Tax authority independence and earnings management

This paper studies the impact of intelligent tax supervision on the decision of corporate earnings management. Companies determine earnings management strategies by weighing the marginal benefits and costs of accrual-based earnings management and real earnings management. Existing literature finds that managers prefer real earnings management than accrual-based earnings management because of regulatory pressure. This paper takes tax costs into consideration and adopts that tax will affect the substitution relationship between different earnings management methods.Accrual-based earnings management is realized by accounting methods. But real earnings management has a direct cash flow effect. Compared with accrual-based earnings management, real earnings management is subject to a higher level of book-tax conformity. Real activity manipulation is more costly due to tax incentives. Intelligent tax supervision represented by Golden Tax-III can effectively realize information integration and reduce information asymmetry between taxpayers and tax authorities. It can help to identify companies whose tax burdens deviate from the industry average. So Golden Tax-III can strengthen tax supervision and significantly increase the tax costs of real earnings management. Then, it can affect earnings management strategies. The higher the degree of tax non-compliance, the greater the impact of the implementation of Golden Tax-III.We use the implementation of Golden Tax-III as an exogenous event to construct a DID test. The results show that: Tax-noncompliant companies have a higher level of accrual-based earnings management after Golden Tax-III; tax-noncompliant companies have a lower level of real earnings management after Golden Tax-III; the substitution relationship between the two earnings management strategies in tax-noncompliant companies is mainly reflected after Golden Tax-III.The main contributions of this paper are as follows: (1) It directly examines the impact of tax costs on earnings management strategies, and finds that companies prefer accrual-based earnings management to real earnings management under strong tax supervision. It also expands the previous earnings management model. The research enriches and supplements the literature on earnings management. (2) It constructs a DID test to examine the impact of tax regulation on earnings management based on the implementation of Golden Tax-III. It can help to solve the problem of self-selection and endogeneity and supplement the relevant literature on tax and earnings management. (3) It finds that the intelligent supervision represented by Golden Tax-III can effectively distinguish tax-noncompliant companies and achieve precise supervision. The results help to understand and evaluate the economic consequences of Golden Tax-III, and also provide enlightenment for the development of intelligent tax supervision and taxation regulatory policy.

Purpose– The purpose of this paper is to examine earnings management around tax rate reduction in the wake of the 2007 corporate tax reform in China.Design/methodology/approach– This paper is an empirical work using a sample of listed Chinese real estate firms.Findings– This study finds that firms managed earnings, including accrual-based earnings management and real earnings management, to decrease income in the fourth quarter of 2007, and to increase income in the first quarter of 2008. It suggests that the real estate firms were shifting income from the fourth quarter of 2007, when the statutory tax rate was 33 per cent, to the first quarter of 2008, when the statutory tax rate was 25 per cent, and therefore saved on tax payments. It also finds that corporate ownership structures, including ownership concentration and state ownership, affect earnings management. In the fourth quarter, state ownership is negatively associated with accrual-based earnings management, while ownership concentration is positively related to both accrual and real earnings management. In the first quarter, state ownership is negatively related to real earnings management.Social implications– Tax authority and policy makers might be interested in evidence on earnings management around tax rate reduction. Changes in tax rates increase the incentives to shift income, which may warrant a closer scrutiny by both outside auditors and tax auditors.Originality/value– This paper is the first study that relates to both accrual-based earnings management and real earnings management to corporate tax rate changes by showing that firms manipulate income upward in the low-tax-rate periods and downward in the high-tax-rate periods.

The aim of this study was to verify whether the discretionary actions of managers to manage earnings can be captured by abnormal book-tax differences (ABTD). In Brazil, there are no studies with the disaggregated use of earnings management (EM) through operational choices as a proxy for discretionary decisions to be captured by ABTD. Moreover, the previous studies focus on the period before the International Financial Reporting Standards (IFRS) were required in Brazil or when they were still being implemented, which may change the context of earnings management in the country and, consequently, the relationship with ABTD. This study is relevant for accounting information users, such as investors, creditors, the tax authorities, and regulatory bodies, as the findings may help them to identify manager opportunism through earnings management. The identification that tax management can be affected by EM through accounting and operational decisions reveals that investors, creditors, the tax authorities, regulators, and auditors should remain vigilant against deteriorations in accounting information quality and, consequently, in the utility of that information. An analysis of 201 non-financial companies was carried out, covering 2012 to 2016, thus totaling 1,005 observations. Five panel data regression models were used: three to capture EM, one to identify ABTD, and one to relate these variables. A significant and positive relationship was revealed between accounting and operational EM and ABTD, indicating that companies that manage earnings upward have positive ABTD, and companies that manage earnings downward have negative ABTD. This research therefore contributes to identifying that ABTD captures the discretionary actions of managers related to EM through accounting and operational decisions.

