nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2015‒02‒16
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Accounting Quality and Debt Concentration: Evidence from Internal Control Weakness Disclosures By Lou , Yun; Otto , Clemens
  2. Mid-term Effects of the Flat Rate Personal Income Tax in Hungary By Bartha, Zoltán
  3. Taxing Capital Income: Effective Marginal Tax Rates Under 2014 Law and Selected Policy Options By Congressional Budget Office
  4. Transparency: From Enlightenment to Neoliberalism or When a Norm of Liberation Becomes a Tool of Governing By Mehrpouya , Afshin; Djelic , Marie-Laure
  5. Behavioral Responses to Local Tax Rates: Quasi-Experimental Evidence from a Foreigners Tax Scheme in Switzerland By Slotwinski, Michaela; Schmidheiny, Kurt
  6. Interfaces, narrations and the legitimisation of financialisation: The discursive activity of management accountants By Legalais, Laetitia; Morales, Jérémy
  7. Productivity versus Transparency: Information Technology Adoption in Emerging Markets By K. Sudhir; Debabrata Talukdar
  8. A New Methodology for Estimating Internal Credit Risk and Bankruptcy Prediction under Basel II Regime By M. Naresh Kumar; V. Sree Hari Rao
  9. Extrinsic vs Intrinsic Motivations for Tax Compliance. Evidence from a Randomized Field Experiment in Germany By Dwenger, Nadja; Kleven, Henrik; Rasul, Imran; Rincke, Johannes

  1. By: Lou , Yun; Otto , Clemens
    Abstract: This paper examines the effect of accounting quality on the degree of debt concentration (i.e., the tendency to rely predominantly on only a few types of debt) in corporate capital structures. Building on theoretical and empirical studies arguing that asymmetric information increases the renegotiation and bankruptcy costs associated with relying on multiple types of debt, the authors predict that lower quality accounting numbers induce firms to choose more concentrated debt structures. Measuring (low) accounting quality with the existence of material internal control weaknesses over financial reporting (ICWs), they find evidence consistent with their prediction: Firms choose more concentrated debt structures after experiencing ICWs. This effect is stronger for more severe ICWs (i.e., company-level rather than account specific ICWs). We find similar results using accounting restatements and audit quality as alternative measures of accounting quality.
    Keywords: N/A
    Date: 2014–12–01
  2. By: Bartha, Zoltán
    Abstract: The objective of the paper is to examine whether the advantages and disadvantages mentioned in the literature of the flat rate income tax could be observed in Hungary. Personal income tax data provided by the Hungarian National Tax and Customs Administration was used to check the arguments. It was found that the flat tax indeed favours richer taxpayers, and because of the family tax credits, it heavily favours families with children. Tax revenues declined as tax rates were cut, while the GDP growth rate was close to stagnant. Both of these developments go against the expectations of the flat tax supporters, although it has to be mentioned that the changes were made in the midst of a European- and world-wide depression, which could have distorted the pure effects of the new tax code. Although in many countries the flat rate tax was a positive signal for investors boosting foreign direct investments, the Hungarian government introduced extra taxes on some of the transnational companies in order to balance the budget (and compensate for the lost personal income tax revenues), which meant that there was a decline in the mood of the investors. There is some indication that some illegal activities are shifted to the legal domain: the ratio of those tax reporters who earned an annual income of HUF 2 million or higher has gone from 62.5% to 66.6% in the period of 2010-12.
    Keywords: flat rate income tax, Hungary, tax statistics, income distribution
    JEL: E64 H24
    Date: 2014–09
  3. By: Congressional Budget Office
    Abstract: An effective marginal tax rate (ETR) measures an investor’s tax burden on returns from an investment. CBO estimates that the ETR, on average, for all capital income is 18 percent. ETRs on returns from investment vary by sector, ranging from 29 percent for businesses to virtually zero for owner-occupied housing. In this report, CBO estimates ETRs under current law and eight policy options for taxing capital income.
