nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2018‒06‒18
twelve papers chosen by

  1. Deferred Taxation under Default Risk By Cristian Carini; Michele Moretto; Paolo Panteghini; Sergio Vergalli
  2. Local Taxation and Tax Base Mobility: Evidence from a business tax reform in France By Tidiane Ly; Sonia Paty
  3. Estimating the effect of the EMU on current account balances: a synthetic control approach By Hope, David
  4. Accrual Accounting and Resource Allocation: A General Equilibrium Analysis By Choi, Jung Ho
  5. Linking national emissions inventories to economic accounting By Instituto de Pesquisa Econômica Aplicada
  6. Is it just Luring Reported Profit? The Case of European Patent Boxes By Marko Köthenbürger; Federica Liberini; Michael Stimmelmayr
  7. Using Fair Value Earnings to Assess Firm Value By Barth, Mary E.; Landsman, Wayne R.
  8. Taxing Direct Sales of Digital Services: A Plea for Regulated and Internationally Coordinated Profit Splitting By Wolfram F. Richter
  9. Effectiveness of Internal Audit and Oversight at Central Banks: Safeguards Findings - Trends and Observations By Elie Chamoun; Riaan van Greuning
  10. Georgia; Technical Assistance Report-Enhancing the Fiscal Rules By International Monetary Fund
  11. Banking Supervision and External Autditors: What works best? By Donato Masciandaro; Davide Romelli
  12. Tax Evasion on a Social Network By Duccio Gamannossi degl'Innocenti; Matthew D. Rablen

  1. By: Cristian Carini; Michele Moretto; Paolo Panteghini; Sergio Vergalli
    Abstract: In this article, we have used a continuous EBIT-based model to study deferred taxation under default risk. Quite surprisingly, default risk has been disregarded in research on deferred taxation. In order to underline its importance, we first calculated the probability of default, over a given time period, together with the contingent value of tax deferral. We then applied our theoretical model to a sample of 27,749 OECD companies. We showed that, when accounting for both firms with a negative EBIT and firms with a probability of default higher than 50% (over a 10-year period), a relevant percentage of firms were close enough to default. Hence, these taxpayers should not consider deferred taxation in their financial statements, for the sake of prudence. Moreover, under default, the expected present value of deferred taxes was much lower than that obtained in a deterministic context. Hence, if we look at deferred taxes from the Government’s point of view, we must consider them as being risk-free loans. However, only a portion are subsequently repaid, due to default. This implies that, when a Government allows accelerated tax depreciation it should be aware of future losses due to default. So far, these estimates have been missing, although techniques do exist and are quite practical.
    Keywords: capital structure, contingent claims, corporate taxation and tax depreciation allowances
    JEL: H25 M41
    Date: 2018
  2. By: Tidiane Ly (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France); Sonia Paty (Univ Lyon, Université Lumière Lyon 2, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: This paper investigates the impact of tax base mobility on local taxation. We first develop a theoretical model in order to examine the connection between local business property taxation and tax base mobility within a metropolitan area. We find that decreasing capital intensity in the tax base increases the business property tax rates unambiguously. We then test this result using a French reform, which changes the composition of the main local business tax base in 2010. Estimations using Difference-in-Differences show that the reduction in the mobility of the tax base indeed results in higher business property tax rates. Housing tax rates were not affected by the reform.
    Keywords: Local taxation, Tax base mobility, Tax competition, Difference-in-Differences
    JEL: H71 H72 R50 R51
    Date: 2018
  3. By: Hope, David
    Abstract: The European sovereign debt crisis wrought major political and economic damage on the European Monetary Union (EMU). This led to a reassessment of the pre-crisis period of economic growth and stability in the EMU, shifting attention to the macroeconomic imbalances that emerged between member states, especially those in current account balances. This paper uses macroeconomic data on OECD economies and a new statistical approach for causal inference in observational studies—the synthetic control method—to estimate the effect of the EMU on the current account balances of individual member states. This ‘counterfactuals’ approach provides strong evidence that the introduction of the EMU was responsible for the divergence in current account balances among member states in the run-up to the euro crisis. The results suggest that the EMU effect operated through multiple channels and that fundamental changes to the institutional framework of the EMU may be required to safeguard the currency union against a reemergence of dangerous external imbalances in the future.
