Are credit rating agencies users of government accounting information? Evidence from the sovereign rating process

Sovereign governments are regularly evaluated by credit rating agencies (CRAs) that perform an analysis of creditworthiness based on mostly public data. This article shows that the data used by CRAs is mainly drawn from economic and statistical accounts rather than government financial statements. Thus, CRAs cannot be considered users of financial accounting information, at least at the sovereign government level. The evidence also suggests that governmental accounting information is neglected because it lacks the fundamental quality of comparability that CRAs require, given that ratings are ordinal measure of creditworthiness. Unless governments begin producing harmonized financial statements, it is unlikely that CRAs will ever become users of accounting information. Meanwhile, CRAs ground their sovereign rating process on harmonized economic and statistical accounts that are lacking important information on government payables, receivables, contingent liabilities and assets. This article examines whether credit rating agencies (CRAs) qualify as users of sovereign government accounting information. The analysis of two rating methodologies and 18 interviews with rating analysts reveal that sovereign ratings are generated using data drawn primarily from government finance statistics, rather than government financial reports. The reason is that only the former produce information that, while far from comprehensive, is comparable across sovereigns; a quality that government financial reports presently lack. Accordingly, CRAs are not users of sovereign government accounting information.