nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2015‒10‒10
ten papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Do IFRS Decrease Earnings Manipulation in European countries? By Tereza Miková
  2. Income taxation and equity: new dominance criteria and an application to Romania By P. Brunori; F. Palmisano; V. Peragine
  3. Financial Soundness Index for the Private Corporate Sector in Colombia By Juan S. Lemus-Esquivel; Carlos A. Quicazán-Moreno; Jorge L. Hurtado-Guarín; Angélica Lizarazo-Cuéllar
  4. Inequality, Financial Deepening and Current Account Impact By Jorge Carrera; Esteban Rodríguez; Mariano Sardi
  5. Board Independence, the Information Environment, and Audit Fees By John Zhang
  6. Intangible Assets and Firm-Level Productivity Growth in the U.S. and Japan By MIHO TAKIZAWA
  7. Pareto-Improving Optimal Capital and Labor Taxes By Sarolta Laczo; Albert Marcet; Katharina Greulich
  8. Balance of publications about IFRS in two Colombian magazines By Jhonny Stiven Grajales Quintero; Jhon Jairo Cuevas Mejia; Wilson Alexis Usme Suarez
  9. Owner-Level Taxes and Business Activity By Henrekson, Magnus; Sanandaji, Tino
  10. Dynamic Tax Evasion with Audits based on Conspicuous Consumption By Rosella Levaggi; Francesco Menoncin

  1. By: Tereza Miková (University of Economics, Prague)
    Abstract: The paper investigates the effect of IFRS on earnings management. I analyze whether earnings management reduced after IFRS adoption and use one of earlier studies verified method “loss avoidance thresholds”. This paper concentrates chosen European countries representatives.I examine sample of 771 companies (9272 firm-year observations) during the years 2000 – 2013. My results are different in selected countries. Study demonstrates that one set of accounting standards contributes to better reporting quality and reduce pervasiveness of earnings manipulation in France. But in contrast there is no difference supporting lower earnings management after than before IFRS application in Germany and the United Kingdom. Due to my findings, other political and economic factors, such a legal system or strength of capital market, play significant role in entire process to reach higher comparability and transparency cross-border companies’ financial statements. Overall, my result suggests that IFRS moderately contribute to accounting quality of reported financial statements and brings benefit for stakeholders but other economic factors are as well irreplaceable.
    Keywords: Accounting Standards, Earnings Manipulation, International Financial Reporting Standards, Loss Avoidance, Financial Reporting Quality.
    JEL: M41
  2. By: P. Brunori (Università di Bari); F. Palmisano (U); V. Peragine (Università di Bari)
    Abstract: This paper addresses the problem of the normative evaluation of income tax systems and income tax reforms. While most of the existing criteria, framed in the utilitarian tradition, are uniquely based on information about individual incomes, this paper, building upon the opportunity egalitarian theory, proposes new equity criteria which take into account also the socio-economic characteristics of individuals. Suitable dominance conditions that can be used to rank alternative tax systems are derived by means of an axiomatic approach. Moreover, the theoretical results are used to assess the redistributive effects of an hypothetical tax reform in Romania through a microsimulation analysis.
    Keywords: income inequality; inequality of opportunity; tax reforms; microsimulation; progressivity; horizontal equity.
    JEL: D63 E24 O15 O40
    Date: 2014–12
  3. By: Juan S. Lemus-Esquivel; Carlos A. Quicazán-Moreno; Jorge L. Hurtado-Guarín; Angélica Lizarazo-Cuéllar
    Abstract: This paper has as main objective to build a composite metric of financial soundness for the private corporate sector in Colombia. Instead of relying on the individual and sometimes restrictive financial ratio analysis approach, the purpose of this document is to provide a single metric aimed at measuring the financial health of firms. Said metric, the financial soundness index, is derived by employing the cross-section approach of principal component analysis. For the time period of 2000-2013, the results allow to identify which industries have a weak, strong or similar balance sheet performance relative to that observed for the private corporate sector as a whole. Furthermore for firms that are debtors of the Colombian financial system, validation tests on the index confirm the apparent relationship between accounting data and the credit risk perception of and materialization for financial intermediaries.
