Tax Aggressiveness, Accounting Fraud, and Annual Report Readability

Abstract

Purpose: There are some proofs provided by previous research that when a management wants to hide something (i.e: earning management), the firm’s annual report becomes less readable. This research would like to reaffirm such notion by examining the impact accounting fraud and tax aggressiveness of a firm on its annual report readability. Methodology: This study uses data from companies listed in Indonesia Stock Exchange in 2016. To prove that tax aggressiveness and accounting fraud do reduce annual report readability, this study uses multiple regression that is run by SPSS 22 software. Finding: From the output of multiple regression analysis, it is proven that tax aggressiveness has a negative relation with annual report readability. Tax aggressiveness is a “grey area” action that could be considered as illegal activity altogether. That being said, the more aggressive a firm’s tax planning is, the more management has to hide to avoid the possibility of being questioned or even punished by financial authorities. With so much to hide, the annual report becomes more complex and thus, increase the Fog Index number. Accounting fraud however, has no significant impact on annual report readability. There are two reasons why this hypothesis cannot be proven. First, out 558 companies listed in Indonesia Stock Exchange, there are only 37 companies that restated their financial reports in 2016 so restatement’s effect on annual report readability cannot be defined clearly. Second, there are many reasons why management restates their financial report and not all of them are bad. Some restatements are done purely because of unintentional error. In this paper there is no measure that could determine management’s intention therefore, the increase Fog Index reading could happen with or without restatement. Originality: This is the first study that researches the relation between tax aggressiveness, accounting fraud, and annual report readability.