Political interference in private entities' financial reporting and the public interest: evidence from the Spanish financial crisis

Abstract

Purpose

The study aims to show how the public interest has been argued to justify the political interference in the accounting of financial entities as a tool to face a critical financial situation in a country. And to offer a different perspective of the publicness notion that focuses on the field of financial accounting for private entities.

Design/methodology/approach

The paper draws on legal and political arguments referred to the public interest that consider the balancing approach, and so goes beyond the traditional agency framework, to explain politicians' influence on financial reporting. The behavior of the newly elected Spanish government, which issued accounting impairment rules for banks is described, and the accounting practices of a highly politically connected financial entity—Bankia—are used to illustrate the consequences of that intervention.

Findings

The paper evidences that the government intervention, which implied non-compliance with IFRS, was in line with its economic goals, led to the financial sector bailout and avoided the rescue of the country. This is what we call “breaking rules to achieve the public interest”, which is also consistent with a big-bath behavior to justify the bailout and legitimate the decision to breach IFRS. The silence of enforcers is consistent with the balancing approach that suggests compliance costs from a breach of rules are perceived less relevant after a high-level decision.

Research limitations/implications

This is a country-specific study based on a single case study that limits the generalizability of the findings.

Originality/value

This research provides a new angle to consider the political motivations to intervene in accounting in the private sector, as well as the enforcers' motivations to allow it. From an interdisciplinary perspective, it shows how politicians have argued the “public interest” to use (and abuse) to intervene in accounting rules, as well as to influence the accounting practice of a highly politically connected bank. It also highlights the potential long-term unintended consequences of these actions.

Citation

Giner, B. and Mora, A. (2021), "Political interference in private entities' financial reporting and the public interest: evidence from the Spanish financial crisis", Accounting, Auditing & Accountability Journal, Vol. 34 No. 7, pp. 1581-1607. https://doi.org/10.1108/AAAJ-11-2019-4271