Regulatory incentives and financial reporting quality in public healthcare organisations

Margaret Greenwood, Richard Baylis, Lei Tao

Research output: Contribution to journalArticlepeer-review

15 Citations (SciVal)


English National Health Service Foundation Trusts are subject to a regulatory regime in which the level of monitoring and intervention is determined by performance against two key performance metrics: a ‘financial risk rating’, based on a number of performance metrics, such as the reported surplus margin and return on assets, and a ‘prudential borrowing limit’. In this paper we investigate the variation in financial reporting quality, proxied by discretionary accruals, with the incentives introduced by this regime. We find: first, that discretionary accruals are managed to report small surpluses; second, that, consistent with the avoidance of regulatory intervention in both the short and medium term, discretionary accruals are more positive when pre-managed performance is below intervention triggering thresholds and more negative when well above threshold; third, that, despite a move away from financial breakeven as the primary performance objective, there remains an aversion to small loss reporting. We further find that the level of discretionary accruals is driven by two metrics of strategic significance: the surplus margin (a measure of retained earnings) and the prudential borrowing limit (a measure of borrowing capacity).
Original languageEnglish
Pages (from-to)831-855
Number of pages25
JournalAccounting and Business Research
Issue number7
Early online date5 Jul 2017
Publication statusPublished - 2017


  • discretionary accruals
  • healthcare
  • public sector
  • regulation


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