    Keywords: common currency areas; EMU; current control method; synthetic control method; European sovereign debt crisis
    JEL: F3 G3
    Date: 2016–09–01
  4. By: Choi, Jung Ho (Stanford University)
    Abstract: I evaluate the role of accrual accounting in improving rms' production decisions and resource allocation across rms. I introduce both cash ow and accounting earnings as imperfect measures of performance into a general equilibrium model with heterogeneous rms under imperfect information. The model demonstrates rms' more informed decisions with an improved measure of performance lead to more resources being allocated to potentially high-productivity firms through the product and input markets. The estimated parameter values are consistent with accrual accounting improving managers' information about future productivity by providing a better measure of performance. The quantitative analysis suggests having accrual accounting information in addition to cash accounting information leads to a 0.5% increase in aggregate productivity and a 0.7% increase in aggregate output through resource allocation in the United States. The estimates are larger in China and India as benchmarks for developing countries: a 1.5%-2.1% increase in aggregate productivity and a 2.3%-3.2% increase in aggregate output. Overall, I demonstrate accrual accounting plays an important role in determining aggregate productivity through resource allocation.
    Date: 2018–01
  5. By: Instituto de Pesquisa Econômica Aplicada (IPC-IG)
    Abstract: "How can emissions reporting be transformed into emissions accounts? Maria Lidén, Senior Advisor, Environmental Accounts and Natural Resources at Statistics Sweden, asserted that this endeavour is possible. Statistics Sweden has managed to successfully improve each successive inventory of air emissions. Every new set of national economic accounts has been better than the preceding one. There is no need for extra services to account for emissions?the only need is to transform the data". (?)
    Keywords: Linking, national, emissions, inventories, economic, accounting
    Date: 2017–12
  6. By: Marko Köthenbürger; Federica Liberini; Michael Stimmelmayr
    Abstract: Patent box regimes have become increasingly popular as an instrument to attract taxable income from intellectual property (IP). This paper assesses the quantitative impact of patent box regimes on profit shifting by multinational enterprises (MNEs). We proxy the ability to access the tax benefit of the patent box by historical IP ownership. On average, affiliates belonging to MNEs with historical IP ownership report, after the introduction of a patent box, 8.5 percent higher profit compared to their counterparts with no IP ownership. Patent boxes do not only lure reported profit. The pre-tax profit change is a net effect and thus also accounts for reversed internal debt shifting out of the country and productivity changes. The overall behavioral adjustments might lower corporate tax revenues. Further, the design of the patent box and the existence of a tax haven affiliate within an MNE turn out to be critical for the amount of profits shifted.
    Keywords: corporate tax avoidance, patent box, multinational enterprise, profit shifting
    JEL: H25 H26 F23 C21 C23
    Date: 2018
  7. By: Barth, Mary E. (Stanford University); Landsman, Wayne R. (University of North Carolina)
    Abstract: Whether fair value accounting should be used in financial reporting has been the subject of debate for many years. A key dimension to this debate is whether fair value earnings can provide information to financial statement users that is helpful in making their economic decisions. A criticism of fair value accounting is the contention that fair value earnings simply reflects "shocks" to value, and thus cannot be used to assess firm value. We show how fair value earnings can be disaggregated into components that can be used to assess firm value, as well as components that provide information about various types of shocks to value, e.g., effects of changes in expected cash flows.
