scholarly journals Financial reporting incentives: Taxation and external financing need

2020 ◽  
Vol 12 (1) ◽  
pp. 57-69
Author(s):  
Nino Serdarević ◽  
Ajla Muratović-Dedić
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Tax Burden ◽  
External Financing ◽  
Financial Reports ◽  
Debt Contracting ◽  
Taxable Income ◽  
Conservative Accounting ◽  
Reporting Incentives ◽  
Aggressive Financial Reporting

Earnings management literature extensively explores tax regime and debt contracting as possible incentives in financial reporting. Firms engage with aggressive financial reporting to bias earnings in periods when the need for external financing increases. Contrary to this, the tax burden represents incentive for more conservative reporting. We argue that the level of firm's financial reporting aggressiveness is not constant but rather floating from period to period, directly affecting the quality of financial reports. We assume that firm's management on its own discretion determines the level of conservatism, balancing between these two incentives. The prevailing of two incentives, the need for external financing and the tax burden, determines the level of conservatism in particular reporting period. We hypothesised that the reduction in tax burden incentive overcomes the debt contracting incentive in the years of decreasing external financing need, implying more conservative accounting to balance between economic and taxable income. The total accruals are used as a measure of earnings management reflected to working capital accruals. The data analysis conducted on financial reports of 297 firms in the time-series of five years shows a significant correlation between total accruals, external financing needs and difference between economic and taxable income.

The practice of using earnings management methods under tax incentives absence and financial incentives restriction conditions

2021 ◽  
Vol 22 (8) ◽  
pp. 868-886
Author(s):  
Lyudmila S. MAKHAN'KO
Keyword(s):  
Earnings Management ◽  
Financial Incentives ◽  
Tax Incentives ◽  
Tax Burden ◽  
External Financing ◽  
Financial Indicators ◽  
Unique Character ◽  
Dividend Payments ◽  
Limited Application ◽  
General Scientific

Subject. This article analyzes the regularities of the processes of application of earnings management methods in the absence of tax incentives and in conditions of limited use of financial incentives. Objectives. The article aims to identify trends in the use of earnings management methods in the absence of tax incentives and in conditions of limited application of financial ones, and substantiate a set of analytical procedures for their identification to enhance the reliability of the organization's financial situation assessment. Methods. For the study, reviewing academic papers on the subject matter, I used the general scientific cognition methods of comparison, generalization, grouping, systematization, and the principle of historicism. Results. The article defines the most important financial incentives, including the tax ones, when earnings management is aimed at reducing or redistributing the tax burden, and financial incentives in terms of positioning in the stock market and adjusting dividend payments. The article finds the regularities of changes in individual financial indicators helping identify enterprises that likely use earnings management methods in terms of accounting for exchange rate differences. Conclusions and Relevance. The research shows that the probability of applying earnings management methods remains in the absence of discernible financial benefits in the short term in terms of reducing the tax burden or the possibility of attracting additional external financing in the financial markets. The unique character of the research lies in the study of the practice of applying earnings management methods in the absence of apparent financial incentives.

scholarly journals The Attenuating Effect of Intelligent Agents and Agent Autonomy on Managers' Ability to Diffuse Responsibility for and Engage in Earnings Management

2020 ◽  
Vol 34 (4) ◽  
pp. 143-164
Author(s):  
Peter C. Kipp ◽  
Mary B. Curtis ◽  
Ziyin Li
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Intelligent Agents ◽  
Autonomous Agents ◽  
Ethical Conduct ◽  
Human Agent ◽  
Perception Of Control ◽  
Reporting Decisions ◽  
Aggressive Financial Reporting

SYNOPSIS Advances in IT suggest that computerized intelligent agents (IAs) may soon occupy many roles that presently employ human agents. A significant concern is the ethical conduct of those who use IAs, including their possible utilization by managers to engage in earnings management. We investigate how financial reporting decisions are affected when they are supported by the work of an IA versus a human agent, with varying autonomy. In an experiment with experienced managers, we vary agent type (human versus IA) and autonomy (more versus less), finding that managers engage in less aggressive financial reporting decisions with IAs than with human agents, and engage in less aggressive reporting decisions with less autonomous agents than with more autonomous agents. Managers' perception of control over their agent and ability to diffuse their own responsibility for financial reporting decisions explain the effect of agent type and autonomy on managers' financial reporting decisions.

