Retroactive Tax Legislation, Reported Earnings, and Investors' Responses to Earnings 'Surprises': Evidence from R&amp;D Credit Extensions

Bratten, Brian; Hulse, David S.

doi:10.2139/ssrn.2502139

Cited by 6 publications

(1 citation statement)

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“…To address this concern, we identify three primary sources of tax law changes that occurred during our sample period. First, the R&D tax credit expired and was retroactively reinstated six times over the course of our sample period (Bratten & Hulse, 2016), whereas the introduction of the Alternative Simplified Credit in 2007 significantly altered R&D credit calculations and eligibility for some firms (Finley, Lusch, & Cook, 2015). Second, bonus depreciation rates-which affected the immediate tax benefits associated with capital investments for some firms-fluctuated between 30% and 100% during our sample period, whereas bonus depreciation was even unavailable for certain years (Hulse & Livingstone, 2010).…”

Section: Tax Law Changesmentioning

confidence: 95%

External Auditor Responses to Tax Risk

Abernathy

Finley

Rapley

et al. 2019

Journal of Accounting, Auditing & Finance

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Both practitioners and academics are increasingly focusing their attention on the riskiness of firms’ tax planning activities. In this study, we examine how external auditors respond to tax risk, measured using the volatility of firms’ annual cash and GAAP (Generally Accepted Accounting Principles) effective tax rates. Consistent with the notion that tax risk represents a source of engagement risk that is priced by external auditors, we first document a positive association between audit fees and tax risk incremental to fee premiums arising from tax aggressiveness. We also find that knowledge spillover benefits related to the provision of tax nonaudit services moderate this positive association. In supplemental tests, we provide evidence on additional auditor responses to tax risk. In particular, we document that tax risk is positively associated with both audit report lag and the likelihood of the auditor reporting a tax-related material weakness in the client’s internal controls. Our findings add to the growing literature at the intersection of corporate taxation and auditing, and to the literature distinguishing between the level and riskiness of firms’ tax avoidance strategies.

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Section: Tax Law Changesmentioning

confidence: 95%