Earnings cosmetics in a tax-driven accounting environment: evidence from Finnish public firms

Abstract

Finnish firms are known to manage earnings downwards to avoid income taxes. This study suggests that they simultaneously manage earnings upwards in a smaller scale. The idea behind this behaviour is that humans may perceive a profit of, say, 301 million as abnormally larger than a profit of 298 million. Consequently, firms tend to adjust the second leftmost digit of earnings to exceed nine in order to make the first digit of earnings larger by one. Such corporate behaviour has been previously documented in New Zealand and in the USA. Our study finds a similar phenomenon in Finland. Our results show that although the largest second digits (eight and nine) are fewer than expected, only sixes and sevens are statistically significantly managed upwards.

Näkökulmia tilintarkastukseen ja arviointiin

“…Hän havaitsi, että tilikauden tuloksen vasemmalta toisena lukuna oli normaalia useammin nolla ja normaalia harvemmin yhdeksän. Myöhemmin kosmeettisesta tuloksenohjauksesta on saatu lisää empiiristä evidenssiä (Thomas 1989;Niskanen & Keloharju 2000;Van Caneghem 2002;Das & Zhang 2003;Kinnunen & Koskela 2003). Matemaattisesti tämän ilmiön taustalla on Benfordin laki, jota on laskentatoimen tutkimuksessa sovellettu esimerkiksi petosten ja väärennettyjen raportointitietojen havaitsemiseen (Nigrini 1996;Durtschi ym.…”

“…Useissa tutkimuksissa on havaittu voitollisissa tuloksissa odotettua suurempia määriä pieniä numeroita ja vastaavasti odotettua pienempiä määriä suuria numeroita (Carslaw 1988;Thomas 1989;Niskanen & Keloharju 2000;Van Caneghem 2002;Das & Zhang 2003;Kinnunen & Koskela 2003;Skousen ym. 2004;Anono & Guan 2008;Jorgensen ym.…”

Creative Accounting: Nature, Incidence and Ethical Issues

“…Tax is mentioned as a significant motivator also by Niskanen and Keloharju (2000) in a Finnish context and in Japan by Herrmann and Inoue (1996).…”

“…A special type of creative accounting relates to the presentation of financial numbers, based on cognitive reference points. As explained by Niskanen and Keloharju (2000): 'the idea behind this behaviour is that humans may perceive a profit of, say, 301 million as abnormally larger than a profit of 298 million'. Their study and others (e.g.…”

Does Benford’s Law hold in economic research and forecasting?

“…managers tend to optically "shrink" losses by rounding appropriately (less zeros, more nines). Additional studies on this issue have been conducted by Niskanen and Keloharju (2000) for Finnish companies and Van…”