    JEL: H25
    Date: 2014–12–18
  4. By: Mehrpouya , Afshin; Djelic , Marie-Laure
    Abstract: Transparency is one of the fundamental norms that structure our contemporary individual, organizational and social lives. Its influence can be felt at all levels, and it provides, in particular, the normative foundation for the current explosion of accounting, audit and other visibility-based accountability structures. The emergence and rapid expansion of international organizations – that have played a central role in structuring transnational governance around a plethora of standards and audits – has been fundamental to the theorization and global diffusion of accountability regimes. In this paper, the authors undertake a conceptual genealogy of the powerful notion of transparency. Starting with its Enlightenment roots, they explore the multiple competing and conflicting mobilizations of the notion of transparency through time to liberate, to deliberate, to legitimize, to control, to structure or to govern. They then trace the transposition of these various historical trajectories into the transnational space. Beginning with the League of Nations, the authors follow the various mutations of transnational transparency up to its contemporary and profound neoliberal transformation. They show how transnational transparency has shifted from being a norm of emancipatory accountability, “exposing the few to the many”, to one of governing by “exposing the many to the few”.
    Keywords: transparency; transnational governance; accountability; genealogy; enlightenment; visibility
    Date: 2014–09–01
  5. By: Slotwinski, Michaela; Schmidheiny, Kurt
    Abstract: For a long time two main obstacles have prevented researchers from empirically identifying the causal effect of income taxes on individuals behavior: omitted variable bias and the inherent reverse causality between income taxes and the tax base. This paper exploits an institutional feature of Swiss tax law concerning the income taxation of foreign employees living in Switzerland (Quellenbesteuerung). The implied discontinuities (tax notches) allow us to draw causal inferences on behavioral reactions of individuals to taxation within a quasi-random setting. We study the effect of local taxes on individuals location choice and income adjustment to preferential tax schemes at such institutional tax notches. We find strong evidence that foreigners with income around the tax notch strategically adjust their income. We do not find evidence that local income tax rates affect the initial location choice of newly arriving foreigners. However, we do find significant effects of local income tax rates on the location choice once these foreigners receive permanent residence status after 5 years of arrival. These effects materialize mainly for high income earners.
    JEL: J22 H24 J61
    Date: 2014
  6. By: Legalais, Laetitia; Morales, Jérémy
    Abstract: This paper examines the justifications accountants give for their role and position in organisations. Through a qualitative study based on observations and interviews, we follow management accountants acting as influential representatives of the financial language in their organisations. Trying to embed financial issues within managerial decision-making, and actively supporting increasing centrality of financial literacy and expertise, these management accountants provide, in the process, ‘legitimating accounts’ of their interventions on operational processes. We group the various arguments they use to justify their influence into four categories: their position in the information circuit, their accounting and financial expertise, their degree of importance in the eyes of general management, and their role as the interface between operations and general management. We show that through these arguments they construct a narrative that legitimises the central role of financial language in their organisation, even though their intervention is legitimised by the financialisation of organisations. This study thus furthers understanding of how the narratives produced by management accountants legitimise the connection of local operations to the broader trend of financialisation.
    Keywords: Justification; Financialisation; Legitimating accounts; Management accountants; Gestion financière des entreprises; Contrôleurs de gestion; Contrôle de gestion;
    JEL: M12 M41
    Date: 2014–07
  7. By: K. Sudhir (Cowles Foundation & School of Management, Yale University); Debabrata Talukdar (State University of New York at Buffalo)
    Abstract: Firms make investments in technology to increase productivity. But in emerging markets, where a culture of informality is widespread, information technology investments leading to greater transparency can impose a cost through higher taxes and need for regulatory compliance. We examine this tradeoff between productivity and transparency by examining IT adoption in the Indian retail sector.  We find that computer technology adoption is lower when firms have motivations to avoid transparency. Specifically, technology adoption is lower when there is greater corruption, but higher when there is better enforcement and auditing. So firms have a higher productivity gain threshold to adopt computers in corrupt business environments with patchy and variable enforcement of the tax laws. Not accounting for this motivation to hide from the formal sector underestimates productivity gains from computer adoption. Thus in addition to their direct effects on the economy, enforcement, auditing and corruption can have indirect effects through their negative impact on adoption of productivity enhancing technologies that also increase operational transparency.
