Little Lies, Sweet Little Lies: Motivations for Municipal Financial Statement Misclassification

This paper aims at shedding light on the plausible motivations for misclassification of a public accounting report. This issue has not been studied by scholars as much as misreporting. We will analyze misclassification errors which occurred in Italy from 2008 to 2010. In 2008, the municipal tax on main houses (Imposta comunale sugli immobili, ICI) was substituted with an intergovernmental grant of an equal amount. About 38% of municipalities did not register the compensatory grants in the correct budget line. Our analysis suggests that misclassification errors respond to a willingness to reduce external stakeholders' pressure on local governments decisions.