nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2013‒10‒18
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. IFRS Adoption in Canada: An Empirical Analysis of the Impact on Financial Statements By Michel Blanchette; François-Éric Racicot; Komlan Sedzro
  2. Do Building Up of Values Matter? An Analysis of Ethical Values of Accounting Professionals and Unethical Reporting Practices in Accounting By Singh, Ajay Kumar; Vasudeva, Sakshi
  3. Efficient tax reporting: The effects of taxpayer information services By Christian A. Vossler; Michael McKee
  4. Audits as Signals By Kotowski, Maciej H.; Weisbach, David A.; Zeckhauser, Richard J.
  5. Investor Valuations of Japan's Adoption of a Territorial Tax Regime: Quantifying the Direct and Competitive Effects of International Tax Reform By Bradley, Sebastien; Dauchy, Estelle; Hasegawa, Makoto
  6. Taxation of Domestic Dividend Income and Foreign Investment Holdings By Mishra, Anil V; Ratti, Ronald A
  7. Taxes and the choice of organizational form by entrepreneurs in Sweden By Edmark, Karin; Gordon, Roger
  8. More haircut after VAT cut? On the efficiency of service sector consumption taxes By Tuomas Kosonen
  9. The optimal distribution of the tax burden over the business cycle By Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
  10. On optimal emission control – Taxes, substitution and business cycles By Lintunen , Jussi; Vilmi, Lauri

  1. By: Michel Blanchette (Université du Québec en Outaouais); François-Éric Racicot (Telfer School of Management at the University of Ottawa); Komlan Sedzro (École des sciences de la gestion à Université du Québec à Montréal)
    Abstract: International Financial Reporting Standards (IFRS) has become the new dominant set of accounting standards; however the transition to the new regime may be fairly disruptive for users of financial statements as comparability and trend analysis may be impaired. The objective of this study is to impart evidence of the impact of IFRS adoption in Canada on financial statement figures and ratios of publicly-traded companies. The analysis is based on the comparison of accounting figures and financial ratios computed under IFRS and pre-changeover Canadian GAAP (CGAAP) for the same period using a sample of 150 Canadian companies listed on the Toronto Stock Exchange which mandatory adopted IFRS in 2011. Empirical tests are conducted to identify the main areas of differences and investigate specific effects related to company’s industry affiliation and auditor. The results of the analysis indicate that at the aggregate level IFRS adoption does not significantly change the central values that describe the financial position and performance of Canadian companies reported in financial statements. However, differences between individual IFRS and CGAAP values can be large, particularly in the balance sheet, and are not randomly distributed across industries. Moreover, the volatility of financial statement figures is higher in IFRS than in CGAAP. The study concludes that databases built from aggregated accounting information may generally be consistent in IFRS and CGAAP whereas cash flows may be relied on to avoid the subjectivity inherent to accounting adjustments.
    Keywords: International Financial Reporting Standards, IFRS, Canadian Generally Accepted Accounting Principles, CGAAP, Financial Statements, Financial Ratios, IFRS Adoption, Balance sheet, Income statement, Assets, Liabilities, Shareholder's equity, non-controlling interest
    JEL: M41 M48 G10 G14 G17
    Date: 2013–10
  2. By: Singh, Ajay Kumar; Vasudeva, Sakshi
    Abstract: Accounting scandals have shaken the confidence of the investor in the companies. Large number of people lost their money in these scandals. All these scandals were attributed to false, misleading, or untruthful accounting. This undermines the role of accounting professionals who did not report material manipulations in the financial results of the company. The study attempted to find an association between ethical values of accounting professionals and their choices in ethical dilemmas in their profession. Correlation scores in this study revealed that there is a statistically significant low degree of positive correlation between value assessment ratings and ethical dilemmas in scenarios. Similarly, the correlation coefficients computed between scenario ratings and formal ethics education indicates that the latter would be important in preventing the instances of unethical reporting. Ethical value score of professionals were found to be more explanatory than formal ethical education. The study strongly recommends building up of rigorous ethical and fiduciary responsibility in the financial sector through various means. The auditors must be trained to become responsible, independent, and judicious while conducting audits. Professional bodies should encourage compliance with ethical reporting practices in accounting by both carrot and stick approach.
