A cohesive model of predicting tax evasion from the perspective of fraudulent financial reporting amongst small and medium sized enterprises

Purpose The issue of tax evasion through fraudulent financial reporting committed by companies is a major concern facing the tax authority in Malaysia. As such, the purpose of this study is to propose a cohesive model of predicting tax evasion from the perspective of fraudulent financial reporting amongst small- and medium-sized enterprise (SME) taxpayers. Design/methodology/approach The proposed model for this study is designed to explore the extent of the relationships between the independent variables: family ownership firms, company size, presence of tax professionals, company’s duration in business and frequency of tax audits and the moderating variable, i.e. tax audit officers’ level of competence; and the dependent variable, i.e. tax evasion from the perspective of fraudulent financial reporting. This study is grounded on four theories: agency theory, political cost theory, economic deterrence theory and competency theory. Data will be gathered from actual audit cases resolved by the Inland Revenue Board of Malaysia. Ordinary least square regression analysis is proposed for the investigation. Findings This study anticipates that family ownership firms, company size, presence of tax professionals, company’s duration in business and frequency of tax audits could be associated with tax evasion amongst SMEs in Malaysia. This study further proposes that highly competent tax audit officers could mitigate the relationship between frequency of tax audits and tax evasion practices amongst SMEs in Malaysia. Originality/value This study should be able to provide a cohesive model of predicting tax evasion from the perspective of fraudulent financial reporting amongst SMEs in Malaysia. Research on fraudulent financial reporting amongst SMEs is very limited, especially involving the level of competence of the tax audit officers; therefore, this study should contribute to the tax evasion literature by providing a comprehensive model of predicting tax evasion through fraudulent financial reporting using a Malaysian tax setting.

Do Tax Professionals Act Like Auditors when Evaluating Tax-Related Audit Evidence?

The audit of the financial statement income tax accounts is ultimately the responsibility of the audit engagement team; however, tax professionals are often involved because of their knowledge of the tax functional area. Auditors are expected to exercise professional skepticism and independence when performing audits, while tax professionals are expected to be advocates for their tax clients. This study investigates whether the auditor and/or tax professionals’ typical role influences how they evaluate evidence on an audit engagement, especially when provided evidence by individuals with whom they are closely affiliated. The results of an experiment with experienced auditors and tax professionals, suggest that despite differing in their trait skepticism and client advocacy attitudes, tax professionals and auditors make similar judgments when in the role of an audit engagement team member. We also find evidence both auditors and tax professionals are more persuaded by individuals with whom they have a closer affiliation.

Tax Experts’ Response to Regulatory and Institutional Triggers

This chapter explores the situations in which tax experts are most likely to take an innovative or aggressive tax position, focusing on the self-perception of the experts themselves of the factors that may influence them in taking such a position. The results highlight the micro-influences on tax experts that may move them along the spectrum of tax avoidance, which has been acknowledged as posing a significant risk to public welfare, equality of opportunity, and the common good. The chapter presents findings from an international survey of tax professionals and experts and highlights some key risk factors. The factors that lead tax experts to take a position that pushes the envelope of regulation are explored in aggregate and compared across the jurisdictional boundary of high or low levels of financial secrecy. The findings have the potential to empower both regulators and professional bodies in addressing the problem of tax avoidance.

Mitigating Advocacy Bias: The Effect of the Reviewer Role on Tax Professional Judgment

This study examines the effect of the reviewer role on tax professionals' advocacy bias. Prior research establishes the prevalence of advocacy bias and focuses on whether reviewers can detect preparers' advocacy bias; however, this study examines whether the reviewer role influences tax professionals' judgment and decision-making processes. In an experiment randomly assigning 75 tax professionals to the reviewer and preparer roles, I find professionals who occupy the reviewer role report similar advocacy attitudes to preparers but are significantly less likely to exhibit advocacy bias than preparers. Reviewers also employ a more consistent decision process than those in a preparer role. Results highlight the reviewer role as a moderator of advocacy bias, demonstrating the importance of the reviewer role for firms and clients. Understanding the effects of review responsibilities on professionals at all levels is increasingly important as firms leverage emerging technology to complete tasks traditionally assigned to less experienced professionals.

The Interactive Effect of Time Pressure and Client Preference on Tax Professionals' Information Search Emphasis, Judgments, and Recommendations

ABSTRACT Tax professionals commonly search large databases of information to identify tax authority necessary to provide compliance and planning advice to clients. Prior research indicates tax professionals' information search processes are subject to confirmation bias in the direction of client preferences and that this bias can lead professionals to make overly aggressive recommendations. However, very little is known about how time pressure may affect tax professionals' judgment and decision-making processes. This study contributes to practice and to the time pressure and decision bias literatures by providing theory and evidence that increasing time pressure leads to confirmation bias during tax information search and that time pressure enhanced confirmation bias affects recommendations through professionals' assessments of the evidential support for the client-preferred position. With an understanding of how time pressure can influence confirmation bias in information search, professionals and their firms can take steps to manage time pressure and its potential biasing effects.