nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2021‒07‒19
fourteen papers chosen by

  1. Big 4 auditors, bank earnings management and financial crisis in Africa By Ozili, Peterson Kitakogelu
  2. Bank earnings management using loan loss provisions: comparing the UK, France, South Africa and Egypt By Ozili, Peterson Kitakogelu
  3. Corporate Tax Avoidance of Malaysian Public Listed Companies: A Multi-Measure Analysis By Nirmala Devi Mohanadas
  4. Third-party Reporting and Tax Collections: Evidence from the Introduction of Withholding of the State Personal Income Tax By Sutirtha Bagchi; Libor Dušek
  5. Basel III in Nigeria: making it work By Ozili, Peterson K
  6. Financial Innovation in the 21st Century: Evidence from U.S. Patents By Josh Lerner; Amit Seru; Nick Short; Yuan Sun
  7. Apport de l’Audit Interne à la Gouvernance des Entreprises : Cas de l’Algérie By Hamida Adja; Kechad Rabah; Colot Olivier
  8. Reforming the taxation of housing in Israel By Alastair Thomas
  9. Entrepreneurial Taxation with Endogenous Firm Entry and Unemployment By Holmberg, Johan
  10. The Pass-Through of Temporary VAT Rate Cuts: Evidence from German Supermarket Retail By Clemens Fuest; Florian Neumeier; Daniel Stöhlker
  11. Current Account Targeting Hypothesis versus Twin Deficit Hypothesis: the EMU experience of Portugal By António Afonso; José Carlos Coelho
  12. Vasicek Model Extension. Premature default By Osadchiy, Maksim
  13. Two Stochastic Control Problems In Capital Structure and Portfolio Choice By Shan Huang
  14. Contagious Dishonesty: Corruption Scandals and Supermarket Theft By Giorgio Gulino; Federico Masera

  1. By: Ozili, Peterson Kitakogelu
    Abstract: This paper examines whether African banks audited by a Big 4 auditor use loan loss provisions for earnings management purposes before, during and after the global financial crisis. It focuses on income smoothing as a type of earnings management. Using bank data from 21 African countries from 2002 to 2014, the results show that African banks audited by a Big 4 auditor use loan loss provisions to smooth income and the incentive to smooth income is greater during recessionary periods. Also, African banks audited by a Big 4 auditor use income smoothing to lower high earnings during the financial crisis and in the pre-financial crisis period but not in the post-financial crisis period.
    Keywords: Loan loss provision, banks, audit quality, Big 4 auditor, income smoothing, financial crisis, earnings management, economic cycles, recession, earnings smoothing
    JEL: G20 G21 G28 M00 M40 M41 M42 M48 M49
    Date: 2021
  2. By: Ozili, Peterson Kitakogelu
    Abstract: This paper investigates bank earnings management using loan loss provision (LLP). The paper examines income smoothing which is a type of earnings management. It compares the income smoothing behaviour of banks in the UK, France, South Africa and Egypt. The findings show that bank income smoothing is present in the UK and Egypt, and absent in France and South Africa during the period examined. Banks in Egypt used LLPs to smooth income before the global financial crisis. Meanwhile, bank income smoothing is pronounced in France during and after the financial crisis but is absent in the pre-crisis period. Also, bank income smoothing is reduced in countries that (i) have strict banking supervision, (ii) adopt common law such as the United Kingdom, and (iii) adopt civil law such as France and Egypt. Bank earnings management is also greater in countries that adopt a mixed legal system such as South Africa, and in countries that adopt IFRS accounting standards.