    Keywords: Ethics, Values, Accounting professionals,unethical reporting,
    JEL: M41
    Date: 2013
  3. By: Christian A. Vossler; Michael McKee
    Abstract: As policy makers recognize the complexity of the tax system can result in some “evasion” being due to errors, there has been increasing focus on the role of taxpayer services as a tool in the enforcement regime. Such programs can improve the image of the tax agency but the critical issue is the effect on tax reporting. While the earlier focus has been on tax evasion, tax overreporting is also an issue since it leads to inefficient resource allocation. Thus, the present paper focusses on the effectiveness of taxpayer service programs in enhancing tax reporting. Data are collected on tax reporting decisions via laboratory experiments designed to implement the tax reporting task. To investigate the effects of taxpayer services, we “complicate” these compliance decisions of subjects, and then provide “services” from the “tax administration” that allow subjects to compute more easily their tax liabilities. Briefly, we find that our subjects are less likely to file when tax liability is uncertain but the provision of information offsets this effect; it appears that simply providing the service, even an imperfect service, increases the propensity to file and the accuracy of the filing. Key Words: tax information services; tax reporting; behavioral economics; experimental economics
    JEL: H2 H26 C91
    Date: 2013
  4. By: Kotowski, Maciej H. (Harvard University); Weisbach, David A. (University of Chicago); Zeckhauser, Richard J. (Harvard University)
    Abstract: A broad array of law enforcement strategies, from income tax to bank regulation, involve self-reporting by regulated agents and auditing of some fraction of the reports by the regulating bureau. Standard models of self-reporting strategies assume that although bureaus only have estimates of the of an agent's type, agents know the ability of bureaus to detect their misreports. We relax this assumption, and posit that agents only have an estimate of the auditing capabilities of bureaus. Enriching the model to allow two-sided private information changes the behavior of bureaus. A bureau that is weak at auditing, may wish to mimic a bureau that is strong. Strong bureaus may be able to signal their capabilities, but at a cost. We explore the pooling, separating, and semi-separating equilibria that result, and the policy implications. Important possible outcomes are that a cap on penalties increases compliance, audit hit rates are not informative of the quality of bureau behavior, and by mimicking strong bureaus even weak bureaus can induce compliance.
    Date: 2013–09
  5. By: Bradley, Sebastien (Drexel University); Dauchy, Estelle (New Economics School); Hasegawa, Makoto (National Graduate Institute for Policy Studies)
    Abstract: Globalization of firm operations has brought the issue of multinational taxation to the forefront of tax reform debates worldwide, with countries paying increasingly close attention to tax developments elsewhere around the world. Using an event study methodology that emphasizes specific firm attributes, we examine investor reactions in both the Japanese and U.S. stock markets to nine events leading up to the enactment of the 2009 Japanese dividend exemption in order to measure the perceived gains in short- and long-term after-tax profitability resulting from this reform. We thus aim to provide a comprehensive evaluation of the full range of direct tax savings effects and indirect effects associated with changes in firm competitiveness and international tax competition. Preliminary results suggest that investors capitalized gains of over 1 percent and 0.3 percent on the date that the bill was finally passed in the Japanese and U.S. markets, respectively, with further pronounced gains arising in the aftermath of select earlier events associated with the revelation of significant new information. Direct tax savings are responsible for a significant proportion of estimated abnormal returns across multiple event dates, even for U.S. firms where these effects are necessarily largely in anticipation of the adoption of a similar territorial regime. Strikingly, the largest beneficiaries of the Japanese reform appear to be firms with less elaborate tax minimization strategies or with no foreign operations altogether, whereas U.S. multinationals with subsidiaries located in tax havens appear more heavily favored.
    Keywords: territorial taxation; international tax reform; dividend exemption; tax competition; tax avoidance
    JEL: F23 H25 H32
    Date: 2013–08–01
  6. By: Mishra, Anil V; Ratti, Ronald A
    Abstract: In this paper it is argued that the heavier is domestic taxation of domestic dividend income, the more attractive is foreign investment to domestic agents. Dividend imputation schemes play an important role in this discussion. Dividend imputation eliminates the double taxation of domestic income, reduces the effective tax rate on domestic investment and makes investment in foreign securities less attractive. A fall of 10% in effective tax rate on domestic dividend income reduces foreign equity investment by about 5%. Domestic investors paid dividends under a dividend imputation system receive a credit for the tax paid at the company level and this reduces the effective tax rate. Cross-border equity investment is increased if tax credit rises for taxes paid overseas. Empirical analysis is based on bilateral investments among 23 mature economies over 2001-2011. Results are robust to consideration of the global financial crisis and the role of double taxation treaties.
