scholarly journals Is U.S. Multinational Dividend Repatriation Policy Influenced by Reporting Incentives?

2012 ◽  
Vol 87 (5) ◽  
pp. 1463-1491 ◽  
Author(s):  
Jennifer L. Blouin ◽  
Linda K. Krull ◽  
Leslie A. Robinson
Keyword(s):  
Multinational Corporations ◽  
Financial Reporting ◽  
Data Availability ◽  
Operating Characteristics ◽  
Foreign Earnings ◽  
Reporting Incentives ◽  
Cash Payment ◽  
Public Company ◽  
Foreign Affiliates ◽  
Repatriation Taxes

ABSTRACT This study finds evidence that public-company reporting by U.S. multinational corporations (MNCs) creates disincentives to repatriate foreign earnings to the U.S. and contributes to the accumulation of cash abroad. MNCs operate under U.S. international tax laws and financial reporting rules and face two potential consequences when they repatriate foreign earnings: a cash payment for repatriation taxes and a reduction in reported accounting earnings. Using a confidential dataset of financial and operating characteristics of foreign affiliates of MNCs combined with public-company data, we examine how repatriation amounts vary across firms that face relatively strong reporting incentives to defer an accounting expense. Our results suggest that reporting incentives reduce repatriations by about 17 to 21 percent annually. Data Availability: Bureau of Economic Analysis (BEA) data were made available to the authors under a legal confidentiality arrangement; all non-BEA data are available from public sources.

Financial Reporting versus Tax Incentives and Repatriation under the 2004 Tax Holiday

2013 ◽  
Vol 36 (1) ◽  
pp. 63-87 ◽  
Author(s):  
Michaele Morrow ◽  
Robert C. Ricketts
Keyword(s):  
Multinational Corporations ◽  
Financial Reporting ◽  
Financial Statements ◽  
Tax Incentives ◽  
Tax Rates ◽  
Foreign Earnings ◽  
Reporting Incentives ◽  
Tax Savings ◽  
Tax Costs ◽  
Tax Holiday

ABSTRACT We analyze the repatriation behavior of U.S. multinational corporations under the tax holiday implemented as part of the American Jobs Creation Act of 2004. Our results suggest that tax incentives, as reflected in differences between firms' effective foreign tax rates, do not appear to be significant predictors of either participation in the tax holiday or the amounts repatriated by firms that chose to participate. In contrast, differences in financial reporting incentives were significant predictors of both participation in the holiday and the amounts repatriated. Not surprisingly, we find that firms appear to have chosen between repatriation of permanently versus temporarily deferred foreign earnings based on how the source of repatriation impacted their GAAP financial statements. Moreover, our results suggest that many firms chose to participate in the holiday only to the extent necessary to achieve financial reporting goals. Overall, our results suggest that financial reporting incentives appear to have been much more important to firms than tax savings in choosing whether and to what extent to participate in the holiday. Indeed, many firms appear to have viewed the act principally as an opportunity to manage reported GAAP income, rather than as an opportunity to reduce their U.S. tax costs.

scholarly journals Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

2018 ◽  
Vol 94 (2) ◽  
pp. 53-81 ◽  
Author(s):  
Lori Shefchik Bhaskar ◽  
Joseph H. Schroeder ◽  
Marcy L. Shepardson
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Audit Quality ◽  
Internal Controls ◽  
Data Availability ◽  
Financial Statement ◽  
Auditor Judgment ◽  
Public Company ◽  
Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

Mandatory IFRS Adoption and Institutional Investment Decisions

2012 ◽  
Vol 87 (6) ◽  
pp. 1993-2025 ◽  
Author(s):  
Annita Florou ◽  
Peter F. Pope
Keyword(s):  
Financial Reporting ◽  
Data Availability ◽  
Market Outcomes ◽  
Institutional Investment ◽  
Financial Reporting Standards ◽  
Institutional Holdings ◽  
Reporting Incentives ◽  
Annual Reporting ◽  
Commercial Sources ◽  
First Time

ABSTRACT We examine whether the mandatory introduction of International Financial Reporting Standards leads to an increase in institutional investor demand for equities. Using a large ownership database covering all types of institutional investors from around the world, we find that institutional holdings increase for mandatory IFRS adopters. Changes in holdings are concentrated around first-time annual reporting events. Second, we document that the positive IFRS effects on institutional holdings are concentrated among investors whose orientation and styles suggest they are most likely to benefit from higher quality financial statements, including active, value, and growth investors. These results are consistent with holdings changes being associated with the financial reporting regime change. Finally, we show that increased institutional holdings are concentrated in countries in which enforcement and reporting incentives are strongest, and where the differences between local GAAP and IFRS are relatively high. Overall, our study helps shed new light on the channels by which IFRS information becomes impounded in market outcomes. JEL Classifications: G11; K22; M41; M42. Data Availability: The data used in this study are available from the commercial sources identified in the paper.