    Keywords: firms’ financial soundness, principal component analysis, financial ratios, composite indices, financial stability.
    JEL: L25 G30 G32 C3
    Date: 2015–08–04
  4. By: Jorge Carrera (Central Bank of Argentina, UNLP); Esteban Rodríguez (Central Bank of Argentina); Mariano Sardi (Central Bank of Argentina)
    Abstract: In this paper we analyze if changes in levels of inequality are associated, ceteris paribus, with changes in the balance of the current account, taking in consideration the role of the development stage of the economy in the interaction between these variables. In this sense, the financial system emerges as a key intermediary, which may affect the sign and intensity of these relationships. Using panel data from 29 countries for the 1970-2011 periods, our results confirm the need to distinguish between functional and personal income distribution. Greater participation of wages in total income is related with a deterioration of the current account. This result is robust to different specifications and estimation methodologies. On the other hand, while we find evidence that deterioration in personal income distribution is associated with a lower current account balance, our results shows that the relationship is stronger in emerging economies than in advanced, unlike what is suggested by the recent literature, which has focused mainly on the case of the US. The existence of differences between groups of countries confirms that the relationship between income concentration and external sector is mediated by various structural and idiosyncratic factors and, as a result, the net effect will vary depending on the sample used. Given the complexity of these relationships, we warn about the risks of generalizing to emerging countries results based only in the study of advanced economies.
    Keywords: inequality, current account, financial intermediation, global imbalances, financial crisis
    JEL: C23 D31 D33 E44 F32 F41
    Date: 2015–09
  5. By: John Zhang (Durham University)
    Abstract: To enhance board oversight, since 2002 US legislation has required listed companies to have a majority independent board. This paper uses this legislative change to examine the relation between board independence and audit fees. To provide a clean estimate of this relation, we adopt a difference-in-difference approach using a sample matched on client firm characteristics. We find that greater board independence is insignificantly associated with a change in audit fees when client firms operate in a weak information environment. When the information environment is strong, greater board independence is associated with an increase in audit fees. Our results are consistent with a nascent theory emphasising information asymmetry and provide insight into the effectiveness of the mandated board independence in relation to audit quality.
    Keywords: audit fee, board independence, information environment
    Abstract: The purpose of this study is to measure the effect of intangibles on the growth of developed countries, particularly, at firm level. This paper analyzes the role â€intangibles†play in firms' growth and performance, in addition to the production factors of labor and tangible capital, using their financial data in the U.S. and Japan. And this study attempts to analyze whether companies accumulating intangible assets respond better to shocks (for example, financial crises) than those without intangible capital. We could see that intangibles were important sources of productivity growth at the micro level in the U.S. Those results were not obtained in Japan. The cross term between intangibles and tangibles was positive and significant in both the U.S. and Japan. This suggests that if a firm invests more not only in intangibles but also in tangibles, the firm can enjoy a high productivity growth. Finally, this paper analyzed whether companies that had invested in intangibles responded better to shocks than those without intangible capital. The results showed that the firms with greater intangible capital managed to overcome the crisis in the U.S.
    Keywords: Intangible assets, productivity
    JEL: J24 O40
    Date: 2015–05–01
  7. By: Sarolta Laczo (Bank of England and IAE-CSIC); Albert Marcet (IAE-CSIC, ICREA, UAB, MOVE, Barcelona GSE, and CEPR); Katharina Greulich (Swiss Re)
    Abstract: We study optimal fiscal policy in a model with agents who are heterogeneous in their labor productivity and wealth, and there is an upper bound on the capital tax rate each period. We focus on Pareto-improving plans. We show that the optimal tax reform is to cut labor taxes and leave capital taxes high in the short and medium run. Only in the very long run would capital taxes be zero. For our calibration labor taxes should be low for the first eleven to twenty-six years, while capital taxes should be at their maximum. This policy ensures that all agents benefit from the tax reform and that capital grows quickly after the reform. Therefore, the long-run optimal tax mix is the opposite of the short- and medium-run one. The initial labor tax cut is financed by deficits, which lead to a positive level of government debt in the long run, reversing the standard prediction that the government accumulates savings in models with optimal capital taxes. The welfare benefits from the tax reform are high and can be shifted entirely to capitalists or workers by varying the length of the transition.
