nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2007‒10‒20
eight papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Audit quality and tax-induced earnings management in UK private firms By Van Tendeloo B.
  2. Tax Enforcement and Tax Havens under Formula Apportionment By Becker, Johannes; Fuest, Clemens
  3. The Effects of EU Formula Apportionment on Corporate Tax Revenues By Michael P Devereux; Simon Loretz
  4. Tax Evasion: Cheating Rationally or Deciding Emotionally? By Giorgio Coricelli; Mateus Joffily; Claude Montmarquette; Marie-Claire Villeval
  6. The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence By Michael P Devereux
  7. Decision Making and Trade without Probabilities By Jack Stecher; Radhika Lunawat; Kira Pronin; John Dickhaut
  8. A Common Consolidated Corporate Tax Base for Multinational Companies in the European Union, Some Issues und Options By Christoph Spengel; Carsten Wendt

  1. By: Van Tendeloo B.
    Abstract: This paper examines audit quality and tax-induced earnings management in UK private (i.e. non-listed) firms. Tax incentives are considered to play a large role in private firms’ earnings management behavior. While Big 4 auditors are generally considered to provide a higher audit quality compared to non-Big 4 auditors, we expect that Big 4 auditors in a weak tax alignment country have weak incentives to constrain tax-induced earnings management. Moreover, Big 4 auditors arguably possess a higher expertise in providing tax advice, which is allowed under the EC recommendation on auditor independence. We provide evidence that UK firms engage more in income-decreasing earnings management and have lower relative tax burdens when they have a Big 4 auditor. These results imply that Big 4 auditors seem to help their clients in engaging in tax-induced earnings management.
    Date: 2007–03
  2. By: Becker, Johannes; Fuest, Clemens
    Abstract: In this paper, we consider optimal tax enforcement policy in the presence of profit shifting towards tax havens. We show that, under separate accounting, tax enforcement levels may be too high due to negative fiscal externalities. In contrast, under formula apportionment, tax enforcement is likely to be too low due to positive externalities of tax enforcement. Our results challenge recent contributions arguing that, under formula apportionment, there is a tendency towards inefficiently high levels of (effective) tax rates.
    Keywords: Corporate Taxation, Foreign Direct Investment
    JEL: F23 H25
    Date: 2007
  3. By: Michael P Devereux; Simon Loretz
    Abstract: The European Commission proposes to replace the current system of taxing corporate income of separate accounting by a two-step 'consolidate and apportionment' procedure. This paper uses a large set of unconsolidated firm-level data to assess the likely impact on corporate tax revenues in each Member State. Taking pre-tax profit as given, overall tax revenues would be likely to drop by 2.5 % if companies can choose whether to participate. By contrast, if they were forced to participate, total tax revenues would be likely to increase by more than 2 %, leaving some European countries, and most notably Spain, Sweden and the United Kingdom better off. We investigate how sensitive these results are to the apportionment factors used.
    Keywords: Corporate Taxation; International Loss Consolidation; Apportionment Rules
    JEL: H25 H87
    Date: 2007
  4. By: Giorgio Coricelli; Mateus Joffily; Claude Montmarquette; Marie-Claire Villeval
    Abstract: The economic models of tax compliance predict that individuals should evade taxes when the expected benefit of cheating is greater than its expected cost. When this condition is fulfilled, the high compliance however observed remains a puzzle. In this paper, we investigate the role of emotions as a possible explanation of tax compliance. Our laboratory experiment shows that emotional arousal, measured by Skin Conductance Responses, increases in the proportion of evaded taxes. The perspective of punishment after an audit, especially when the pictures of the evaders are publicly displayed, also raises emotions. We show that an audit policy that induces shame on the evaders favors compliance. <P>Les modèles économiques d'évasion fiscale prédisent que les individus devraient frauder dès que le bénéfice attendu de l'évasion dépasse son coût espéré. Sous cette condition, le fort taux de revenu déclaré pourtant observé constitue une énigme. Dans cet article, nous nous intéressons au rôle des émotions comme explication possible de ce phénomène. Notre expérience de laboratoire montre que l'intensité des émotions, mesurée par la conductance de la peau, augmente avec la proportion du revenu qui n'est pas déclarée. La perspective d'une sanction à l'issue d'un contrôle, en particulier lorsque la photo des contrevenants est diffusée, soulève également des émotions. Nous montrons qu'une politique de contrôle qui suscite la honte chez les fraudeurs favorise l'honnêteté fiscale.
    Keywords: tax evasion, emotions, neuro-economics, physiological measures, shame, experiments., fraude fiscale, émotions, neuro-économie, mesures physiologiques, honte, expériences.