    Keywords: Retailing, Information technology, Productivity, Corruption, Informal economy, Emerging markets, Propensity score matching, Treatment effects models
    JEL: C31 D22 D33 E26 H26 L81 M15 O33 O53
    Date: 2015–01
  8. By: M. Naresh Kumar; V. Sree Hari Rao
    Abstract: Credit estimation and bankruptcy prediction methods have been utilizing Altman's $z$ score method for the last several years. It is reported in many studies that $z$ score is sensitive to changes in accounting figures. Researches have proposed different variations to conventional $z$ score that can improve the prediction accuracy. In this paper we develop a new multivariate non-linear model for computing the $z$ score. In addition we develop a new credit risk index by fitting a Pearson type-III distribution to the transformed financial ratios. The results from our study have shown that the new $z$ score can predict the bankruptcy with an accuracy of $98.6\%$ as compared to $93.5\%$ by the Altman's $z$ score. Also, the discriminate analysis revealed that the new transformed financial ratios could predict the bankruptcy probability with an accuracy of $93.0\%$ as compared to $87.4\%$ using the weights of Altman's $z$ score.
    Date: 2015–02
  9. By: Dwenger, Nadja; Kleven, Henrik; Rasul, Imran; Rincke, Johannes
    Abstract: Is tax compliance driven only by extrinsic motivations such as deterrence and tax policy or is there also a role for intrinsic motivations such as morals, norms and psychology? Agents may comply based on moral sentiments, social norms, guilt and shame (Andreoni et al. 1998), all of which are non-deterrence driven reasons for compliance. The importance of such intrinsically motivated compliance is hard to study empirically and therefore the least understood. This study uses a unique setting for making progress on this question: the local church tax in Germany. As we show in the paper, tax evaders, compliers, and donors can coexist in the local church tax system and be precisely distinguished from each other. Since there is zero deterrence in the baseline, baseline compliance provides a direct measure of intrinsically motivated tax compliance. Starting from the zero deterrence baseline we use a randomized field experiment to inject deterrence or recognition into the system. This allows us to study if policies aimed at either extrinsic motivation (deterrence) or intrinsic motivation (recognition) have qualitatively different effects on agents who have revealed each of those motivations in the baseline. Our main empirical findings are the following. First, a significant fraction of agents (23%) comply in the zero deterrence baseline where compliance would be zero absent intrinsic motivation, while the remaining 77% evade the tax. Intrinsic motivation is therefore substantial, although the majority behaves as rational, self-interested taxpayers. Second, announcing a zero audit probability (the status quo) has a small and insignificant effect on the compliance rate, showing that there is very little misperception on average. Third, tax salience and deterrence have strong effects on compliance for baseline evaders, but small and insignificant effects for baseline donors. This is consistent with the fact that the enforcement constraint is not binding for the intrinsically motivated and therefore they are naturally unresponsive to deterrence. Fourth and finally, recognition through social and monetary rewards for compliance has fundamentally different effects on baseline donors (who increase their payments) and baseline evaders (who reduce their payments). Hence, whether recognition helps or hurts depends crucially on what motivates taxpayers in the first place, with positive effects on the intrinsically motivated and negative effects on the extrinsically motivated. All of our findings can be explained by a model of tax compliance that unifies the standard Becker-Allingham-Sandmo approach (strengthening extrinsic motives for tax compliance) and the Andreoni (1989, 1990) warm-glow model of pro-social behaviour.
    JEL: C93 D03 H26
    Date: 2014

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