    Keywords: Foreign equity investment; Domestic Dividend Taxes; Dividend Imputation Schemes
    JEL: F21 F30 G15
    Date: 2013–10–04
  7. By: Edmark, Karin (Research Institute of Industrial Economics); Gordon, Roger (University of California)
    Abstract: This paper estimates the role of both tax and non-tax determinants in the choice in Sweden to be a closely-held corporation vs. a proprietorship, using individual data for 2004 to 2008 on owners of closely-held businesses. While lower-income individuals face relatively neutral incentives, higher income individuals face strong tax incentives to be corporate. The data suggest a relatively strong correlation between these tax incentives and the likelihood that a firm is corporate. Many conventional non-tax determinants are confirmed in the data as well.
    Keywords: self-employment; entrepreneurship; taxation of closely-held businesses; business organizational form
    JEL: G32 G38 H25
    Date: 2013–10–02
  8. By: Tuomas Kosonen
    Abstract: Consumption tax rates targeted at specific sectors are often reformed without empirical knowledge about the efficiency of these policies. This paper sheds light on the efficiency issue, the potential for welfare improving reform, by studying the incidence of value added taxes (VAT) on prices and quantities of barber services traded. I also study the incidence on the profits made by the targeted firms. I utilize a VAT reform targeted at a specific service sector which creates a natural experiment set up. VAT for hairdressing services in Finland was reduced from 22% to 8%, whereas the normal tax treatment still applied to beauty salons and other labor intensive services. The choice of the treatment and control groups was exogenous to circumstances in Finland, since these groups were selected in a more wider European setting. The results suggest that hairdressers cut their prices only by half of what complete pass-through would have implied, and that there was hardly any adjustment in the equilibrium quantity due to the reform. Instead of lowering prices, most hairdressers were able to increase their profits. There is important heterogeneity in the results according to firm size.
    Keywords: VAT reform, efficiency, tax incidence
    Date: 2013–09–26
  9. By: Konstantinos Angelopoulos; Stylianos Asimakopoulos; James Malley
    Abstract: This paper analyses optimal income taxes over the business cycle under a balanced-budget restriction, for low, middle and high income agents. A model incorporating capital-skill complementarity in pro- duction and differential access to capital and labour markets is de- veloped to capture the cyclical characteristics of the US economy, as well as the empirical observations on wage (skill premium) and wealth inequality. We fi…nd that the tax rate for high income agents is opti- mally the least volatile and the tax rate for low income agents the least countercyclical. In contrast, the path of optimal taxes for the middle income group is found to be the most volatile and counter-cyclical. We further fi…nd that the optimal response to output-enhancing capi- tal equipment technology and spending cuts is to increase the progres- sivity of income taxes. Finally, in response to positive TFP shocks, taxation becomes more progressive after about two years.
    Keywords: optimal taxation, business cycle, skill premium, income distribution
    JEL: E24 E32 E62
    Date: 2013–10
  10. By: Lintunen , Jussi (Finnish Forest Research Institute); Vilmi, Lauri (Bank of Finland, Monetary Policy and Research Department)
    Abstract: This paper studies the cyclical properties of optimal emission taxes and emissions using a real business cycle model with a stock pollutant. We derive conditions for the procyclicality of optimal emission tax and show that the tax is in typical conditions procyclical. The possibility of a countercyclical behavior of the emission tax increases if 1) the pollution is short-lived and the emission transfer into environmental damages rapidly 2) emissions are countercyclical, 3) marginal damages are strongly increasing and 4), in disutility case, the marginal utility of consumption increases with the increase in the intensity of the harmful environmental process. In the climate change context we show that the optimal carbon tax is procyclical irrespectively on the production technology. Instead, the technology is a key determinant of the cyclicality of the emissions. The optimal carbon tax correlates almost fully with the consumption and as a rule-of thumb, it could be indexed to the consumption level of the economy. The relative scale of tax deviations relative to the consumption deviations is determined by the inverse of the intertemporal elasticity of substitution. Comparison between the optimal emission tax and an optimally set constant emission tax shows that the constant tax leads to very slightly higher emissions but the general economic effects are next to negligible.
    Keywords: optimal emission tax; cyclical properties
    JEL: E32 Q54 Q58
    Date: 2013–10–09

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