PurposeThis study aims to examine the prevalence of transfer pricing and earnings management activities, and how they are impacted by corporate governance mechanisms.Design/methodology/approachUsing the political cost theory, the study provides insights into how opportunistic managerial behaviours which have a strong link to profit shifting and tax evasion are driven by corporate governance using data from 16 listed firms for the period 2008–2020.FindingsThe results reveal that the transaction-based transfer pricing model is better than the index-based model and the accrual-based earnings management model suits the political cost theory more than the real earnings management metric. Board size and female CEO increase transfer pricing aggressiveness but board independence, CEO tenure, CEO nationality and female Board Chairwomanship reduce transfer pricing aggressiveness. The findings also reveal the role of multinational enterprise status, private ownership, industry type, firm size, financial leverage, asset tangibility and firm age. For accrual-based earnings management, board independence, CEO tenure, and female Board Chairwomanship significantly decrease earnings management. Other factors include private ownership, firm size, and firm age.Practical implicationsThe findings of the study are relevant for shaping industry-level policies on earning management, transfer pricing and related-party transactions. Since these opportunistic managerial behaviours are the foremost drivers of tax avoidance and profit shifting, the findings of this study provide relevant insights for practitioners, tax and other regulatory authorities, policymakers and the academic community alike.Originality/valueThis is among the premier studies on the transfer pricing and earnings management nexus with corporate governance factors using the political cost theory, especially in the developing country context. It also reveals the significant impact of gender and suggests the need for gender diversity in corporate management.

PurposeThis study investigates the impact of tax planning, both independently and in conjunction with earnings management, on the persistence of earnings and its various components.Design/methodology/approachIn this study, tax planning refers to corporate strategies aimed at minimizing taxes, while earnings management involves manipulating reported earnings through accounting accruals. The analysis uses a dataset of US companies from 1989 to 2016 and includes a series of regression tests.FindingsThe study finds that firms implementing aggressive tax strategies exhibit lower persistence in cash flows from operations and earnings. Furthermore, companies using both aggressive tax planning and earnings management techniques show the lowest persistence in total accruals, cash flows from operations and reported earnings.Research limitations/implicationsOur sample of US firms limits generalizability. Future research could explore the international impacts of tax planning and earnings management on earnings quality and include post-2016 data for insights on the 2018 tax cuts and COVID-19. Investigating other earnings quality measures and their influence on investors and analysts could enhance performance assessment.Practical implicationsThis research identifies key factors influencing the interpretation of financial statements, offering valuable insights for regulators, auditors, tax authorities, financial analysts and other users with significant practical and social implications.Originality/valueThis study contributes to prior research by highlighting the need to investigate the real effects of tax avoidance and extends prior research by examining the impact of high levels of tax planning, along with aggressive earnings management, on earnings persistence.

The financial statements of the company produced and prepared as a management accountability to investors so that it reflects the company's activities. The liability is not limited to management purposes but also for the benefit of the tax authorities. The big difference in the spur interest and information management to consider how accounting numbers generated can maximize its interests. How that can be done to influence the management accounting numbers can be the earnings management through deferred tax assets and deferred tax expense in the financial statements. This study aims to: (1) Describing the effects of deferred tax assets on earnings management in manufacturing companies in Indonesia Stock Exchange 2010-2014. (2) Describe the effect of deferred tax expense on earnings management in manufacturing companies in Indonesia Stock Exchange 2010-2014. (3) Describe the effect of deferred tax assets and deferred tax expense on earnings management in manufacturing companies in Indonesia Stock Exchange 2010-2014. Data processing method is by descriptive statistical analysis with analysis tools that multiple linear regression. Research shows that: (1) Assets Deferred tax effect on earnings management, (2) Deferred tax expense has no effect on earnings management, and (3) Deferred tax assets and deferred tax expense jointly effect on earnings management.Key words: Asset deferred tax, deferred tax expense, and earnings management

The implications of book-tax conformity and tax change for the earnings management of Portuguese micro firms

