path of development of its accounting systems and their intended and unintended effects. It may also represent an attempt to understand some of the shortcomings of the Italian public sector reform model observing the history of accounting changes in an organisation which is considered to be a “virtuous” one. The analysis of the case shows that changes in the accounting systems of the municipality under study proceed in an incremental and evolutionary way but they are punctuated by radical and discontinuous events modifying their features. Radical changes are justified by external events, crisis and very often by law requirements. The latter, however, become an excuse to prompt a change that was already under preparation. The Financial Department and, more precisely, the CFO play a fundamental role in introducing innovations in the municipality and in using financial and accounting innovations to send signals to the organisation that there is a need for change. An increased awareness throughout the organisation of the need to adopt a “managerial” approach is the long—term result of a decade of innovations in the accounting systems. At the same time, the strategy adopted by the CFO to push changes in the structure has also

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produced isolation of his Department from the other ones. The former is running the risk to become a self-referential organisational unit, whose actions are fed by external rather than internal legitimacy and are doomed to increase the gap between expected and declared effects because of their inconsistency with contextual problems and needs. In conclusion, consistently with what has been observed elsewhere (Hood, 1998; Olson, 2001), the Financial Department has been designing an accounting system more and more sophisticated and trying to make it technically perfect and formally consistent with the most advanced managerial ideas and fashions. But the accounting renewal projects seem not to take into consideration the organisational context in which they are introduced. In the same way, the Financial Department lacks a real interaction with the other Departments. The CFO and his staff’s decisions rely mainly on their managerial competencies and tools and on their membership to external networks rather than on the demand for change coming from people working in the organisation. This approach originates a “vicious circle” which feeds their isolation. The analysis of new cases could contribute to the development of further research by: (1) understanding the role of leaders and charismatic actors in the process of change in the Italian public sector; (2) analysing the relative positions of actors involved in change process when one of them is the “professional expert”, such as in the case of the interaction between the Financial Department and other departments; (3) identifying factors which can explain the developing of discontinuous or incremental change processes and the gap between declared purposes and actual effects; (4) studying differences in the impact of incremental and discontinuous accounting changes on the organisation.

Acknowledgements The authors wish to acknowledge helpful comments from the participants at the Critical Perspectives on Accounting Conference (New York, 2002) and at the European Critical Accounting Studies Conference (Leicester, 2002).

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