Properties of accrual accounts in public sector entities: evidence from the Italian National Health Service

PurposeThis paper aims to contribute to the debate over the desirability of introducing an accrual-based accounting system in the public sector by examining whether accrual-based accounting information is superior to cash-based information in the context of public sector entities.Design/methodology/approachThis paper applies a quantitative research method to assess the degree of smoothness and relevance of the accrual components of income recorded by 302 entities of the Italian National Health Service (INHS) over the period 2014-2020.FindingsThe analysis reveals that net income is smoother than cash flows as a summary measure of economic results and that accounting for accruals improves the predictability of future cash flows. However, the authors' novel disaggregation of accrual accounts reveals that those accounts that contribute the most to making income smoother than cash flows - noncurrent assets and liabilities - are also those that contribute the least to predicting future cash flows.Originality/valueThe disaggregation of accrual accounts allows to identify the sources of the informational benefits of accrual accounting, and to document the existence of an informational trade-off between smoothness and relevance in the context of public sector entities.

Automated summary

The study examines the desirability of introducing an accrual-based accounting system in the public sector and finds that accrual-based accounting information is superior to cash-based information in terms of smoothness and predictability of future cash flows. However, the disaggregation of accrual accounts reveals a trade-off between smoothness and relevance in the context of public sector entities.