Monitoring roles of auditors and tax authorities in tax-induced downward earnings management

Yongbo LI, Kenny LIN, Feng ZHANG

Research output: Other Conference ContributionsPresentationPresentation

Abstract

In this study we examine how external auditors and tax authorities separately and jointly constrain corporate tax incentives to manage earnings downward through discretionary accruals. We find that stricter tax authority scrutiny limits these accruals to a greater extent. We also find that although the monitoring effect of auditors is in general insensitive to income-decreasing accruals, higher-quality auditors are more effective than their lower-quality counterparts in constraining such accruals when tax enforcement is stricter. We interpret the results as being consistent with the different monitoring foci of auditors and tax authorities, and with the penalty risk argument that auditors will behave more conservatively so as to avoid regulatory costs arising from the failure to detect managerial misconduct that is discovered ex-post by the tax authority.
Original languageEnglish
Publication statusPublished - 29 May 2015
EventCanadian Academic Accounting Association Annual Conference 2015 - Canada, Toronto, Canada
Duration: 28 May 201528 May 2015

Conference

ConferenceCanadian Academic Accounting Association Annual Conference 2015
CountryCanada
CityToronto
Period28/05/1528/05/15
OtherCAAA

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Tax
Auditors
Earnings management
Authority
Monitoring
Accruals
Tax incentives
Corporate tax
Discretionary accruals
External auditor
Auditor quality
Regulatory costs
Tax enforcement
Income
Penalty

Cite this

LI, Y., LIN, K., & ZHANG, F. (2015). Monitoring roles of auditors and tax authorities in tax-induced downward earnings management. Canadian Academic Accounting Association Annual Conference 2015, Toronto, Canada.
LI, Yongbo ; LIN, Kenny ; ZHANG, Feng. / Monitoring roles of auditors and tax authorities in tax-induced downward earnings management. Canadian Academic Accounting Association Annual Conference 2015, Toronto, Canada.
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LI, Y, LIN, K & ZHANG, F 2015, 'Monitoring roles of auditors and tax authorities in tax-induced downward earnings management' Canadian Academic Accounting Association Annual Conference 2015, Toronto, Canada, 28/05/15 - 28/05/15, .

Monitoring roles of auditors and tax authorities in tax-induced downward earnings management. / LI, Yongbo; LIN, Kenny; ZHANG, Feng.

2015. Canadian Academic Accounting Association Annual Conference 2015, Toronto, Canada.

Research output: Other Conference ContributionsPresentationPresentation

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AU - LIN, Kenny

AU - ZHANG, Feng

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N2 - In this study we examine how external auditors and tax authorities separately and jointly constrain corporate tax incentives to manage earnings downward through discretionary accruals. We find that stricter tax authority scrutiny limits these accruals to a greater extent. We also find that although the monitoring effect of auditors is in general insensitive to income-decreasing accruals, higher-quality auditors are more effective than their lower-quality counterparts in constraining such accruals when tax enforcement is stricter. We interpret the results as being consistent with the different monitoring foci of auditors and tax authorities, and with the penalty risk argument that auditors will behave more conservatively so as to avoid regulatory costs arising from the failure to detect managerial misconduct that is discovered ex-post by the tax authority.

AB - In this study we examine how external auditors and tax authorities separately and jointly constrain corporate tax incentives to manage earnings downward through discretionary accruals. We find that stricter tax authority scrutiny limits these accruals to a greater extent. We also find that although the monitoring effect of auditors is in general insensitive to income-decreasing accruals, higher-quality auditors are more effective than their lower-quality counterparts in constraining such accruals when tax enforcement is stricter. We interpret the results as being consistent with the different monitoring foci of auditors and tax authorities, and with the penalty risk argument that auditors will behave more conservatively so as to avoid regulatory costs arising from the failure to detect managerial misconduct that is discovered ex-post by the tax authority.

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LI Y, LIN K, ZHANG F. Monitoring roles of auditors and tax authorities in tax-induced downward earnings management. 2015. Canadian Academic Accounting Association Annual Conference 2015, Toronto, Canada.