PurposeThe purpose of this paper is to examine three different responses to the Finnish 2005 tax reform that, among other things, reduced the corporate tax rate and hiked dividend taxation. Focus lies on the factors influencing the decision to change the fiscal year-end and whether earnings management is more prevalent when the decision is not taken.Design/methodology/approachThis study uses the financial statement data of Finnish private firms and studies 350 fiscal year-end changing firms and 700 non-changing firms with logistic and linear regression analysis. Discretionary accruals are the proxy for earnings management.FindingsThe results suggest that firms seize the window of opportunity and extend fiscal years depending on the magnitude of the expected tax savings. Firms that do not change their fiscal year-end engage in more tax-induced earnings management. In terms of economic consequences, the earnings management approach is less economically significant.Research limitations/implicationsThis study only examines a limited number of firms that change their fiscal year-end, hence, care has been exercised in generalising the findings.Practical implicationsThe findings may be considered when structuring future tax reforms, particularly when considering transition rules relating to changes in fiscal year-ends. The study may also have implications beyond tax reforms since the evidence of opportunistic changes in the fiscal year-end can be informative for tax authorities, independent auditors and creditors.Originality/valueThis study contributes to the relatively scarce literature on private firm responses to tax policy changes by analysing both upward and downward earnings management, as well as changes in the fiscal year-end. This is in contrast to previous research that mainly focusses on listed firms and absolute earnings management or earnings management in one direction.

Objective: This study aims to investigate the impact of tax planning, deferred taxation, and excellent corporate governance on firm value, with earnings management serving as a mediating variable. Methods: Regression analysis is used in this study. Textile and garment subsector companies listed on the Indonesia Stock Exchange from 2014 to 2021 comprise the research sample. Results: According to the findings of the study, tax planning and excellent corporate governance have a positive and significant effect on earnings management, whereas deferred taxes have no effect on profits management. Other findings indicate that tax preparation, effective corporate governance, and earnings management all have a positive and significant impact on firm value. However, deferred tax has a considerable negative impact on firm value. Mediation testing shows that earnings management significantly mediates the effect of tax planning and good corporate governance on firm value. However, earnings management does not significantly mediate the effect of deferred taxes on firm value. Conclusions: Conflicts of interest in tax management occur between firm management and tax authorities (tax officials) in the context of tax planning and deferred tax based on agency theory. A conflict of interest develops when company management, which is responsible for managing the firm efficiently, attempts to reduce tax payments in order to boost company earnings. Tax officials, on the other hand, strive to maximize tax collection in compliance with current laws and regulations.

The purpose of this paper was to investigate the connection between earnings management and corporate social responsibility (CSR) for all the listed mining firms in India. This paper is an empirical work that used a sample of 40 listed mining firms in NSE/ BSE India for the period from 2007-2015. We found a positive impact of CSR disclosure on earnings management (EM) practices. We explained this result empirically by incorporating corporate governance and financial performance indicators for our proposed hypotheses. Investors and policy makers might be interested in the evidence on the not so good impact of governance on the relationship between CSR and EM. Tax authorities and audit committees might scrutinize whether there is implementation of Companies Act, 2013 by the mining companies. The companies which are not adopting the Act should be penalized accordingly. This paper is the first study of Indian mining firms that explored the relationship existing between CSR and earnings management by depicting the influences of Indian corporate laws in such a capital intensive industry.

This study investigates the difference between tax avoidance and earnings management, consisting of accrual earnings management and real earnings management. Also, this study investigates the association between accrual earnings management and real earnings management with tax avoidance in the pandemic era. The research data is sourced from financial reports of consumers goods industry companies listed on the Indonesia Stock Exchange from 2019 to 2020, obtained from www.idx.co.id. Based on purposive sampling, the total sample in this study amounted to 74 observations. Hypothesis testing in this study employed paired sample t-test or Wilcoxon Non-Parametric Test to examine the comparative hypothesis and multiple regression analysis for cross-section data to examine the correlative hypothesis. This study suggests no difference in tax avoidance, accrual earnings management, real earnings management level in the pandemic era compared to the pra-pandemic era. This study also concludes that real earnings management is negatively associated with tax avoidance during the pandemic, while accrual earnings management is not associated with tax aggressiveness. The Indonesia Tax Authorities need to improve monitoring and control procedures related to tax avoidance activities conducted by companies.

