nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2017‒01‒08
ten papers chosen by

  1. Commitment vs. Flexibility with Costly Verification By Marina Halac; Pierre Yared
  2. Financial Sleuthing By Niamh Brennan
  3. Audit committees: practices, practitioners and praxis of governance By Niamh Brennan; Collette E. Kirwan
  4. A typology for exploring the quality of explanations for non-compliance with UK corporate governance regulations By Philip J. Shrives; Niamh Brennan
  5. Modelling corporate tax reforms in the EU: New simulations with the CORTAX model By à lvarez-Martínez, María Teresa; Barrios, Salvador; d'Andria, Diego; Gesualdo, Maria; Pontikakis, Dimitrios; Pycroft, Jonathan
  6. Production versus revenue efficiency with limited tax capacity: theory and evidence from Pakistan By Michael Carlos Best; Anne Brockmeyer; Henrik Jacobsen Kleven; Johannes Spinnewijn; Mazhar Waseem
  7. Dynamic scoring of tax reforms in the European Union By Salvador Barrios; Mathias Dolls; Anamaria Maftei; Andreas Peichl; Sara Riscado; Janos Varga; Christian Wittneben
  8. Real Regulatory Capital Management and Dividend Payout: Evidence from Available-for-Sale Securities / Gestion du capital réglementaire et politique de dividende : Le cas des valeurs mobilières disponibles à la vente By Michele Fabrizi; Elisabetta Ipino; Michel Magnan; Antonio Parbonetti
  9. A Case of Distortion By Niamh Brennan
  10. Is Bank Supervision Effective? Evidence from the Allowance for Loan and Lease Losses By Yang, Ling

  1. By: Marina Halac; Pierre Yared
    Abstract: We introduce costly verification into a general delegation framework. A principal faces an agent who is better informed about the efficient action but biased towards higher actions. An audit verifies the agent’s information, but is costly. The principal chooses a permissible action set as a function of the audit decision and result. We show that if the audit cost is small enough, a threshold with an escape clause (TEC) is optimal: the agent can select any action up to a threshold, or request audit and the efficient action if the threshold is sufficiently binding. For higher audit costs, the principal may instead prefer auditing only intermediate actions. However, if the principal cannot commit to inefficient allocations following the audit decision and result, TEC is always optimal. Our results provide a theoretical foundation for the use of TEC in practice, including in capital budgeting in organizations, fiscal policy, and consumption-savings problems.
    JEL: D02 D82 D86 E02
    Date: 2016–12
  2. By: Niamh Brennan
    Abstract: Forensic accounting is the use of accounting expertise to assist a court. "Forensic" denotes anything to do with a court of law and forensic accounting is increasingly recognised as a separate and important discipline at the intersection of law and accountancy. A relatively new role within accounting, forensic accountants build on a unique blend of accounting and investigative skills.They are,infact, financial detectives, dissecting financial statements, looking behind rather than merely at the numbers. Their expertise lies in working with sensitive financial evidence, lawyers, law enforcement agencies and the court system. Integrating accounting, auditing and financial investigation and their application in litigation and dispute resolution, forensic accounting is a highly-specialised area of practice that combines accounting and legal disciplines.
    Keywords: Forensic accounting
    Date: 2016–02
  3. By: Niamh Brennan; Collette E. Kirwan
    Abstract: Purpose: The purpose of this paper is to review and critique prior research on audit committees using a practice-theory lens. Research on audit committees has followed the same trajectory as early research on boards of directors, which has been criticised for its singular theoretical perspectives and methodologies that do not capture the complexity of real-world experiences/behaviours. Design/methodology/approach: The authors devise an analytical framework based on practice theory to conduct the review. The authors examine what audit committees should do (i.e. best practice) vs what audit committees actually do (i.e. actual activities in practice – praxis). Attributes of audit committee members, and the relationship dynamics relevant to their role execution (i.e. practitioners), are considered. Findings: Research on boards has found that over-emphasis on agency theory’s monitoring role negatively impacts boards' effectiveness. The authors invoke other theories in examining what audit committees do in practice. The authors characterise the role of audit committees as oversight not monitoring. The authors question whether, similar to auditing, audit committees are blamist tools or are genuinely orientated towards supporting improvements in organisational management systems. The authors unpack the ritualistic ceremonial behaviours and symbolic endeavours vs substantive engagement by audit committees. The analytical framework also considers the 'guardianship circle' around audit committees in the form of the key practitioners and their relationships: audit committee members, auditors and managers. Originality/value: Drawing on the analytical framework, the authors provide directions for further opportunities for research of audit committees.