    Date: 2018–01
  8. By: Wolfram F. Richter
    Abstract: The employment of capital is rival in nature. Small countries do not benefit from taxing its employment. By contrast, the use of digital services is non-rival and small countries do benefit from taxing expenditures on such services. In fact, some countries have already decided to tax digital activities. If such practice spreads, the development of digital services is negatively affected. It is argued that countries exporting digital services have reason to respond by promoting an international tax regime in which the right of taxing the profit earned on the direct sales of digital services is split between the countries involved.
    Keywords: taxing digital services, import tax, tax exemption, profit splitting, Shapley value
    JEL: H25 M48
    Date: 2018
  9. By: Elie Chamoun; Riaan van Greuning
    Abstract: Experience under the safeguards policy has shown that central banks continued to strengthen their safeguards frameworks, but that vulnerabilities prevailed in the areas of internal audit and oversight by the audit committee (AC). This paper takes steps to help unravel why this was the case, based on analysis of safeguards findings in these areas during the period April 2010 to December 2017 (covering 111 assessments at 64 central banks). Based on this analysis, it presents the key attributes that determine the effectiveness of internal audit and the AC. It also argues that, an effective internal audit function, coupled with strong oversight by a high-performing AC are key enablers of good governance.
    Date: 2018–05–31
  10. By: International Monetary Fund
    Abstract: Georgia has legislated numerical fiscal rules for the main fiscal aggregates. The Economic Liberty Act (ELA), which was adopted in 2011 and came into force in 2014, defines numerical upper limits for the state debt (60 percent of GDP), the budget balance (3 percent of GDP), and expenditures (30 percent of GDP). While the debt and budget balance rules (BBRs) have been adhered to since their introduction, expenditures have exceeded the legislative limit, albeit by a small margin. Previous IMF technical assistance (TA) identified several issues in the application of the fiscal rules. A Fiscal Transparency Evaluation (FTE), conducted by the Fiscal Affairs Department in late 2016, found some gaps in reporting of general government revenue and expenditures against the standards set out in the IMF’s Government Finance Statistics Manual 2014 (GFSM2014) as well as gaps in the assessment and reporting on compliance with the fiscal rules. The FTE recommended a review of the fiscal rules framework, and this report summarizes the findings and recommendations of this review.
    Date: 2018–06–01
  11. By: Donato Masciandaro; Davide Romelli
    Abstract: What are the pros and cons of involving external auditors in banking supervision? This paper investigates the relationship between banking supervision and the involvement of external auditors from a theoretical and empirical perspective. We first provide a simple principal-agent framework that highlights the importance of several country-specific institutional characteristics in determining an optimal level of involvement of external auditors in banking supervision. We then propose a new index that captures the degree of involvement of external auditors in financial sector supervision. We construct this index for a broad set of 142 countries and show that countries characterized by higher levels of auditor involvement in supervision are less likely to experience a financial crisis. These results provide new and original empirical evidence on the link between regulatory and supervisory institutional designs and the probability of financial distress.
    Keywords: Banking Supervision, Auditing, Delegation, Economics and Law
    JEL: G21 G28
    Date: 2017
  12. By: Duccio Gamannossi degl'Innocenti; Matthew D. Rablen
    Abstract: We relate tax evasion behavior to a substantial literature on self and social comparison in judgements. Tax payers engage in tax evasion as a means to boost their expected consumption relative to others in their “local” social network, and relative to past consumption. The unique Nash equilibrium of the model relates optimal evasion to a (Bonacich) measure of network centrality: more central taxpayers evade more. The indirect revenue effects from auditing are shown to be ordinally equivalent to a related Bonacich centrality. We generate networks corresponding closely to the observed structure of social networks observed empirically. In particular, our networks contain celebrity taxpayers, whose consumption is widely observed, and who are systematically of higher wealth. In this context we show that, if the tax authority can observe the social network, it is able to raise its audit revenue by around six percent.
    Keywords: tax evasion, social networks, network centrality, optimal auditing, social comparison, self comparison, habit, indirect effects, relative consumption
    JEL: H26 D85 K42
    Date: 2018

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