nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2014‒07‒28
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. A Negotiation-Based Model of Tax-Induced Transfer Pricing By Johannes Becker; Ronald B. Davies
  2. Fair value: actuarial accounting for the markets... or for the accountants? By Jerman, Lambert
  3. Audits as Signals By Kotowski, Maciej Henryk; Weisbach, David A.; Zeckhauser, Richard Jay
  4. Optimal Auditing with Heterogeneous Audit Perceptions By Philipp Meyer-Brauns
  5. Auditor choice, audit fees and principalprincipal Conflict By Chiraz Ben Ali; Cédric Lesage

  1. By: Johannes Becker (University of M{\"u}nster); Ronald B. Davies (University College Dublin; Institute for International Integration Studies, Trinity College Dublin; CES-Ifo)
    Abstract: We present a new model of tax induced transfer pricing as an alternative to the oft-used concealment model. Inspired by interviews with practitioners, we consider a large multinational firm which is audited by the tax authority in the high-tax location. When this country adjusts the transfer prices proposed by the firm, the low-tax location may dispute this decision and initiate negotiations. Since negotiations are costly, the high-tax location sets a transfer price that prevents the low-tax location from entering negotiations. We compare this model's predictions to those of the concealment model. The negotiation model replicates the predictions on the tax rate effects on transfer pricing, while adding new predictions. Profit shifting is expected to fall in the high-tax country's bargaining power and to rise in firm profits and domestic firm ownership in both countries. Most importantly, profit shifting occurs even if tax enforcement is perfect. We analyze the effects of an introduction of a common consolidated corporate tax base with formula apportionment and conclude that the negotiation model may change the perspective on such a policy. Specifically, strong countries with large bargaining power may find this reform unappealing.
    Keywords: transfer pricing, Nash bargaining, tax avoidance, corporate taxation
    JEL: H25 H32 H87
    Date: 2014–07
  2. By: Jerman, Lambert
    Abstract: Fair value accounting under IAS-IFRSs is often presented as market accounting that results from expression of the financial requirements of business management and accounting practice. By showing that fair value has the features of actuarial accounting, and is the product of a conceptual shift made necessary by the contemporary context and thus in dissonance with certain aspects of current accounting practice, this article demonstrates that fair value accounting in fact represents an opportunity for the international accounting standard-setter, seen as a legitimate body for European standardisation, and for financial statement preparers as regards financial statement users, by creating new margins of discretion for them. To support this argument, the article particularly emphasises that fair value, because it corresponds to actuarial accounting, brings about a surplus of information for investors without actually raising the transparency of financial reporting.
    Keywords: Juste valeur; Fair value;
    JEL: M41
    Date: 2013–06
  3. By: Kotowski, Maciej Henryk; Weisbach, David A.; Zeckhauser, Richard Jay
    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: 2014
  4. By: Philipp Meyer-Brauns
    Abstract: This paper derives a government's optimal tax audit policy when taxpayers hold different beliefs about the likelihood of a tax audit. When audits are inexpensive, differences in perceived audit risk lead to stricter optimal auditing in equilibrium. If audits are relatively costly, heterogeneity in audit perceptions lowers the equilibrium audit intensity. Except when beliefs are near-identical throughout the population, both tax evasion and honest reporting occur in equilibrium. A welfare analysis shows a non-monotonic, U-shaped relationship between perception heterogeneity and social welfare. High levels of social welfare are associated with very homogeneous or very heterogeneous populations. Moderately heterogeneous taxpayer populations are associated with lower levels of social welfare.
    Keywords: optimal auditing, heterogeneity, tax evasion
    JEL: D82 H26
    Date: 2014–06
  5. By: Chiraz Ben Ali; Cédric Lesage
    Abstract: This study examines the behavior of auditors, considered as a monitoring mechanism, in the presence of a principal-principal agency conflict in a common-law country. Following the surprising findings of Holderness (2009) about ownership concentration of U.S firms, we examine ownership structure as a determinant of audit fees and auditor choice by disentangling managerial and controlling shareholding on a sample of U.S. listed firms. Our results show that audit fees and high-quality demand (big 4 auditors) (1) are negatively associated to managerial ownership and (2) positively associated with blockholders ownership. We also show that the impact of blockholders ownership is more complex then presumed and evidence a curvilinear relation (concave) between blockholders ownership and audit fees.
    Keywords: auditor behavior, principal-principal conflict, ownership
    Date: 2014–07–15

This nep-acc issue is ©2014 by Alexander Harin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.