nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2016‒12‒18
six papers chosen by

  1. The fiscal and equity impact of tax expenditures in the European Union By Salvador Barrios; Francesco Figari; Luca Gandullia; Sara Riscado
  2. Measuring business profits: Accountants versus economists By Hasan, Zubair
  3. Estimating profit shifting in South Africa using firm-level tax returns By Hayley Reynolds; Ludvig Wier
  4. Predicting accounting fraud: Evidence from Japan By Song Mingzi; Naoto Oshiro; Akinobu Shuto
  5. Sustainability of an economy relying on two reproducible assets By Robert D. Cairns; Stellio Del Campo; Vincent Martinet
  6. Banking Supervision Outsourcing: Economics, Rules and Drivers By Donato Masciandaro

  1. By: Salvador Barrios (European Commission - JRC); Francesco Figari (University of Insubria and ISER University of Essex); Luca Gandullia (University of Genova); Sara Riscado (European Commission - JRC)
    Abstract: Tax expenditures are preferential tax treatments granted to specific individuals or categories of households which aim at achieving social and economic goals – poverty and inequality reduction, and employment promotion, among others. Tax expenditures are widely used by EU Member States. However, their fiscal and equity impacts are not always clear and their effectiveness and efficiency as a policy instrument needs to be carefully evaluated, especially in the present context of constrained public finances. Tax expenditures might in some cases distort economic incentives be it towards consumption or investment, in some case by favouring rent seeking behaviour and making tax systems less transparent and/or regressive from a social viewpoint. While policy recommendations often call for streamlining tax expenditures, in practice policy measures are often difficult to design in particular given the difficulty in measuring the fiscal and equity impact of tax expenditures. This paper quantifies the fiscal and equity effects of tax expenditures in 27 European countries making use of EUROMOD, the EU-wide microsimulation model. We focus on four specific categories of preferential tax treatments affecting personal income taxation related to housing, pension, education and health expenditures. One key feature of the microsimulation model EUROMOD is that it embeds the interaction between different tax instruments and benefits entitlement which, in EU tax systems, proves essentially to fully gauge the fiscal and equity impact of tax expenditures. In order to quantify the impact of tax expenditure on governments' tax revenues and on households' disposable income a benchmark tax system scenario is created where tax expenditures – in the form of allowances, deductions, exemptions, reliefs and credits – are explicitly considered. We find a variety of effects, in terms of sign and magnitude, across Member States, and within these, among types of households and across generations. Overall our findings suggest that the impact of tax expenditure on tax revenues and on income inequalities can be sizeable. The redistributive impact of removing tax expenditures can go both directions, either on the progressive or regressive side, depending on the country and the tax expenditure considered. This result points out to the importance of a careful country specific scrutiny, for each type of tax expenditures.
    Keywords: Tax expenditures, microsimulation, fiscal and equity impacts
    Date: 2016–11
  2. By: Hasan, Zubair
    Abstract: This paper discusses a topic rarely addressed in the literature on profit theory over the decades. In empirical work on subjects like growth, efficiency and welfare, business profits at times appear as one of the variables. Such studies perforce use profit data reported in the business accounting records. This data is invariably at variance in important ways with the economists’ theoretical view of profit. The cause of divergence is the cosmopolitan forward looking ex ante view of entrepreneurism the economists take as opposed to the narrow conservative ex post focus of the accountants needed to protect the interest of business proprietors who pay them for the job. There is a need to narrow this gap to improve the results of empirical explorations. This paper identifies some areas of divergence like maintenance of capital, evaluation of inventory and the impact of conservatism. It concludes that the economists are obliged more to take cognizance of accounting constraints than the other way round.
    Keywords: Business profits, Efficiency, capital maintenance, inventory evaluation, Conservatism
    JEL: M21 M41
    Date: 2016–12–09
  3. By: Hayley Reynolds; Ludvig Wier
    Abstract: Using the universe of South African corporate tax returns for 2009–14, we estimate profit- and debt-shifting responses in South Africa. We find evidence that South African subsidiaries engage in profit shifting and that profit-shifting responses to tax incentives across all channels are systematically higher compared to developed countries.
    Keywords: developing countries, international taxation, multinational firms, profit shifting, tax
  4. By: Song Mingzi (Financial Technology Research Institute Inc., Tokyo); Naoto Oshiro (Financial Technology Research Institute Inc., Tokyo); Akinobu Shuto (The University of Tokyo)
    Abstract: This study develops a prediction model for identifying accounting fraud by analyzing the accounting information for Japanese firms. In particular, we (1)explore the characteristics of accounting fraud firms by analyzing financial information obtained from annual reports (yukashoken-houkokusho in Japanese) and (2)develop a model for predicting accounting fraud based on the characteristics of Japanese fraud firms. To identify the characteristic of fraud firms, we focus on 39 variables for the eight factors of "accruals quality," "performance," "nonfinancial measures," "off-balance-sheet activities," "market-related incentives," "conservatism," "real-activities manipulation," and "Japanese-specific factors." Through our univariate analysis and model building process, we find that “accrual quality," "market-related incentives," "real-activities manipulation," "conservatism" and "Japanese-specific factors" are generally useful for detecting accounting fraud. We also conduct several analyses that test the predictive ability of our models, including (1)the detection rates of fraud firms, (2)Type I and Type II error rates, (3)marginal effect analysis on independent variables, and (4)robustness tests on time periods and industry clustering. We find that our models have generally higher predictive power in detecting accounting fraud. We expect that our models can be used widely in various accounting and finance practices.
  5. By: Robert D. Cairns; Stellio Del Campo; Vincent Martinet
    Abstract: Evaluating the sustainability of a society requires a system of shadow or accounting values derived from the sustainability objective. As a first step toward the derivation of such shadow values for a maximin objective, this paper studies an economy composed of two reproducible assets, each producing one of two consumption goods. The effect of the substitutability between goods in utility is studied by postulating, in turn, neoclassical diminishing marginal substitutability, perfect substitutability and perfect complementarity. The degree of substitutability has strong effects on the maximin solution, affecting the regularity or non-regularity of the program, and on the accounting values. This has important consequences for the computation of genuine savings and the sustainability prospects of future generations.
    Keywords: Sustainable development, Maximin, Sustainability accounting, Substitutability
    JEL: O44 Q56
    Date: 2016–12–15
  6. By: Donato Masciandaro
    Abstract: What are the pros and cons of involving external auditors in banking supervision? Which are the concrete rules of the game all around the world? How to evaluate them? The aim of this paper is to shed light on the relationship between the quality of banking supervision and the involvement of external auditors, considering the potential benefits and costs. On the one side, the involvement of private financial gatekeepers can improve overall credibility of the supervisory setting. On the other side, the involvement of private actors for the implementation of public tasks can give rise to a range of known risks.The article opens with economic analysis highlighting the pros and cons of involving external auditors and entrusting them with a measure of banking supervision. On the basis of the economic framework, the author constructs an original and systematic index of Auditors’ Involvement in Supervision – the AIS Index – based on 22 indicators, which is then applied to evaluate country by country the state of banking supervision in the world. The resulting data set is used for econometric testing of the existence of drivers that can explain the political choices made over auditors’ involvement in supervision.
    Keywords: Banking Supervision, Auditing, Delegation, Economics and Law
    JEL: G21 G28
    Date: 2016

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