nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2015‒08‒13
nine papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Who is audited? Experimental study on rule-based tax auditing schemes By Yoshio Kamijo; Takehito Masuda; Hiroshi Uemura
  2. Global Financial Crisis, Ownership Change, and Corporate Governance Evolution: Firm-Level Evidence from Russia By Iwasaki, Ichiro
  3. What drives the comparability effect of mandatory IFRS adoption? By Stefano Cascino; Joachim Gassen
  4. Tax Basis Determinations, Pass-Through Entities, and Taxpayer Noncompliance By James Alm; Jay A. Soled
  5. On the relation between capital flows and the current account By Oeking, Anne; Zwick, Lina
  6. Does an Uncertain Tax System Encourage "Aggressive Tax Planning"? By James Alm
  7. Value Added Tax policy and the case for uniformity: empirical evidence from Mexico By Laura Abramovsky; Orazio Attanasio; David Phillips
  8. A Dissection of the Current Account Persistence Puzzle By Michael Bleaney; Mo Tian
  9. Emerging Issues in Finance Sector Inclusion, Deepening, and Development in the People’s Republic of China By Asian Development Bank (ADB); Asian Development Bank (ADB); Asian Development Bank (ADB); Asian Development Bank (ADB)

  1. By: Yoshio Kamijo (School of Economics and Management, Kochi University of Technology); Takehito Masuda (Japan Society for the Promotion of Science); Hiroshi Uemura (School of Economics and Management, Kochi University of Technology)
    Abstract: In this study, we employ a game theoretic framework to formulate and analyze tax audit schemes. We test the theoretical predictions in a laboratory experiment. We compare audit schemes based on three audit rules: random audit rule, cut-off audit rule, and lowest income reporter audited rule (LIRA). While the cut-off audit rule is known to be optimal in theory, it has not been examined in a controlled laboratory experimental setting. The primary experimental finding is that LIRA rule yields the highest degree of truthful reporting among the rules, contrary to the theory. Moreover, the regression analysis shows that individual social norms regarding tax payment as well as the cut-off rule and the LIRA significantly increase the degree of truthful reporting. Our experimental finding that the LIRA yields the highest degree of truthful reporting is practically important because the tax authority in most countries assigns higher priority for enhancing tax compliance.
    Keywords: audit schemes, tax evasion, laboratory experiment, cut-off rule, lowest income reporter audited rule
    JEL: C91 D81 H26
    Date: 2015–07
  2. By: Iwasaki, Ichiro
    Abstract: In this paper, using panel data of industrial firms obtained from unique questionnaire surveys conducted all over the Russian Federation in 2005 and 2009, we trace structural change in corporate governance systems before and after the global financial crisis and empirically examine their determinants. We found that, during this period, Russian firms improved the quality of corporate governance across the entire industrial sector. Furthermore, our empirical evidence strongly supports a hypothesis regarding the relationship between outside ownership and board composition as well as that concerning the impact of outside directorship on the audit system. Meanwhile, our estimation results also indicate the possibility that the global financial crisis has brought about asymmetric changes, in the sense that it enhanced the independence of corporate boards, while it deteriorated the independence of the audit system, thus, partially rejecting our prediction with respect to the disciplinary effect of the crisis on the corporate governance system.
    Keywords: global financial crisis, ownership change, evolution of corporate governance, board composition, audit system, Russia
    JEL: D22 G01 G34 M42 P34
    Date: 2015–07
  3. By: Stefano Cascino; Joachim Gassen
    Abstract: We investigate the effects of mandatory IFRS adoption on the comparability of financial accounting information. Using two comparability proxies based on De Franco et al. [2011] and a comparability proxy based on the degree of information transfer, our results suggest that the overall comparability effect of mandatory IFRS adoption is marginal. We hypothesize that firm-level heterogeneity in IFRS compliance explains the limited comparability effect. To test this conjecture, we first hand-collect data on IFRS compliance for a sample of German and Italian firms and find that firm-, region-, and country-level incentives systematically shape IFRS compliance. We then use the identified compliance determinants to explain the variance in the comparability effect of mandatory IFRS adoption and find it to vary systematically with firm-level compliance determinants, suggesting that only firms with high compliance incentives experience substantial increases in comparability. Moreover, we document that firms from countries with tighter reporting enforcement experience larger IFRS comparability effects, and that public firms adopting IFRS become less comparable to local GAAP private firms from the same country.