    Keywords: banks, earnings management, loan loss provisions, income smoothing
    JEL: G01 G20 G21 G28 G29 M00 M40 M41 M42 M48 M49 O55 O57
    Date: 2021
  3. By: Nirmala Devi Mohanadas (Faculty of Business, Multimedia University, Malaysia Author-2-Name: Abdullah Sallehhuddin Abdullah Salim Author-2-Workplace-Name: Faculty of Management, Multimedia University, Persiaran Multimedia, 63100 Cyberjaya, Selangor, Malaysia Author-3-Name: Suganthi Ramasamy Author-3-Workplace-Name: Faculty of Business, Multimedia University, 75450 Air Keroh, Melaka, Malaysia Author-4-Name: Author-4-Workplace-Name: Author-5-Name: Author-5-Workplace-Name: Author-6-Name: Author-6-Workplace-Name: Author-7-Name: Author-7-Workplace-Name: Author-8-Name: Author-8-Workplace-Name:)
    Abstract: " Objective - Even with corporate tax avoidance being extensively studied, it is still lacking a single universal measurement. There is also a dearth of studies focusing on developing economies such as Malaysia. This study, therefore, analyses the correlations between effective tax rates (ETRs) and book-tax differences (BTDs), which are the most commonly used measures of corporate tax avoidance on Malaysian listed companies for ten years. Methodology/Technique - This study performs distribution, frequency, and correlation analyses on the ETRs and BTDs of the Top 300 companies listed in the Main Market of Bursa Malaysia based on market capitalization. The data used spans a ten-year period from 2010 to 2019. Findings - The results of the distribution, frequency, and correlation analyses show that both these measures are closely related gauges of corporate tax avoidance. Novelty - The results of this study provide further statistical proof that ETR and BTD measures of corporate tax avoidance are closely related. Its utilization of data from listed companies in Malaysia expands the current body of literature by addressing corporate tax avoidance practice in a developing economy. By concentrating on both ETR and BTD measures, this study's analysis is consistent with the broad continuum of corporate tax avoidance spectrum and significantly reduces the risk of warping its determination of tax avoidance level. Type of Paper - Empirical."
    Keywords: Cash ETR; corporate tax avoidance; GAAP ETR; permanent BDT; total BTD.
    JEL: G30 H25 H26 M40
    Date: 2021–07–30
  4. By: Sutirtha Bagchi (Department of Economics, Villanova School of Business, Villanova University); Libor Dušek (Charles University, Faculty of Law)
    Abstract: This paper examines the impact of introducing withholding of the personal income tax by state governments in the U.S. We exploit the staggered adoption of withholding by individual states over the period 1948–1987 to construct difference-in-differences style estimates. We obtain a robust finding: Introducing withholding led to an immediate and permanent increase in income tax revenues by about 22 percent, holding tax rates constant. The result is consistent with the crucial role of withholding and third-party reporting in improving tax compliance. We consider several alternative explanations such as changes to the tax base and increases in enforcement activity but these explanations lack support. There is some evidence that non-filing substantially decreased following the introduction of withholding.
    Keywords: Tax Easion; Third-Party Reporting; Withholding; Tax Base Changes; Difference-in-Differences
    JEL: H11 H21 H26 H71 N42
    Date: 2021–07
  5. By: Ozili, Peterson K
    Abstract: Basel III is a framework to preserve the stability of the international banking system. Nigeria adopts Basel capital framework for capital regulation in the banking sector. This article is a policy discussion on how to make Basel III work in Nigeria. The significance of Basel III is discussed, and some ideas to consider when implementing Basel III to make it work in Nigeria, are provided. Under Basel III, the Nigerian banking system should expect better capital quality, higher levels of capital, the imposition of minimum liquidity requirement for banks, reduced systemic risk, and a transitional arrangement for transitioning across Basel I and II. This article also emphasizes that (i) there should be enough time for the transition to Basel III in Nigeria, (ii) a combination of micro- and macro- prudential regulations is needed; and (iii) the need to repair the balance sheets of banks, in preparation for Basel III. The study recommends that the Nigerian regulator should enforce strict market discipline and ensure effective supervision under the Basel framework. There should be international cooperation between the domestic bank regulator and bank regulators in other countries. The regulator should have a contingency plan to reassure the public of the safety of their deposits, and there should be emergency liquidity solutions to support the financial system in bad times.
    Keywords: Basel III, Bank Business Models, Bank Performance, Financial Stability, Capital Regulation, Bank Regulation, Nigeria
    JEL: G01 G20 G21 G22 G23 G24 G28 G29
    Date: 2021
  6. By: Josh Lerner; Amit Seru; Nick Short; Yuan Sun
    Abstract: We develop a unique dataset of 24 thousand U.S. finance patents granted over last two decades to explore the evolution and production of financial innovation. We use machine learning to identify the financial patents and extensively audit the results to ensure their reasonableness. We find that patented financial innovation is substantial and economically important, with the number of annual grants expanding from a few dozen in the 1990s to over 2000 in the 2010s. The subject matter of financial patents has changed, consistent with the industry’s shift in revenue and value-added towards household investors and borrowers. The surge in financial patenting was driven by information technology firms and others outside of financial sector, which collectively accounted for 69% of the awards. The location of innovation has shifted, with banks moving this activity from regions with tight financial regulation to more permissive ones. High-tech regions have attracted financial innovation by payments, IT, and other non-financial firms. Turning to the source of these ideas, while academic knowledge remained associated with more valuable patents, citations in finance patents to academic papers, especially in those by banks, fell sharply.
