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Purpose: This paper aims to examine how proportional appropriation systems affect the quality of financial reporting in entities controlled by local governments. Design/methodology/approach: The authors examine this issue using the setting of Italian municipally owned entities (MOEs) following the implementation of a new accounting regulation that limits the spending power of the participating municipality when the owned entity reports losses. The authors apply Benford's law on net income figures using the Chi-square and Z-tests on the adjusted version of the Mean Absolute Deviation (MAD) criterion to spot any sign of low data quality. The sample, which consists of 2,120 MOEs, covers the years 2010–2019 and is evenly divided into the periods pre- and post-policy introduction. Findings: Widespread data anomalies were detected following the introduction of the new regulation for MOEs controlled by local governments. Evidence is stronger for entities owned entirely by municipalitie ....

Mean Absolute Deviation , Benfords Law , Earnings Management , Public Sector Accounting , Pending Power Hypothesis ,