nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2007‒05‒12
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Corporate Governance, Reputation Concerns, and Herd Behavior By Barbara Schöndube-Pirchegger
  2. Why are Switzerland's foreign assets so low? The growing financial exposure of a small open economy By Nicolas Stoffels; Cédric Tille
  3. The flat tax in Romania. A good economic strategy? By Socol, Cristian; Marinas, Marius; Socol, Aura Gabriela
  4. Value Added Tax Treatment of Financial Services: An Assessment and Policy Proposal for Developing Countries By Pierre-Pascal Gendron
  5. Why Do Most Countries Set High Tax Rates on Capital? By Nicolas Marceau; Steeve Mongrain; John D. Wilson

  1. By: Barbara Schöndube-Pirchegger (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: This paper offers an explanation for audit committee failures within a corporate governance context. We consider a setting in which the management of a firm sets up financial statements that are possibly biased. These statements are reviewed/audited by an external auditor and by an audit committee. Both agents report the result of their audit, the auditor acting first. The auditor and the audit committee use an imperfect auditing technology. As a result of their work they privately observe a signal regarding the quality of the financial statements. The probability for a correct signal in the sense that an unbiased report is labelled correct and a biased one incorrect, depends on the type of the agent. Good as well as bad agents exist in the economy. Importantly, two good agents observe identical informative signals while the signal observed by a bad agent is uninformative and uncorrelated to those of other good or bad agents. The audit committee as well as the auditor are anxious to build up reputation regarding their ability in the labor market. Given this predominate goal they report on the signal in order to maximize the market’s assessment of their ability. At the end of the game the true character of the financial statements is publicly learned and the market uses this information along with the agents’ reports to update beliefs about the agents’ type. We show that herding equilibria exist in which the auditor reports based on his signal but the audit committee .herds. and follows the auditor’s judgement no matter what its own insights suggest.
    Keywords: corporate governance, audit committee, game theory, herding
    Date: 2007–02
  2. By: Nicolas Stoffels; Cédric Tille
    Abstract: Switzerland's international investment position shows a puzzling feature since 1999: Large and persistent current account surpluses have failed to boost the value of Swiss foreign assets. In this paper, we link this pattern to the substantial increase in the leveraging of Switzerland?s international assets and liabilities over the last twenty years, which we document in detail. We estimate the impact of exchange rate and asset prices movements on Swiss net foreign assets, and show that they led to substantial valuations losses since 1999, accounting for between one-quarter and one-half of the gap between the net foreign assets and cumulated current account flows. We show how these adverse valuation effects have erased Switzerland?s advantage in terms of the yield on its net foreign asset position.
    Keywords: Capital movements ; International finance ; International economic integration ; Switzerland ; Assets (Accounting)
    Date: 2007
  3. By: Socol, Cristian; Marinas, Marius; Socol, Aura Gabriela
    Abstract: This paper evaluates the main effects of the implementation of tax flat system in Romanian economy. If accompanying measures are not going to be enforced, the introduction of the flat rate of 16% in Romania will lead to unsustainable budgetary deficits and inflationist pressures. The flat tax favors the workers with big salaries and also big and financially solid companies (which, mainly “export” the profit). It will attack the fragile macroeconomic stability. It is uncertain if it will lead to the increase of the degree of employment, having in view the fact that the contributions to the social insurances have a very high level. The alternative scenario is simple. Romania should have chosen to continue what it was confirmed to be a valid element of the economic evolution towards a European standard (progressive fiscal system).
    Keywords: flat tax; fiscal policy; inflation; AD-AS model
    JEL: E62 E31 H21
    Date: 2007–04–05
  4. By: Pierre-Pascal Gendron (The Business School, Humber College Institute of Technology & Advanced Learning, Toronto, and International Tax Program, Joseph L. rotman School of Management, University of Toronto)
    Abstract: How to tax financial services is in many ways the key frontier issue for VAT in developed countries. No convincing conceptually correct and practical solution for capturing the bulk of financial services under the VAT has yet been developed anywhere. Developing and transitional countries face constraints that make the taxation of financial services an even more formidable challenge. Since developed economies with sophisticated financial institutions and markets and capable tax administrations have opted with few exceptions (such as Québec) to exempt such activities, it is not surprising that exemption also rules in almost all developing and transitional countries. Surprisingly, however, it may not be that difficult to collect at least some VAT on financial services even in such countries. This article examines the current VAT treatment of financial services in Canada and around the world, as well as its rationales and economic effects. It then outlines alternatives to that treatment, focusing on developing and transitional economies and their tax policy constraints. Finally, it outlines best practices for tax reform and proposes a new alternative to the exempt treatment: a hybrid system designed to capture VAT revenues in developing and transitional economies in a practical way.
    Keywords: value added tax, financial services, Canada, developing and transitional countries
    JEL: H24 O23
    Date: 2007
  5. By: Nicolas Marceau; Steeve Mongrain; John D. Wilson
    Abstract: We consider tax competition in a world with tax bases exhibiting different degrees of mobility, modeled as mobile and immobile capital. An agreement among countries not to give preferential treatment to mobile capital results in an equilibrium where mobile capital is nevertheless taxed relatively lightly. In particular, one or two of the smallest countries, measured by their stocks of immobile capital, choose relatively low tax rates, thereby attracting mobile capital away from the other countries, which are then left to set revenue maximizing taxes on their immobile capital. This conclusion holds regardless of whether countries choose their tax policies sequentially or simultaneously. In contrast, unrestricted competition for mobile capital results in the preferential treatment of mobile capital by all countries, without cross-country differences in the taxation of mobile capital. Nevertheless our main result is that the non-preferential regime generates larger global tax revenue, despite the sizable revenue loss from the emergence of low-tax countries. By extending the analysis to include cross-country differences in productivities, we are able to resurrect a case for preferential regimes, but only if the productivity differences are sufficiently large.
    Keywords: Tax Competition, Capital Mobility
    JEL: F21 H87
    Date: 2007

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