Tax Effects of Book-Tax Conformity, Financial Reporting Incentives, and Firm Size

2013 ◽  
Vol 12 (2) ◽  
pp. 1-25 ◽  
Author(s):  
K. Hung Chan ◽  
Kenny Z. Lin ◽  
Feng Tang
Keyword(s):  
Financial Reporting ◽  
Small Firms ◽  
Reporting Quality ◽  
Unintended Consequences ◽  
Data Availability ◽  
Policy Position ◽  
Cross Sectional ◽  
Tax Effects ◽  
Reporting Incentives ◽  
The Government

ABSTRACT This study employs a natural experiment to examine the tax effects of a change in the level of conformity between tax and financial reporting in China for firms with different financial reporting incentives. We find that in a full book-tax conformity system, firms with incentives to report higher book income pay significantly higher income tax (per dollar of sales) than do firms without the same incentives. Although we do not find similar evidence in a non-conformed system, we observe cross-sectional variation in taxes paid by firms of varying sizes: by exploiting non-conforming financial reporting rules to a greater extent, large firms pay proportionately lower taxes than do small firms. To improve financial reporting quality, many countries have adopted International Financial Reporting Standards (IFRS) that may affect book-tax reporting differences. Our results suggest that this policy alternative is less desirable from a tax perspective. Therefore, accounting standard setters and securities regulators around the world should consider not only how such a change is intended to benefit capital markets, but also what unintended consequences this policy choice might have for government revenue. Our results also strengthen the government policy position on giving more tax relief to small firms. Data Availability: All data are available from public sources.

Do Quarterly and Annual Financial Statements Reflect Similar Financial Statement Error in the Post-SOX Era?

2021 ◽  
Vol 6 (1) ◽  
pp. 1-31
Author(s):  
Erik S. Boyle ◽  
Melissa F. Lewis-Western ◽  
Timothy A. Seidel
Keyword(s):  
Financial Reporting ◽  
Financial Statements ◽  
Data Availability ◽  
Financial Statement ◽  
Annual Reports ◽  
Fiscal Year ◽  
High Quality ◽  
Financial Reports ◽  
Quality Reporting ◽  
Public Company

ABSTRACT The U.S. has invested substantial resources into the regulation and oversight of public-company financial reporting. While these investments should incentivize high-quality reporting among quarterly and annual financial statements, the sharp rise in public company auditor oversight may disproportionately benefit annual reports given the fiscal year-centric nature of audits. We compare the within company-year difference in financial statement error between quarterly and annual financial reports and examine how any difference changed following SOX. We find that pre-SOX error is lower for audited financial statements than for reviewed financial statements and that this difference increases following SOX. Additional tests suggest that elevated auditor oversight, rather than managerial incentives, is the impetus for the change. Despite regulatory investment designed to incentivize the production of high-quality quarterly and annual financial statements, the post-SOX difference in error between quarterly and annual financial statements appears to have increased. Data Availability: Data are available from public sources cited in the text. JEL Classifications: M41; M42.

scholarly journals Audit Partners' Judgments and Challenges in the Audits of Internal Control over Financial Reporting

2020 ◽  
Vol 39 (4) ◽  
pp. 57-85
Author(s):  
Jeffrey R. Cohen ◽  
Jennifer R. Joe ◽  
Jay C. Thibodeau ◽  
Gregory M. Trompeter
Keyword(s):  
Financial Reporting ◽  
Internal Control ◽  
Data Availability ◽  
Audit Committees ◽  
Structured Interviews ◽  
Material Weakness ◽  
The Public ◽  
National Office ◽  
Evaluation Task ◽  
Public Company

SUMMARY Internal control over financial reporting (ICFR) audits have been the subject of intensive examination by the Public Company Accounting Oversight Board (PCAOB) and researchers but the process through which auditors make ICFR judgments is largely a “black box.” To understand ICFR judgments, we conducted semi-structured interviews with 20 audit partners. Common themes in our interviews suggest that the subjectivity inherent in the ICFR evaluation task contributes to resistance against ICFR audit findings and cougnterarguments from management. Moreover, auditors perceive that their judgments are being second-guessed by PCAOB inspectors. Auditors believe that managers have difficulty accepting that material weaknesses can exist without a detected error, that management's reflexive reaction is to deny/avoid a material weakness finding, and managers routinely claim that management review controls (MRCs) would have caught the detected control deficiency. Auditors cope with management's defenses by consulting with their national office and leveraging support from strong audit committees. Data Availability: Requests for the data should be accompanied by a description of intended uses.