Tax Reporting Aggressiveness and Its Relation to Aggressive Financial Reporting

2009 ◽  
Vol 84 (2) ◽  
pp. 467-496 ◽  
Author(s):  
Mary Margaret Frank ◽  
Luann J. Lynch ◽  
Sonja Olhoft Rego
Keyword(s):  
Stock Returns ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Tax Law ◽  
Reporting Incentives ◽  
Reporting Behaviors ◽  
Aggressive Financial Reporting ◽  
Tax Reporting ◽  
Better Than

ABSTRACT: We investigate the association between aggressive tax and financial reporting and find a strong, positive relation. Our results suggest that insufficient costs exist to offset financial and tax reporting incentives, such that nonconformity between financial accounting standards and tax law allows firms to manage book income upward and taxable income downward in the same reporting period. To examine the relation between these aggressive reporting behaviors, we develop a measure of tax reporting aggressiveness that statistically detects tax shelter activity at least as well as, and often better than, other measures. In supplemental stock returns analyses, we confirm that the market overprices financial reporting aggressiveness. We also find that the market overprices tax reporting aggressiveness, but only for firms with the most aggressive financial reporting.

Is Earnings Quality Associated with Corporate Social Responsibility?

2012 ◽  
Vol 87 (3) ◽  
pp. 761-796 ◽  
Author(s):  
Yongtae Kim ◽  
Myung Seok Park ◽  
Benson Wier
Keyword(s):  
Corporate Social Responsibility ◽  
Social Responsibility ◽  
Earnings Management ◽  
Financial Reporting ◽  
Data Availability ◽  
Socially Responsible ◽  
Financial Reports ◽  
Top Executives ◽  
Accruals Quality ◽  
Corporate Social

ABSTRACT This study examines whether socially responsible firms behave differently from other firms in their financial reporting. Specifically, we question whether firms that exhibit corporate social responsibility (CSR) also behave in a responsible manner to constrain earnings management, thereby delivering more transparent and reliable financial information to investors as compared to firms that do not meet the same social criteria. We find that socially responsible firms are less likely (1) to manage earnings through discretionary accruals, (2) to manipulate real operating activities, and (3) to be the subject of SEC investigations, as evidenced by Accounting and Auditing Enforcement Releases against top executives. Our results are robust to (1) controlling for various incentives for CSR and earnings management, (2) considering various CSR dimensions and components, and (3) using alternative proxies for CSR and accruals quality. To the extent that we control for the potential effects of reputation and financial performance, our findings suggest that ethical concerns are likely to drive managers to produce high-quality financial reports. Data Availability: Data used in this study are available from public sources identified in the study.

scholarly journals International Differences Between Big Four Auditors and Their Smaller Counterparts in Monitoring Earnings Management

2012 ◽  
Vol 2 (2) ◽  
pp. 55 ◽  
Author(s):  
Xinhua Wang ◽  
Bibo Yang
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
The United States ◽  
Persistent Problem ◽  
International Differences ◽  
Financial Reporting Standards ◽  
Reporting Incentives ◽  
Agency Issues ◽  
Accounting Reports ◽  
Big Four

Earnings management that misrepresents the firm’s financial picture and misleads investors is a persistent problem. One role of the auditor is to efficiently monitor the accounting reports so as to better inform investors as to the true status of the firm and help close the asymmetric information gap between owners and management. Auditors, however, operate within the constraints of social and legal environments that often display vast international differences. Using sample data from around 50,000 firm-year observations in 42 countries, the paper shows that in the United States the Big Four auditors more effectively monitor overstated earnings than their smaller counterparts, while elsewhere they tend to be more effective in monitoring both overstated and understated earnings. An important policy implication of the results is that uniform worldwide audit and financial reporting standards may not be as effective as might be hoped, because international differences in ownership structures and the resultant agency issues create different reporting incentives.

scholarly journals Does Revenue-Expense Matching Relate To Going-Concern Audit Opinion Conditional On Firm’s Financial Distress?

