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8/10/2019 Earnings Management Motivations
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EARNINGS MANAGEMENT
MOTIVATIONS
TAX-POLICY IN RESPONS TO
EARNINGS MANAGEMENT
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PRESENTATION OUTLINE
Introduction
LR Discussion
Conclusion
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INTRODUCTION
Three categories of accountingchoice studies (Fields et. al., 2001):
Relation to afirms
contractualarrangement
s
Relationto asset
price
Relation toexternal parties
other than actualor potential owner
of the firm e.g.policy makers,governmentregulators
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CONTD
Firms engage in EM formany reasons
One reason is a responseto anticipated changes intax policy. E.g. changes intax rate, tax incentives
So, it falls in third categoryof accounting choice
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DISCUSSION
Key point to correlate a tax-policywith the EM:
1) What are the tax-policy
involved?
2) How the measurement to detect
EM?
3) Findings - correlations
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LITERATURE REVIEW
From six articles:NO ARTICLE TITLE AUTHOR YEAR
1 EM in response to
corporate tax rate
changes: Evidence from
the 1986 Tax Reform Act
David A.
Guenther
1994
2 Tax waiver year effect
on EM practices in
Malaysia
Jafni Hashim
& Mohd Nizal
Haniff and
Ibrahim Kamal
AbdulRahman
2012
3 EM around tax
reduction: evidence
from Chinas 2007
corporate tax reform
Tao Zeng 2014
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Contd
NO ARTICLE TITLE AUTHOR YEAR
4 The impact of tax
holidays on EM: An
empirical study of
corporate reporting
behavior in a
developing-economy
framework
Kenny Z. Lin 2006
5 Correlation between tax
holidays and EM: An
empirical study
Zinatul
Ashiqin
Bachek,
Norsiah
Ahmad &Norman Mohd
Salleh
2012
6 EM to influence tax
policy: evidence from
large Malaysian Firms
Ajay Adhikari,
Chek
Derashid &
Hao Zhang
2005
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LR DISCUSSION
(1) EM in response to corporate tax changes:Evidence from the 1986 Tax Reform Act
Author David A. Guenther (1994)
Tax-policy Changes in tax rate
Sample Financial statement data from a sample of firms
taken from 1990 COMPUSTAT Annual Industrial
Filemanufacturing, wholesale, retail and
services (other than financial services industries
Methodology Current accrual base on Jones (1991)
Findings Significantly negative current accruals in the
year to the tax rate reductions by:
a) Defer revenuedecreasing current assets
b) Accelerate expensesincreasing current
assets
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ILLUSTRATION
Before change tax
rate46%
After change tax rate
34%
Defer revenues
Inc rease expens es
Decrease current
assets to defer
revenue
Increasing current
liabilities to
accelerate
expenses
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(2) Tax waiver year effect on EM practices in
Malaysia
Author Jafni Hashim & Mohd Nizal Haniff andIbrahim Kamal Abdul Rahman (2012)
Tax policy Tax waiver year of 1999 which came
about from introduction of the Self-
Assessment System (SAS) by IRBM in
the year 2000Sample 660 companies listed on the main and
second board of Bursa Malaysia for the
period between 1998 and 2000
Methodology Modified Jones Model (adjusted)
discretionary current accruals
Finding Not significant with the hypothesis
developed - positive discretionary
current accrual (income increasing
earnings management) in the tax waiver
year of 1999
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ILLUSTRATION
During waive year
(1999) @ tax waive(0%)
After waive year (2000)
@ tax rate of (28%)
Accelerate revenues
Defer expens es
Increase accruals
through revenue
(acceleration or
expenses deferral)
Decrease(reverse)
(accruals)
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(3) EM around tax rate reduction: evidence
from Chinas 2007 corporate
Author Tao Zeng (2014)
Tax policy Tax rate reduction
Sample Financial data are collected from the
China Stock Market Financial Statement
Database (CSMAR)real estate firmsMethodology Accrual-based earnings management
and real earnings management
Finding The firms managed their earnings by
decrease income in the 4thquarter of
2007 and increase income in the 1st
quarter of 2008.
They shifting income from the 4thquarter
of 2007 when the tax rate 33% to the 1st
quarter of 2008 when the tax rate 25%
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(4) The impact of tax holidays on EM: an empirical
study of corporate reporting behavior in a
developing-economy framework
Author Kenny Z. Lin (2006)
Tax policy Tax-incentive schemetax rate increase
Sample 112 sample firms - foreign investment
enterprises (FIEs) in ChinaMethodology Discretionary current accruals
Finding The firms make income-increasing
accruals in the year before a tax-rate
increaseincome shifting behaviormanage earnings upward to take
advantage of lower tax rates that are
available in certain years
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(5) Correlation between tax holidays and EM: an
empirical study
Author Zinatul Ashiqin Bachek, Norsiah Ahmad
& Norman Mohd Salleh (2012)
Tax policy Tax-incentivepioneer status
Sample 216 companies from manufacturing
industry that have enjoyed pioneer status
and exemption expired in 2002 to 2006
Methodology Discretionary current accruals
Finding Consistent with previous studies (Lin,
2006), the company accelerate revenueto the year prior to the expiration of their
exemptions to reduce tax liabilities after
their tax exemptions expired
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(6) EM to influence tax policy: evidence from large
Malaysian firms
Author Ajay Adhikari, Chek Derashid & Hao
Zhang (2005)
Tax policy A period of possible change in tax policy
Sample Annual reports published by firms listed
on the main board of KLSE between1994 and 1997
Methodology Effective tax rate (ETR) and discretionery
accruals (low in book-tax conformity)
Proxy EMchanges in deferred tax
expenses
Finding Low ETR decrease book income prior to
a reduction in corporate tax in order to
influence tax policy
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CONCLUSIONS
Tax-policy motivated the company tomanage their earnings
Evidence from that studies may be
interest to tax policymakers in enforcingtax rules that are designed to preventabusive tax avoidance
Also have implications for externalauditors, who often face conflictingdemands to give tax minimization adviceon the one hand and to detect materialcases of client earnings management onthe other
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