    Keywords: international accounting; IFRS; comparability; compliance; reporting incentives
    JEL: J50
    Date: 2015–03
  4. By: James Alm (Department of Economics, Tulane University); Jay A. Soled (Rutgers School of Business, Rutgers University)
    Abstract: In the United States, one of the most popular ways to conduct business is to use a pass- through entity such as a partnership, limited liability company, or S corporation. Investor taxpayers in such pass-through entities commonly hold their ownership interest for years or decades. Over this lengthy period of time, a taxpayer’s tax basis in the entity is subject to constant annual adjustments, which generally have no immediate tax consequences. However, when the pass-through entity investment is later sold or liquidated, tax basis determinations are of critical importance, and these determinations enable taxpayers to calculate their concomitant gains or losses. At this pivotal juncture, accurately determining taxpayers’ tax bases in these investments is highly unlikely, and the IRS’s ability to detect taxpayers’ tax basis reporting inaccuracies is virtually nonexistent. This analysis examines the phenomenon of taxpayers who do not know their tax basis in pass-through entity investments and the consequences associated with such ignorance. Also provided are projected revenue losses associated with taxpayers purposefully or inadvertently inflating the tax basis that they have in their pass-through entity investments. To curtail the projected revenue losses associated with tax basis misreporting, we propose several reform measures that Congress should adopt. Such measures include simplifying tax basis computations, enhancing information reporting, and limiting the ability of taxpayers to estimate the tax basis of their pass-through investments.
    Keywords: tax basis, pass-through entities, information reporting
    JEL: H2 H26 K34 K42
    Date: 2014–07
  5. By: Oeking, Anne; Zwick, Lina
    Abstract: Imbalances in the current and financial account have been at the heart of the discussion on global imbalances. With respect to monitoring macroeconomic stability it is highly important to know whether capital flows cause reactions in the current account or whether they rather adjust to changes in the current account, and hence which variable can be used as an indicator for upcoming imbalances. In this paper, we study the dynamics of the current account and different types of net capital flows (portfolio flows, direct investment and other investment flows) for selected OECD countries applying the concept of Granger-causality. Moreover, in a non-linear model we test whether the direction of Granger-causality changes over the business cycle. Our results show that the current account generally Granger-causes the financial account components. However, for short-term flows the direction changes over the business cylce: they seem to finance the current account during economic downturns, while inducing its changes during upturns.
    Keywords: Current Account,International Capital Flows,Granger-causality,Threshold VAR
    JEL: F32
    Date: 2015
  6. By: James Alm (Department of Economics, Tulane University)
    Abstract: "Aggressive tax planning" (ATP) is typically characterized as a tax scheme that reduces the effective tax rate of a particular type of income to a level below the one sought by fiscal policy for this income. One motivation often suggested for its use is the uncertainty in tax liabilities introduced by a complicated and ever changing tax system. In this paper, I examine the impact of an uncertainty on the use of such tax schemes; by implication, I also examine how a simpler and more stable tax system that reduced this uncertainty might affect ATP. In this analysis, I draw upon some of my own work on tax avoidance and tax evasion, and then I extend this work to the related but separate area of ATP. Importantly, I introduce and model both individual and group motivations, incorporating insights from behavioral economics in these new analyses. Taxpayers are clearly motivated in part by narrowly defined financial considerations as shaped by the tax, audit, and penalty rates that they face, all of which I classify as individual motivations. However, individuals are also often influenced by many other factors that go beyond self-interest and that have as their main foundation some aspects of social norms, morality, altruism, fairness, or the like. In their entirety, I lump these factors together as group motivations, and I argue that they are shaped by the dynamic social context in which, and the process by which, decisions emerge. My main conclusion is that there is much in theory to suggest that uncertainty leads to more use of ATP, especially when both individual and group motivations are considered.