2016 ◽  
Vol 32 (3) ◽  
pp. 947-966 ◽  
Author(s):  
Hak Woon Kim ◽  
Sooro Lee
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Financial Distress ◽  
Management Behavior ◽  
Audit Opinion ◽  
Going Concern ◽  
Conservative Accounting ◽  
Aggressive Accounting ◽  
And Behavior

This paper investigates how firms manage the revenue-expense relationship in the presence of a going-concern audit opinion (GCO). Using Korean data, we find that firms with GCOs both delay and accelerate recognition of current expenses for current revenues. We also find that firms in severe financial distress that receive GCOs exhibit conservative accounting, whereas GCO firms in relatively less financial trouble adopt aggressive accounting. Overall, our results imply that firms’ matching extent and behavior provide useful information regarding financial reporting and can explain the earnings management behavior of firms with GCOs.

scholarly journals AGRESIVITAS PELAPORAN KEUANGAN DAN PENGHINDARAN PAJAK

2021 ◽  
Vol 5 (2) ◽  
pp. 90-101
Author(s):  
Andyan Zakiy Pradhana ◽  
Arif Nugrahanto
Keyword(s):  
Financial Reporting ◽  
Critical Analysis ◽  
Tax Avoidance ◽  
Tax Compliance ◽  
Financial Statements ◽  
Financial Reports ◽  
Aggressive Financial Reporting ◽  
High Level ◽  
Business Sectors ◽  
Positive Effect

Identification of tax avoidance is one of the substantial issues for tax authorities. Success in this stage ensure optimal tax compliance. To do that, financial statements become the object of critical analysis. This study seeks to identify the effect of financial statements (aggressive) on tax avoidance. The mineral and coal mining sector is chosen as the sample because it is one of the business sectors with a fairly high level of tax avoidance. There are 26 companies on the IDX that are the samples of this study. By regressing fixed effect panel data in the form of financial reports for 2012-2018, the results show that aggressive financial reporting has a positive effect on tax avoidance. With a confidence level of 99%, every 1% increase in the level of aggressiveness of financial reporting equivalent to an increase in tax avoidance efforts of 4.6%. For tax authorities, these findings can be used to assess the risk of non-compliance by taxpayers.

Impact of COVID-19 Pandemic on Earnings Management: An Evidence from Financial Reporting in European Firms

2021 ◽  
pp. 097215092110534
Author(s):  
Naima Lassoued ◽  
Imen Khanchel
Keyword(s):  
Earnings Management ◽  
Least Squares ◽  
Financial Reporting ◽  
Management Practices ◽  
Ordinary Least Squares ◽  
Economic Recovery ◽  
Financial Reports ◽  
Discretionary Accrual ◽  
Preceding Period ◽  
The Impact

The aim of this study is to determine the impact of COVID-19 pandemic on earnings management practices. Focusing on a sample of 2,031 firms listed in 15 European countries, the study uses three discretionary accrual metrics as a proxy for earnings management ( Dechow et al., 1995 ; Kothari et al., 2005 ; McNichols, 2002 ) models. To this end, ordinary least squares (OLS) regressions are applied to compare earnings management during the pre-pandemic period (2017q1–2019q4) and the pandemic period (2020q1–2020q4). The results indicate that the sample firms tend to manage earnings during the pandemic period than during the preceding period. This finding implies a reduced reliability of the financial reports during the COVID-19 pandemic. Further analysis provides evidence of significant income-increasing earnings management during 2020. This finding suggests that firms manage earnings upward by alleviating the level of reported losses to rebuild investor and stakeholder confidence needed to support the economic recovery.

Sign in / Sign up

Export Citation Format

Share Document