Do PCAOB Inspection Reports Influence Corporate Executives' Perceptions of Audit Quality and the Likelihood of Switching Auditors?

2014 ◽  
Vol 14 (1) ◽  
pp. 48-71 ◽  
Author(s):  
Jesse C. Robertson ◽  
Chad M. Stefaniak ◽  
Richard W. Houston
Keyword(s):  
Financial Reporting ◽  
Response Pattern ◽  
Audit Quality ◽  
Data Availability ◽  
Response Patterns ◽  
Auditor Switching ◽  
Corporate Executives ◽  
Public Company ◽  
Mixed Responses

ABSTRACT The PCAOB conducts inspections of public company auditors to improve audit quality and build investors' confidence in the quality of financial reporting (PCAOB 2010f). While there is some evidence that the inspection reports could be improving actual audit quality (e.g., Gramling et al. 2011; Carcello et al. 2011), their impact on perceptions of audit quality remains largely unexplored. We investigate the effects of inspection reports, which consistently disseminate negative information in the form of audit deficiencies (and in some cases, quality control criticisms) on perceived audit quality and potential auditor switching. We report the results of an experiment in which 90 corporate executives considered one of three response patterns that firms typically offer across multiple inspection reports: consistently provide concessions, consistently provide denials, or provide mixed responses that consist of both concessions and denials. We find that PCAOB inspection reports generally decrease perceived audit quality, regardless of response pattern, which, in turn, is generally associated with an increased likelihood that executives will consider switching auditors. We offer implications for audit policy and research, including the possibility that, while PCAOB inspections could be improving actual audit quality, the reports could be imposing costs by reducing perceived audit quality and, in turn, increasing the likelihood of auditor changes. Data Availability: Contact the first author.

Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-level Investment Efficiency

2020 ◽  
Author(s):  
Harald J. Amberger ◽  
Kevin S. Markle ◽  
David M. P. Samuel
Keyword(s):  
Multinational Corporations ◽  
Recent Change ◽  
Investment Efficiency ◽  
Agency Conflicts ◽  
Foreign Subsidiaries ◽  
Natural Experiments ◽  
Foreign Earnings ◽  
Repatriation Taxes ◽  
The Uk ◽  
Central Management

Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between the central management of the MNC and the manager of the foreign subsidiary being the driver, we show that this effect is concentrated in subsidiaries with high information asymmetry and in subsidiaries that are weakly monitored. Quasi-natural experiments in the UK and Japan establish a causal relationship for our findings and suggest that a repeal of repatriation taxes increases subsidiary-level investment efficiency while reducing the level of investment. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax law that eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs.

Does Audit Firm Tenure Matter to Audit Committee Members? Evidence from an Accounting Dispute

2018 ◽  
Vol 33 (2) ◽  
pp. 25-41 ◽  
Author(s):  
Janice E. Rummell ◽  
F. Todd DeZoort ◽  
Dana R. Hermanson
Keyword(s):  
Financial Reporting ◽  
Audit Committee ◽  
Committee Member ◽  
Audit Firm ◽  
Big 4 ◽  
Analyst Expectations ◽  
Public Company ◽  
Management Experience ◽  
Support Relation

SYNOPSIS This study examines the effects of Big 4 audit firm tenure on audit committee member support for the auditor in an auditor/management dispute over a subjective accounting issue. One hundred eighteen U.S. public company audit committee members participated in an experiment with audit firm tenure (short/long) manipulated randomly between subjects. The results indicate that participants in the long audit firm tenure group provide more support for the auditor in the dispute than participants in the short tenure group. Audit committee support for the auditor is positively related to audit committee member experience and CPA status, as well as perceived management pressure to meet analyst expectations, but negatively related to perceived management experience in financial reporting. Finally, audit committee members' perceptions of audit firm reliability (i.e., credibility and dependability) mediate the audit firm tenure-auditor support relation. Overall, our results suggest enhanced audit committee support for longer-tenured auditors.

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