In Canada, antidumping complaints against foreign competitors must be lodged with the Canadian External Trade Tribunal. The tribunal assesses if foreign competition is harming domestic producers by considering many factors, such as the plaintiff's financial condition reflected in its financial statements. Hence, to obtain a favourable decision from the tribunal, managers of Canadian firms who have launched antidumping complaints have an incentive to voluntarily reduce reported earnings during the investigation period, i.e., to engage in earnings management.Results indicate that Canadian firms reduce their reported earnings by a significant amount (6.3% of lagged assets) during the year in which they are under investigation by the tribunal, even after controlling for variables such as firm performance that may affect reported earnings. Moreover, it would appear that stock market investors see through earnings management and re‐adjust the relationship between reported earnings and firm valuation in the year earnings are subject to external investigations by the tribunal. Policy implications from these findings are discussed.RésuméLes entreprises canadiennes qui estiment que les importations leur portent préjudice peuvent porter plainte auprès du Tribunal canadien du commerce extérieur. Dans son processus d'enquête suivant le dépôt d'une plainte, le tribunal considère plusieurs facteurs, enpar‐ticulier la siutation financière de I'entreprise portant plainte, telle qu'elle est refletée dans ses étatsfinanciers. Par conséquent, les dirigeants d'entreprises portant plainte et souhaitant obtenir une decision favorable de la part du tribunal auront tout intérêt à volontairement réduire le bénéfice publié durant la période d'enquête, c'est‐à‐dire à s'engager dans une stratégic de gestion des résultats.Les résultats montrent que les entreprises canadiennes réduisent leur bénéfice net de manière sensible (6,3 % de I'actif en début de période) pendant Vannée durant laquelle elles sont sujettes à une enquête du tribunal. Ce constat est maintenu même en tenant compte des variables comme la performance sous‐jacente de la firme, qui peuvent influencer la rentabilité de I'entreprise. De plus, il semble que les investisseurs ne sont pas dupes de cette stratégic de gestion des résultats et qu ‘Us réajustent à la hausse la relation entre le bénéfice publié et la valeur de la firme au cours de I'année de I’ enquête. Les implications de ces résultats sont par la suite abor‐dees.

This study examines the relationship between earnings management and corporate tax in Nigeria, focusing on how firms manipulate financial reports to influence tax obligations. The research aims to assess the extent to which earnings management practices impact corporate tax liabilities and whether regulatory frameworks effectively mitigate such practices. A quantitative research design was employed, utilizing secondary data from audited financial statements of selected listed companies in Nigeria. The sample consists of firms spanning various sectors, chosen based on availability and relevance to the study. Data were analyzed using regression analysis to establish correlations between earnings management indicators and corporate tax payments. The findings indicate a significant relationship between earnings management and corporate tax, with firms engaging in income smoothing and profit shifting to minimize tax burdens. The study also reveals that weak enforcement of tax regulations contributes to the persistence of these practices. In conclusion, the research underscores the need for stricter regulatory oversight and transparent financial reporting to curb earnings manipulation. It recommends that tax authorities enhance compliance monitoring while firms adopt ethical accounting practices to ensure corporate tax contributions align with actual earnings.

W atrin, Ebert, and Thomsen (2012; hereinafter, WET) examine the influence of financial and tax reporting requirements on earnings management by European firms. WET explain two reporting requirements imposed on European firms that differ from those placed on U.S. firms. First, parent and subsidiary corporations are required to file tax statements on a separate-company basis rather than on a consolidated-group basis and, second, corporations are required to disclose separate-company financial statements as well as consolidated-group financial statements. Using these two unique aspects of European reporting, WET investigate how discretionary accruals in the consolidated-group financial statements are related to the magnitude of book-tax differences in separate-company financial statements and to the use of IFRS versus local GAAP accounting standards in the separate-company financial statements. WET conclude that firms operating in a one-book system (where corporations use IFRS for consolidated-group financial statements, separate-company financial statements, and tax reporting) show significantly more earnings management in consolidated financial statements compared with those in a two-book system (where corporations use IFRS for consolidated-group financial statements but use local GAAP for separate-company financial statements and for tax reporting). They further conclude that conformity between separate-company financial statements and tax reporting shows a stronger association with earnings management in consolidated financial statements than does the accounting standard used in the separate-company financial reports. Generally, book-tax conformity and book-tax differences are measured based on differences between the earnings a firm reports to its investors (in consolidated-group financial statements) and the income it reports to tax authorities. WET add to the existing literature by focusing on permanent book-tax differences in separate-company financial statements and the accounting standards used in separate-company versus consolidated-group financial statements. Examining earnings management in this rich institutional setting is the primary strength of this study. My questions and concerns about this study relate to (1) the choice between IFRS and local GAAP, (2) the tax filing

Taxes help the country develop in education, health, industry, and more. Since taxes are a major source of state revenue, the government prioritizes tax payment. Industrial taxpayers should follow appropriate norms and correct accounting principles to avoid violating government or country tax legislation. This research aims to study and assess the influence of profitability, leverage and earnings management on tax avoidance in mining companies listed on the Indonesia Stock Exchange (BEI). The focus of this research is on the group of companies in the mining sector listed on the BEI during the period 2019 to 2023. A saturated sampling technique, or often referred to as a census, is used in this research, where all 62 companies in the population are included as samples for a continuous period of 5 years. , resulting in a total of 310 observations. The results of hypothesis testing show that the earnings management, leverage and profitability variables together have a significant influence on tax avoidance. Earnings management, leverage, and profitability each have a large and positive impact on tax avoidance practices. This research is aimed at providing valuable insights and a complete understanding of tax evasion, with the aim of assisting stakeholders, including the government, in making the right decisions and formulating effective tax control laws.