Many governments have replaced traditional cash-based accounting with some form of accrualbased accounting system. However, empirical evidence on the effects of the public accounting system on fiscal policy is scarce. Following rules by the federal states, municipalities in Germany have adopted accrual-based accounting systems gradually. By exploiting variations over time and across states I find no evidence for an impact on the overall financial balance. However, my findings suggest that accrual accounting has altered the structure of the budget. Revenues from the sales of non-financial assets have decreased significantly. This supports the hypothesis that municipalities had used these one-off measures before to meet fiscal constraints. Using data on entities controlled by the municipalities, the analysis provides no evidence for repercussions on these public funds, institutions or enterprises.

Introduction

Traditionally, the budget and accounting information of governments have been based on the cash principle. Starting in the 1980s, public sector accounting has experienced some fundamental changes. Private sector-style management instruments have been implemented, and in many countries a move towards accrual accounting has taken place (OECD/IFAC, 2017). Primarily, these reforms aspire to reveal the long-term budgetary impact of policy decisions and to capture public assets and liabilities. With the intention to improve fiscal monitoring, the discussion about accrual standards for public sector accounting has gained renewed interest after the sovereign debt crisis. The European Commission currently intends to introduce harmonized, compulsory accrualbased European Public Sector Accounting Standards (EPSAS) for all member states (European Commission, 2013). The voluntary switch to accrual accounting has already been actively encouraged and sponsored by the Commission. Despite the relevance of the topic and the prominent political debate, empirical evidence on the effects of the public accounting system is scarce. In particular, there has been little research on the costs and benefits of such reform. There are some studies, mainly from the accounting literature, that primarily analyze the effect of accrual-based accounting on the efficiency of the public sector.