    Keywords: tax avoidance, tax evasion, uncertainty, risk, behavioral economics, experimental economics
    JEL: H2 H26 D03 C9
    Date: 2014–02
  7. By: Laura Abramovsky (Institute for Fiscal Studies); Orazio Attanasio (Institute for Fiscal Studies and University College London); David Phillips (Institute for Fiscal Studies)
    Abstract: Value added taxes (VAT) are an important, and in many cases increasing, source of revenue in both developed and developing countries. Unsurprisingly there is an intense academic and policy debate about the appropriate VAT rate structure, for both equity and efficiency reasons. In this paper we examine the distributional and efficiency case for VAT rate differentiation in Mexico, and analyse the effects of the 2010 reforms to Mexico’s tax system, making use of a tax micro-simulation model, MEXTAX. The amendments to the initial proposed reforms were made to make the tax change more ‘progressive’. We find that, measured as a proportion of income or expenditure, poorer households did gain most from the amendments, but that the cash-terms gains were much larger for households with high levels of income and expenditure. In other words, the reduction in tax take from the amendments was weakly targeted at poorer households; even simple universal cash transfers would have been much more beneficial to poor households. This shows the distributional case for zero rates of VAT on goods like food is weak – especially given the growing sophistication of cash transfer programmes in particularly middle income countries. We then examine the efficiency implications of Mexico’s VAT rate structure. We find that deviations from uniformity have a notable effect on spending patterns, but very little effect on aggregate welfare and economic efficiency as estimated by a standard QUAIDS model of consumer demand. We then argue that economic informality may actually provide an efficiency reason for lower rates of tax on goods like food for which informal production and transactions seem to be much more prevalent. This may turn the typical arguments about differential VAT rates on their head. Rather than being justifiable on distributional grounds, but entailing an efficiency cost, the reverse may actually be true.
    Keywords: Indirect taxes, consumer demand, optimal taxation, micro-simulators, Mexico
    JEL: H20 H21 H31 D12 D30
    Date: 2015–02
  8. By: Michael Bleaney; Mo Tian
    Abstract: Chinn and Wei (2013) show that the ratio of the current account balance to GDP is as persistent under floating rates as under pegged rates. This result contradicts economists’ widely held belief that current account imbalances should be corrected more quickly under floating. This belief consists of three elements: (a) imbalances will induce corrective real exchange rate movements; (b) real exchange rates move further under floating; and (c) larger real exchange rate movements will induce bigger shifts in the current account balance. It is shown that the data support (b) and (c) but not (a): the real effective exchange rate does not respond significantly to the current account balance. The results are robust to the choice of regime classification scheme, time variation of equilibrium values using a Hodrick-Prescott filter, and to recent regime switches. The implication is that the failure of real exchange rates to react as expected to current account imbalances is the main source of the puzzle.
    Keywords: current account, exchange rates, trade balance JEL codes: F31
    Date: 2015–07
  9. By: Asian Development Bank (ADB); Asian Development Bank (ADB) (East Asia Department, ADB); Asian Development Bank (ADB) (East Asia Department, ADB); Asian Development Bank (ADB)
    Abstract: Despite its success to date, the People’s Republic of China (PRC) faces some major challenges in finance sector development. Like all success stories, the PRC is finding it increasingly difficult to maintain momentum. The finance industry needs greater involvement from the private sector, including input in decision making. Achieving the desired outcomes will require a careful balance between the pace at which controls are removed and that at which the regulatory and legal infrastructure is strengthened. Long-term success will also require that economic growth be inclusive, with financial services available to all members of society.
    Keywords: People's Republic of China, money matters, public finance, fiscal reform, local government debt, taxation, VAT, implicit guarantees, public expenditures, fiscal debt, public-private partnerships, Third Plenum Initiatives, National Audit Office
    Date: 2015–01

This nep-acc issue is ©2015 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.