Changes to Accounting Policies, Financial Reporting Quality and Guaranteed Loans during the Covid-19 Crisis

We show that a seemingly innocuous change to accounting policies - extending the filing period of financial statements during the Covid-19 crisis - increased late filers’ access to public guaranteed loans (PGLs) and reduced financial reporting quality (FRQ). We conjecture that, differently than in non-crisis periods, firms delayed filing (i) to exercise reporting subjectivity, useful for obtaining relief mechanisms whose access is based on accounting information; and (ii) because the costs of reduced timeliness are offset by the availability of PGLs. Our analyses on a sample covering close to the universe of Italian SMEs confirm that late filers increased access to PGLs and lowered FRQ. These findings are stronger in industries relying more on relief mechanisms, and for firms whose cost-structures incentivized subjective reporting choices to benefit from post-Covid-19 policy changes. Exploring the channels of reporting subjectivity, we find that late filers increased accrual-based components of income and expenses, reduced amortization charges, and increased capitalization of intangibles. Our key policy implication is that changes to accounting policies during crises are not cost-neutral. This is particularly true when governments concurrently introduce multiple relief mechanisms, and firms do not bear the costs of diminished information quality.