Depreciation as a 'smoothing device' an appropriate objective for local authority reporting?
Robyn Pilcher
Working Paper No. 02/06
March 2006
About the Authors
Ms Robyn Pilcher is a lecturer in the School of Accounting at Charles Sturt University, Building C2-1, Bathurst NSW 2795 Australia.
Charles Sturt University – Faculty of Business Working Paper Series
Managing Editor: Associate Professor Jayne Bisman, School of Accounting, Bathurst
Editors: Dr P. Mathews, School of Commerce, Wagga Wagga
Associate Professor M. O'Mullane, School of Business, Albury
Dr R. Tierney, School of Marketing and Management, Bathurst
The Faculty of Business Working Paper Series is intended to provide staff and students with a means of communicating new and evolving ideas in order to encourage academic debate. Working papers, as the title suggests, should not necessarily be taken as completed works or final expressions of opinion. All working papers are subject to review prior to publication by one or more editors or referees familiar with the discipline area. Normally, working papers may be freely quoted and/or reproduced provided proper reference to the author and source is given. When a working paper is published on a restricted basis, notice of such restriction will appear on this page.
Table of Contents
- Abstract
- 1. Introduction
- 2 Method
- 3 Literature
- 4 Empirical analysis
- 5 Missing Figures
- 6 Summary
- 7 Copeland's Smoothing Criteria
- 8 Conclusions, Limitations and Future Research
- 9 References
Abstract
According to Copeland (1968), reported net profit for a company may be influenced by the accountant's choice among alternative measurement rules. He provided five properties which, he claimed, an accounting practice must possess before it may be used as a manipulative device (1968, p.102). This paper considers these five attributes as it attempts to answer the question: Do local government councils in New South Wales (NSW), Australia's largest state, deliberately manipulate depreciation allocation as a means of smoothing, maximising or minimising the reported operating result? Each of the five criteria, as outlined by Copeland, is considered with respect to the reporting of transport infrastructure assets by NSW local authorities. Empirical analysis determined that transport infrastructure depreciation allocation, by some councils, possessed the five manipulative characteristics. The subsequent impact on performance measures used for decision–making is both significant and disturbing. Very little has been written on the depreciation of transport infrastructure and the subsequent impact on financial reporting. In the past, railways and coal companies feature predominantly, whilst later literature concentrates more on private sector issues. This research provides the first (known), longitudinal empirical analysis related to the charging of depreciation to transport infrastructure by local authorities in NSW. It also adds, albeit in a small way, to the manipulation literature by applying a private sector concept to a public sector – local government – environment. Although only a preliminary investigation, it is contended that results provide enough evidence to extend the study. Hence, future research will consider applying a statistical activity cost theory framework (such as that used by Hillier and McRae, 1998) or similar instrument to ratify the findings reported here.