    JEL: G20 O31
    Date: 2021–07
  7. By: Hamida Adja (ESC - Ecole Supérieure de Commerce d'Alger, UMons - Université de Mons); Kechad Rabah (ESC - Ecole Supérieure de Commerce d'Alger); Colot Olivier (UMons - Université de Mons)
    Abstract: La gouvernance d'entreprise constitue une des thématiques d'actualité, notamment après la série de scandales survenus depuis le début du 21ème siècle. En réponse à ces dysfonctionnements, une attention particulière a été accordée à l'audit interne pour réduire les risques, assurer la transparence et garantir une meilleure gouvernance. Cette étude vise à expliquer la manière dont l'audit interne renforce la gouvernance d'entreprise en Algérie. Pour ce faire, une méthode qualitative à l'aide d'un entretien semi-directif a été adoptée. Les résultats indiquent que l'audit interne améliore la gouvernance d'entreprise à travers l'évaluation du contrôle interne, la gestion des risques, la réduction des asymétries informationnelles, et la protection des droits des parties prenantes. Néanmoins, les signes d'une bonne gouvernance d'entreprise en Algérie sont encore faibles, cela est dû principalement à l'absence d'audit interne dans de nombreuses entreprises, à son rattachement à la direction générale, et à l'environnement macroéconomique défavorable.
    Keywords: Audit interne,Gouvernance d'entreprise,Gestion des risques,Contrôle interne,Asymétrie d'information
    Date: 2021–06–08
  8. By: Alastair Thomas (OECD)
    Abstract: This paper examines the taxation of housing in Israel, and proposes a set of reforms to improve the efficiency and fairness of the current system. Israel’s housing tax system faces similar problems to those of many other OECD countries. In particular, a bias arises in favour of owner-occupied property relative to rented property due to the non-taxation of imputed rents and most capital gains. That said, unlike many OECD countries, Israel taxes some owner-occupied capital gains (above a generous threshold) and generally does not allow mortgage interest relief for owner-occupied properties, reducing the extent of the distortion more than in many countries. As with most OECD countries, Israel levies highly distortionary transaction taxes, although a zero-rate band significantly limits the number of owner-occupied house purchases subject to the tax. Additionally, Israel’s recurrent property tax (the Arnona) faces a number of design problems, while the tax rules for rental income are complex and subject to significant tax evasion. To address these concerns, a reform package is proposed that involves a gradual and broadly revenue-neutral shift away from transaction taxes towards recurrent taxation of residential property, via increases in both the recurrent property tax and rental income taxation. The redesign of the recurrent property tax from an area-based to a market value-based tax is also proposed, as are a number of more technical reforms.
    Date: 2021–07–16
  9. By: Holmberg, Johan (Department of Economics, Umeå University)
    Abstract: This paper deals with optimal nonlinear taxation of labor and entrepreneurial income and extends the recent study of Scheuer (2014) to accommodate equilib- rium unemployment. We find that even if employment is endogenous, the govern- ment can achieve redistribution of income through taxation without distorting production efficiency. This is possible if the government taxes entrepreneurial and labor income separately. The results also show that including involuntary unem- ployment creates an incentive to tax entrepreneurial income at lower marginal rates and labor income at higher marginal rates than otherwise.
    Keywords: Optimal Taxation; Entrepreneurship; Occupational choice; Unemployment
    JEL: H21 H25 J24 J65 L26
    Date: 2021–06–30
  10. By: Clemens Fuest; Florian Neumeier; Daniel Stöhlker
    Abstract: On 3 June 2020, the German government announced a temporary value added tax (VAT) rate reduction. VAT rates were reduced on 1 July 2020 and went back to their previous level on 1 January 2021. We study the price effects of the temporary VAT rate reduction using a web-scraped data set covering the daily prices of roughly 130,000 supermarket products. To identify the causal price effects, we compare the development of prices in Germany to those in Austria. Our findings indicate an asymmetric price response to the VAT rate cut and subsequent increase. The reduction of VAT rates led to a price decrease of roughly 1.3%, implying that about 70% of the tax cut were passed on to consumers. In contrast, the price effect of the VAT increase was only about half that size. We also study the link between tax incidence and the intensity of competition. Pass-through of the VAT reduction was higher in product groups with a large number of competing products. We rationalize this finding by analyzing consumption tax incidence in the ‘love of variety’ model of consumption.