    JEL: C91 C92 D87 H26
    Date: 2007–10–01
  5. By: Jose M. Sanchez (Department of Business Administration, Universidad Pablo de Olavide); Maria L. Velez (Department of Business Administration, Universidad Cadiz); Juan M. Ramon (Department of Business Administration, Universidad Pablo de Olavide)
    Abstract: Conversely to previous research focused in the study of only one use of management accounting systems (MAS) in interorganizational relationships, we develop a model to explore the interaction of both uses (decision control – decision management) offering empirical evidence through a survey in the relationship between a manufacturing firm and its outsourced firms. Through two MAS tools, designed and shared by the manufacturer, both parties inform about their use and their perception of the partner's use. The results show that the perceptions mediate the interaction between both uses, finding discrepancies between real use and perception. It is evidenced that the perception of the decision control of outsourced firms do not harm their decision management, strengthening the theory that both uses can be complementary and that a MAS can supervise partners without damage their use to improve their daily managememt.
    Keywords: management accounting functions, interorganizational relationships.
    Date: 2007–10
  6. By: Michael P Devereux (Oxford University Centre for Business Taxation, IFS, CEPR and CESifo)
    Date: 2007
  7. By: Jack Stecher; Radhika Lunawat; Kira Pronin; John Dickhaut
    Abstract: What is a rational decision-maker supposed to do when facing an unfamiliar problem, where there is uncertainty but no basis for making probabilistic assessments? One answer is to use a form of expected utility theory, and assume that agents assign their own subjective probabilities to each element of the (presumably known) state space. In contrast, this paper presents a model in which agents do not form subjective probabilities over the elements of the state space, but nonetheless use new information to update their beliefs about what the elements of the state space are. This model is shown to lead to different predictions about trading behavior in a simple asset market under uncertainty. A controlled laboratory experiment tests the predictions of this model against those of expected utility theory and against the hypothesis that subjects act na¨ıvely and non-strategically. The results suggest that a lack of subjective probabilities does not imply irrational or unpredictable behavior, but instead allows individuals to use both what they know and knowledge of what they do not know in their decision making. <P>Comment un décideur rationnel est-il censé réagir face à un problème qui ne lui est pas familier lorsqu’il existe une certaine incertitude, et en l’absence d’une base sur laquelle effectuer des estimations probabilistes? Une solution consiste à utiliser une forme de la théorie de l’utilité espérée et de présumer que les agents attribuent leurs propres probabilités subjectives à chaque élément de la représentation d’état (sans doute connue). Par contraste, notre article présente un modèle où les agents ne forment pas de probabilités subjectives sur les éléments de la représentation d’état, mais utilisent de nouveaux renseignements afin de mettre à jour leurs croyances sur les éléments formant la représentation d’état. Le comportement des échanges avec ce modèle dans un marché d’actifs simple et incertain nous mène à des prédictions différentes. En utilisant une expérience contrôlée en laboratoire, nous avons vérifié les prédictions de ce modèle contre celles de la théorie de l’utilité espérée et contre l’hypothèse que les sujets agissent avec naïveté et sans recourir à une stratégie. Les résultats suggèrent qu’un manque de probabilités subjectives n’implique pas un comportement irrationnel ou imprévisible, mais permet plutôt aux individus d’utiliser autant l’information qu’ils possèdent que la connaissance de l’information qu’ils ne possèdent pas dans leur prise de décision.
    Keywords: Uncertainty; non-expected utility; incomplete preferences; ambiguity., Incertitude, utilité non espérée, préférences incomplètes, ambiguïté.
    JEL: M41 D80 D82 D83
    Date: 2007–10–01
  8. By: Christoph Spengel (University of Mannheim, Centre for European Economic Research (ZEW)); Carsten Wendt (Centre for European Economic Research (ZEW),)
    Abstract: The European Commission proposed to provide multinational companies with a Common Consolidated Corporate Tax Base (CCCTB) for their EU wide activities. The main goal of this proposal is the removal of existing tax obstacles to cross-border economic activity which are mainly caused by the coexistence of 27 national tax systems. This paper reviews the European Commission’s proposals and the underlying rationale. It addresses some of the key issues that arise when considering the design of the CCCTB. Among the issues under investigation are the definition of the consolidated group, the scope and technique of consolidation, the territorial scope of the consolidated tax base, the treatment of companies joining and leaving the CCCTB, and related issues.
    Keywords: Corporation Tax, Group taxation, tax co-ordination, European Union
    JEL: H21 H25
    Date: 2007

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