    Keywords: Corporate governance; Audit committees; Practice theory; Practices; Practitioners; Praxis; Guardianship circle
    Date: 2015
  4. By: Philip J. Shrives; Niamh Brennan
    Abstract: Companies not complying with the UK Corporate Governance Code are required to provide explanations for non-compliance. This is the capstone of the 'comply-or-explain' system. There are no regulations about the content of those explanations, leaving shareholders and others to judge their appropriateness. The study develops a typology to assess the quality of corporate governance explanations for non-compliance of UK FTSE 350 companies based on seven quality characteristics. Code breaches generating the non-compliance explanations for analysis are identified for two accounting periods (2004/5 and 2011/12) relating to the 2003 and 2010 Codes (data for 2011/12 in brackets). There were 204 (125) non-compliant companies, 537 (253) Code breaches and 438 (208) explanations for non-compliance, an average of 2.6 (2.0) Code breaches and 2.2 (1.7) explanations per non-compliant company. Although compliance increased over the period examined, explanations were found to be of variable quality. Results suggest that companies need to improve the quality of their explanations if they are to be useful to users, notably location, complexity and specificity of explanations. There are also important questions raised about the work of auditors and their apparent silence. Companies are being encouraged to move towards compliance. We argue that this is against the 'comply-or-explain' philosophy which accepts that ‘one size does not fit all. Better quality of explanation is more important than compliance and thus companies may be unwittingly heading in the wrong direction.
    Keywords: Corporate governance; Comply-or-explain; Non-compliance; Explanation; Quality of explanations; Typology
    Date: 2015–03
  5. By: Ã lvarez-Martínez, María Teresa (European Commission - JRC); Barrios, Salvador (European Commission - JRC); d'Andria, Diego (European Commission - JRC); Gesualdo, Maria (European Commission - JRC); Pontikakis, Dimitrios (European Commission - JRC); Pycroft, Jonathan (European Commission - JRC)
    Abstract: This study investigates the economic impact of a recent proposal for a common corporate tax base (CCTB), European Commission (2016a), and a common consolidated corporate tax base with formula apportionment (CCCTB) within the EU, European Commission (2016b). On top of the common base, it considers proposals to reduce the debt bias in corporate taxation. To do so, we employ an applied general equilibrium model (CORTAX) covering all EU Member States, featuring different firm types and modelling many key features of corporate tax regimes, including multinational profit shifting, investment decisions, loss compensation and the debt-equity choice of firms. First, the economic impact of C(C)CTB is assessed, restricting the scope of the reforms to multinationals only. Macroeconomic results show that the common tax base simulations directly affect the cost of capital, which on average falls across the EU, boosting investment, and therefore driving the increase in GDP. Second, C(C)CTB is simulated together with proposals to reduce or eliminate the debt bias in corporate taxation, principally: the comprehensive business income tax (CBIT), the allowance for corporate equity (ACE) and the allowance for corporate capital (ACC). From a financing prospective, all proposals incentivise firms to rely less on debt-financing. From a macroeconomic perspective, the simulations which narrow the tax base by introducing addition deductions, i.e. ACE and ACC, raise GDP, despite the fact that the (ex-ante) CIT revenue is maintained by adjusting the CIT rate. The opposite is the case for the CBIT, which causes a fall in GDP. Third, a group of sensitivity simulations are presented to check for robustness. Among the insights from the sensitivity simulations, one notes that the inclusion of domestic firms in the CCCTB proposal somewhat increases the positive impact on GDP. A broader harmonised tax base results in lower welfare and GDP outcomes than a narrower harmonised tax base, because it more directly impacts the marginal investment decision. Reducing profit shifting slightly lowers investment, though on balance does not negatively impact welfare. The model results are robust to varying the capital-labour substitutability. In summary, the results of this economic modelling evaluation suggest that a fairer and more efficient tax system can be introduced whilst maintaining, and perhaps improving, GDP and welfare in the EU.
    Keywords: Computable General Equilibrium model, CORTAX, CCTB, CCCTB, Profit-shifting
    Date: 2016–12
  6. By: Michael Carlos Best; Anne Brockmeyer; Henrik Jacobsen Kleven; Johannes Spinnewijn; Mazhar Waseem
    Abstract: To fight evasion, many developing countries use production-inefficient tax policies. This includes minimum tax schemes whereby firms are taxed on either profits or turnover, depending on which tax liability is larger. Such schemes create nonstandard kink points, which allow for eliciting evasion responses to switches between profit and turnover taxes using a bunching approach. Using administrative data on corporations in Pakistan, we estimate that turnover taxes reduce evasion by up to 60–70 percent of corporate income. Incorporating this in a calibrated optimal tax model, we find that switching from profit to turnover taxation increases revenue by 74 percent without reducing aggregate profits.
