Earnings Management Through Effective Tax Rates: The Effects of Tax Planning Investment and the Sarbanes-Oxley Act of 2002

Cook, Kirsten A.; Huston, George Ryan; Omer, Thomas C.

doi:10.2139/ssrn.897749

Cited by 38 publications

(24 citation statements)

References 24 publications

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“…We also adapt the model in Krull (2004) to allow for the possibility that firms build up "cookie jar" reserves through the tax accrual. Equation (1) We control for fees paid to the auditor for tax services (TAX_FEES) following Cook, Huston, and Omer (2008) who find that larger amounts of auditor-provided tax services are associated with larger decreases in the ETR from the third to the fourth quarter for firms that would otherwise miss the target. Consistent with the intuition in Dhaliwal et al (2004), we control for the induced change in ETR and expect a negative association between I_CH_ETR and ETR_DIFF.…”

Section: Empirical Design Methods Used To Test H1 and H2mentioning

confidence: 99%

Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

Gleason

Pincus

Rego

2017

The Journal of the American Taxation Association

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ABSTRACT:We investigate the consequences of tax-related internal control material weaknesses (ICMWs) for financial reporting. We hypothesize that the presence of ineffective controls over the tax function makes earnings management through the income tax accrual (both income-increasing and income-decreasing) easier to implement relative to firms with effective controls. We also predict that the remediation of tax-related ICMWs has the effect of constraining earnings management through the tax accrual. The results provide support for our predictions. We also find that last chance earnings management via tax-related ICMWs is concentrated in the early years of our sample, during the initial SOX implementation period. Our results suggest that tax-related ICMWs were initially associated with greater tax-expense management but that SOX internal control assessments subsequently improved the quality of financial reporting by reducing opportunities for tax-expense management.

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Section: Empirical Design Methods Used To Test H1 and H2mentioning

confidence: 99%

Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

Gleason

Pincus

Rego

2017

The Journal of the American Taxation Association

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“…19 For example, Desai (2003) provides specific examples of firms engaging in tax shelters where the main objective is to increase accounting earnings. Evidence in Cook et al (2008) suggests that the results in Dhaliwal et al are caused by both management of tax accruals and tax avoidance behavior, where tax avoidance is proxied for by high tax fees paid to the auditor. 20 We turn next to the evidence on earnings management through specific tax accounts: the valuation allowance, the tax contingency reserve, and the designation of foreign earnings as permanently reinvested.…”

Section: Are Earnings Managed Through the Tax Accounts?mentioning

confidence: 99%

A review of tax research

Hanlon¹,

Heitzman²

2010

Journal of Accounting and Economics

2,133

646

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Abstract:In this paper, we present a review of tax research. We survey four main areas of the literature: 1) the informational role of income tax expense reported for financial accounting, 2) corporate tax avoidance, 3) corporate decision-making including investment, capital structure, and organizational form, and 4) taxes and asset pricing. We summarize the research areas and questions examined to date and what we have learned or not learned from the work completed thus far. In addition, we provide our opinion as to the interesting and important issues for future research. ______________________This paper was prepared for the 2009 Journal of Accounting and Economics Conference. We appreciate comments from Scott Dyreng, Mihir Desai (discussant), S.P. Kothari (editor), John Long, Ed Maydew, Lillian Mills, Tom Omer, Sonja Rego, Doug Shackelford, Terry Shevlin, Joel Slemrod, Cliff Smith, David Weber, Ryan Wilson, Jerry Zimmerman, George Zodrow, and conference participants at the JAE Conference as well as at the 2009 University of North Carolina Tax Symposium and the discussant there, Bill Gentry. All errors and omissions are our own. * Corresponding author: 100 Main Street, Cambridge, MA. email: mhanlon@mit.edu. 1 A Review of Tax Research IntroductionIn this paper, we review tax research in accounting as well as tax research in economics and finance to the extent that it is related to or is affected by research in accounting. Shackelford and Shevlin (2001) provide a careful and thorough review of empirical tax research in accounting in the prior Journal of Accounting and Economics review volume. Shackelford and Shevlin limit their review to research published in accounting outlets and describe the development of the relatively young archival, microeconomic-based income tax literature that arose from the Scholes andWolfson framework. In his discussion of the review, Maydew (2001) emphasizes the need for tax researchers in accounting to think more broadly and to incorporate more theory and evidence from economics and finance. We agree. Tax research has a long history in many disciplines; this fact cannot be ignored. Our goal in this paper is to integrate the theoretical and empirical tax research from accounting, economics, and finance, to summarize what is known and unknown, and to offer suggestions for future research.The multidisciplinary nature of tax research is what makes tax research exciting (yes, exciting), yet difficult. Tax research can be difficult not only because one has to follow tax studies in accounting, finance, economics, and law (through academic institutions, governmental agencies, and policy think tanks), but also because different disciplines often use different languages and have different perspectives. 1 For example, economists generally focus on tax compliance, tax incidence (such as who bears the corporate tax), investment and economic growth effects (such as how taxes 1 Slemrod (1992a) characterizes these differences as economists studying what corporations actually do and accountants stud...

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“…43 Two studies test for changes in earnings management following passage of Sarbanes-Oxley. Cook et al (2008) extend Dhaliwal et al (2004), testing whether this usefulness of the tax accounts to achieve ''last chance'' earnings management changed with the Sarbanes-Oxley Act of 2002. They find that the earnings management discovered in Dhaliwal et al (2004) is greater in firms that pay higher tax-related fees to their auditors and that this result did not change after passage of Sarbanes-Oxley.…”

Section: Future Research In Earnings Managementmentioning

confidence: 99%

Research in accounting for income taxes

Graham

Raedy²,

Shackelford³

2012

Journal of Accounting and Economics

223

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a b s t r a c tThis paper comprehensively reviews the Accounting for Income Taxes (AFIT) literature. We begin by identifying four distinctive aspects of AFIT and briefly covering the rules surrounding AFIT. We then review the existing studies in detail and offer suggestions for future research. We emphasize the research questions that have been addressed (most of which relate to whether the tax accounts are used to manage earnings and whether the tax accounts are priced by equity market participants). We also highlight areas that have not received much research attention and that warrant future analysis.

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Earnings Management Through Effective Tax Rates: The Effects of Tax Planning Investment and the Sarbanes-Oxley Act of 2002

Cited by 38 publications

References 24 publications

Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

A review of tax research

Research in accounting for income taxes

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