    Keywords: value added tax, tax incidence, fiscal policy, price effects, competition
    JEL: E31 H22 H25
    Date: 2021
  11. By: António Afonso; José Carlos Coelho
    Abstract: We study the relationship between the government budget balance and the current account balance for Portugal, using quarterly data from 1999 to 2019. On the one hand, the causality tests find a unidirectional relation running from the current account balance to the government budget balance. On the other hand, IV estimations show a bi-directional relationship between these variables, and the existence of a bilateral relationship between the structural components of both balances. Even so, the policy implication is that the use of fiscal policy to correct the external imbalance, especially in an economic crisis, is not substantial, due to the small size of the estimated impact. In addition, with an ARDL model, we find a negative long run relationship between the share of public consumption on GDP and the current account balance. As expected, the variation of real public consumption produces an adverse accumulated response on the current account balance. Finally, the investment rate negatively affects the cyclical component of the current account balance and contributes to the structural improvement of the budget balance.
    Keywords: budget balance; external balance; current account targeting hypothesis; twin deficits; government consumption; ARDL; causality; VAR; Portugal
    JEL: F32 F41 H62 C22
    Date: 2021–06
  12. By: Osadchiy, Maksim
    Abstract: The IRB approach underlies Basel II and Basel III. The approach is based on the Vasicek distribution. The main advantage of the distribution is simplicity and accounting for default correlation. But the distribution substantially underestimates probability of default due to ignoring of premature defaults. Besides, the IRB approach uses the maturity adjustment, which is a kind of a black box, since there is no clear information about the econometric model and calibration of its parameters. If maturity exceeds one year, the IRB formula leads to negativity and even discontinuity of capital in the neighborhood of zero default probability. The paper suggests the Vasicek-Black-Cox (VBC) model, which is constructed to fix drawbacks of the IRB approach. The VBC model is constructed on the base of the Vasicek model and the Black-Cox model. The Vasicek model is a special case of the VBC model, designed to evaluate the default distribution taking into account premature defaults. The VBC model was constructed using the Method of Images, since the firm in the framework of the Black-Cox model is treated as the barrier binary option.
    Keywords: IRB; Vasicek; Merton; Black-Cox; barrier options; default distribution
    JEL: G21 G32 G33
    Date: 2021–07–07
  13. By: Shan Huang
    Abstract: This thesis mainly focuses on two problems in capital structure and individual's life-cycle portfolio choice. In the first problem, we derive a stochastic control model to optimize banks' dividend and recapitalization policies and calibrate that to a sample of U.S. banks in the situation where we model banks' true accounting asset values as partially observed variables due to the opaqueness in banks' assets. By the calibrated model, the noise in reported accounting asset values hides about one-third of the true asset return volatility and raises the banks' market equity value by 7.8\% because the noise hides the banks' solvency risk from banking regulators. Particularly, those banks with a high level of loan loss provisions, nonperforming assets, and real estate loans, and with a low volatility of reported total assets have noisy accounting asset values. Because of the substantial shock on the true asset values, the banks' assets were more opaque during the recent financial crisis. In the second problem, we present an optimal portfolio selection model with voluntary retirement option in an economic situation, where an investor is facing borrowing and short sale constraints, as well as the cointegration between the stock and labor markets. Our model reinterprets the non-participation puzzle in stock investment and early retirement in market booms. Investor's willingness to retire earlier becomes stronger as risk aversion increases or as wages decline in the long term. Consistent with the empirical evidence, we find that retirement flexibility makes the optimal portfolio invest less in the stock market. We also find that our model-generated portfolio share rises in wealth.
    Date: 2021–07
  14. By: Giorgio Gulino; Federico Masera
    Abstract: Is dishonest behavior contagious? We answer this question by studying whether corruption scandals affect the propensity of supermarket customers to steal while using a self-service checkout system. Crucially, this system provides shoppers with the opportunity to engage in dishonest behavior by under-reporting the value of their shopping cart. Exploiting data from random audits on shoppers, we show that the probability of a shopper underreporting increases by 16% after a local corruption scandal is made public. The effect starts immediately and is particularly strong during the first four days after the story breaks. This effect is not driven by any change in material incentives or social norms. Rather, we show that it is due to a reduction in the self-imposed moral cost of stealing and is mainly concentrated among taxpayers.
    Keywords: corruption, crime, consumer behavior, norms
    JEL: D73 K42 Z1 A13
    Date: 2021–07

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