    Date: 2015
  8. By: Jhonny Stiven Grajales Quintero; Jhon Jairo Cuevas Mejia; Wilson Alexis Usme Suarez (Faculty of Economics and Management, Pontificia Universidad Javeriana Cali)
    Abstract: This review article aims to provide an overview of the publications about IFRS in the Revista Internacional Legis de Contabilidad y Auditoría and in the journal Cuadernos de Contabilidad, by Pontificia Universidad Javeriana Bogota. To this extent, the document is configured as the first part of the balance of publications about IFRS in Colombia. The balance of the literature about this subject may give suggestions about the process of adoption and the way in which this process has been analyzed by the academy and by the accounting profession. This first part of the balance of publications about IFRS in Colombia is framed in a research project; in future studies, the authors pretend to construct the state-of-the-art about IFRS in Colombia. This state-of-the-art will include the set of educational and professional magazines of the country, and the gray literature about IFRS that has been published in Colombia.
    Keywords: Balance of Publications, International Accounting Standardization, Adoption of International Standards, IFRS, and Colombia.
    Date: 2015–09
  9. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Sanandaji, Tino (Institute for Economic and Business History Research (EHFF))
    Abstract: In some classes of models, taxes at the owner level are “neutral” and have no effect on firm activity. However, this tax neutrality is sensitive to assumptions and no longer holds in more complex models. We review recent research that incorporates greater complexity in studying the link between taxes and business activity – particularly entrepreneurship. Dividend taxes on owners of large firms affect firm activity in models that include agency conflicts between owners and managers. Similarly, after incorporating entrepreneurs’ occupational choice into the model, taxes are no longer neutral. By forsaking lucrative alternative careers, skilled entrepreneurs tend to have high opportunity costs, which make the choice of attempting to start a business of first order importance. Moreover, in models where it is assumed that capital flows across borders without cost, taxes on domestic business owners do not alter business activity because foreign capital seamlessly compensates for tax-induced declines in investments. This theoretical notion is contradicted by the strong “home bias” observed in business ownership, in particular for small firms and startups without easy access to international capital markets. Recent empirical work has emphasized that taxes have heterogeneous effects on mature firms, entrepreneurial startups, and owner-managed small firms. Lowering dividend taxes on firms with dispersed ownership has been shown to shift capital from mature firms into rapidly growing firms. Moreover, capital gains taxation tends to reduce the number of innovative startups and diminish venture capital activity, while high owner-level taxes encourage small business activity and non-entrepreneurial self-employment because such firms have more opportunities to avoid or evade taxes. To obtain efficient incentives in entrepreneurial startups, contractual terms are required that ex ante guarantee that all providers of critical inputs, especially equity constrained entrepreneurs, are entitled to a share of the resulting capital value firm. Unless properly designed, owner-level taxes prevent such ex ante contracting and thus lower the likelihood of eventual success.
    Keywords: Business taxation; Capital income taxation; Corporate governance; Entrepreneurship; Institutions; Tax policy
    JEL: H25 H26 H32 L26
    Date: 2015–10–05
  10. By: Rosella Levaggi (Università di Brescia); Francesco Menoncin (Università di Brescia)
    Abstract: We solve the problem of a representative agent who maximises the expected present utility of his intertemporal consumption under the as- sumption that an optimal fraction of his wealth is hidden to the tax au- thorities (we show conditions under which evasion is expedient). Evasion affects the capital dynamics in two ways: the growth rate of capital in- creases because some taxes are not paid, but when caught evading the consumer has to pay a fee (proportional to evasion). Consumption can be allocated between ordinary goods and so-called conspicuous goods. The latter are used by the Government for targeting the audit, since they are considered like an indicator of consumer's wealth. In fact, the probabil- ity to be caught is a function of the distance between the actual and the presumed consumption in conspicuous goods. We find a closed form solu- tion to the dynamic optimization problem and show how fiscal and audit parameters affect the optimal evasion and the optimal allocation between the two consumptions.
    Keywords: dynamic tax evasion, targeted audits, conspicuous consumption
    JEL: G11 H26 H42
    Date: 2015–10

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