The impact of increased disclosure requirements and the standardization of accounting practices on earnings management through the reserve for income taxes

Earnings Management through Tax Reserves and Auditor-Provided Tax Services

“…However, these two studies come to contradictory conclusions. While Cazier et al (2015) find that tax reserves are still manipulated to meet earnings forecasts in the post-FIN 48 period, Gupta et al (2016) find no evidence to suggest such earnings management behavior continues to exist post-FIN 48. I suspect the contradiction is a result of the difference in samples.…”

“…Studies (Cazier, Rego, Tian, & Wilson, 2015;Gupta, Laux, & Lynch, 2016) have been conducted to examine whether managers continue using tax reserves to meet earnings targets in the post-FIN 48 period. However, these two studies come to contradictory conclusions.…”

“…I suspect the contradiction is a result of the difference in samples. Gupta et al (2016) rely on large firms only (a random sample of 100 Fortune 500 firms), while Cazier et al (2015) include firms of all sizes (all non-REITS firms in Compustat with available data). IRS Data Books (2007-2010 show that there is significant variation in the level of tax authority monitoring and enforcement (hereafter, tax enforcement) faced by firms of different sizes.…”

“…First, this study expands the literature investigating earnings management through tax reserves in the post-FIN 48 period and helps us better understand the effects of FIN 48. Previous studies (e.g., Cazier et al, 2015;Gupta et al, 2016) either examine only large firms or treat all firms as a homogenous group. This study documents that firms of different sizes behave differently in the post-FIN 48 period.…”

“…The SEC's allegation against two former Dell executives in August 2010 provides a real-life example of how the company used tax reserves as a "cookie jar" to attain earnings forecasts (Note 6). Moreover, on large sample scales, both Cazier et al (2015) and Gupta et al (2016) find evidence that managers use tax reserves to meet earnings targets in the pre-FIN 48 period.…”