    JEL: J1 M40 E6
    Date: 2015–10–30
  7. By: Salvador Barrios (European Commission - JRC); Mathias Dolls (ZEW); Anamaria Maftei (European Commission - JRC); Andreas Peichl (ZEW); Sara Riscado (European Commission - JRC); Janos Varga (European Commission – DG ECFIN); Christian Wittneben (ZEW)
    Abstract: In this paper, we present a dynamic scoring analysis of tax reforms for European countries. In this analysis we account for the feedback effects resulting from the adjustment in the labour market and for the economy-wide reaction to tax policy changes. We combine the microsimulation model EUROMOD, extended to incorporate an estimated labour supply model, with the new Keynesian DSGE model QUEST, used by the European Commission for analysing fiscal and structural reform in EU member states. These two models are connected in two ways: by introducing tax policy shocks in QUEST, derived from computing changes in implicit tax rates using EUROMOD; and by calibrating the elasticity of labour supply and the non-participation rates, by skill categories, in QUEST from values calculated using EUROMOD and the estimated labour supply function. Moreover, we discuss aggregation issues and the consistency between the micro and macro modelling of labour supply and interpret the model interaction in terms of tax incidence analysis. We illustrate the methodological approach with the results obtained when scoring specific reforms in three EU Member States, namely, Italy, Belgium and Poland. We compare two different scenarios – one in which the behavioural response to tax changes over the medium term is ignored and another scenario where this behavioural/micro-dimension is embedded into the microsimulation model. In this particular set-up, we do not find evidence of strong second-round effects, and the fiscal and distributional effects of the reforms tend to overlap in both scenarios. We attribute these results to existing rigidities in labour and product markets, which have shrunk further the small tax policy shocks introduced into the macroeconomic model.
    Keywords: Dynamic scoring, tax reforms, first and second round effects, labour market behaviour
    Date: 2016–12
  8. By: Michele Fabrizi; Elisabetta Ipino; Michel Magnan; Antonio Parbonetti
    Abstract: The 2007–2009 financial crisis has re-ignited a long-running debate about the relative merits of historical cost accounting (HCA) or fair value accounting as foundations for prudential oversight, including the calculation of regulatory capital. Available-for-sale securities provide a good setting to further explore this issue. Using a sample of 5,333 firm-year observations representing 721 unique U.S. banks and bank holding companies between 1998 and 2013, we present evidence that regulatory capital based on HCA induces banks to engage in gains trading activities to improve their capital position and pay dividends. We also document that banks experiencing a decrease in regulatory capital and banks with a higher percentage of institutional investors are more prone to engage in gains trading to pay dividends. Finally, our findings reveal that to counterbalance the increased risk, banks change their lending behavior and decrease the riskiness of their trading portfolios. Overall, our results reveal the potential side effects linked to the use of HCA as a foundation to compute regulatory capital and suggest that HCA is not a panacea. La crise financière de 2007-2009 a relancé le débat quant aux avantages et inconvénients comparés de la comptabilité au coût historique (ou amorti) et de la comptabilité à la juste valeur à des fins de réglementation, notamment en ce qui a trait au calcul du capital. Compte tenu de leur comptabilité particulière, les valeurs mobilières disponibles à la vente offrent un contexte intéressant pour l’étude de cette question. À partir des données financières d’un échantillon de 721 banques américaines au cours de la période 1998-2013, nous constatons que le calcul du capital réglementaire basé sur le coût historique amène les banques à effectuer des opérations de cessions de titres disponibles à la vente en vue de réaliser des gains constatés aux résultats, ce qui leur permet d’améliorer leur ratio de capital réglementaire et d’augmenter leurs dividendes. Nous constatons également que les banques souffrant de pressions à la baisse quant à leur ratio de capitalisation et ayant une plus grande proportion d’investisseurs institutionnels dans leur actionnariat ont une plus grande propension à effectuer de telles opérations. Par contre, nous constatons également qu’afin de contrer l’accroissement du risque financier qui en résulte, les banques modifient leur stratégie de prêt et réduisent le niveau de risque de leur portefeuille de négociation. Dans l’ensemble, nos résultats tendent à montrer les effets secondaires découlant de l’utilisation du coût historique en tant que fondement du calcul du capital réglementaire.
    Keywords: Banks, Regulatory capital, Available-for-sale securities, Realized gains, Realized losses, Dividend payout, banques, capital réglementaire, titres disponibles à la vente, gains réalisés, pertes constatées, politique de dividende
    Date: 2016–12–19
  9. By: Niamh Brennan
    Abstract: There are few regulations concerning narratives outside audited financial statements, leaving room for manipulative impression management in corporate reporting. Pervasive impression management has resulted in an erosion of the quality of financial reporting. Techniques ranging from rhetoric, images, choice of earnings number, comparative and attribution are frequently used to cloud the true picture.
    Keywords: Impression management; Corporate reporting; Financial statements
    Date: 2015–08
  10. By: Yang, Ling
    Abstract: I investigate whether bank supervision is effective in enforcing written rules on the estimations of the allowance for loan and lease losses (ALLL) consistently between public and private banks, which have different intensity of incentives to misreport the ALLL. Results suggest that bank supervision of the ALLL estimations was effective between 2002 and 2012, but has become lax recently. State-chartered public banks underestimated the ALLL by about 13% annually between 2013 and 2015. Bank regulators are willing to cater to banks’ private interests when the economic environment is good and the regulatory emphasis is weak, but not during the crisis.
    Keywords: commercial banks, bank regulation, bank supervision, bank accounting and disclosure, allowance for loan and lease losses (ALLL), reporting incentives
    JEL: G21 G28 M41 M48
    Date: 2016–12–22

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