Are disasters extraordinary? Reporting nonrecurring items in the government setting

Abstract We explore reporting nonrecurring gains and losses (extraordinary and special items) among municipalities. We begin by documenting the nature, type, and frequency of reporting, finding that surprisingly few municipalities report items, including those with FEMA disasters and despite GASB standards. Results suggest municipalities with CPA-finance directors are significantly more likely to report items, while less likely reported among those led by unelected bureaucrats (council-manager political governance). Moreover, nonrecurring items are systematically associated with surpluses and deficits in a manner suggesting strategic reporting. Specifically, our evidence suggests officials report income-increasing nonrecurring items to reduce or avoid reporting deficits, and income-decreasing items to reduce surpluses. Strategic reporting is generally magnified when state laws allow direct voter initiatives and reduced when state laws mandate GAAP accounting or external audits. Overall, we conclude that accounting expertise and political governance structures are significant determinants of reporting nonrecurring items, and that some officials strategically report them.