Earnings Management through Tax Reserves and Auditor-Provided Tax Services

Chunlai Ye

Accounting and Finance Research, 2017, vol. 6, issue 4, 217

Abstract: This study investigates whether firms continue to use tax reserves to achieve financial reporting objectives in the post-FIN 48 period and the effect of auditor-provided tax services on earnings management through tax reserves. Three types of earnings management incentives are considered in this study- meeting or beating the consensus forecasts, income smoothing, and taking an “earnings bath.†The analyses yield evidence that only non-large firms manipulate tax reserves to meet/beat earnings forecast in the post-FIN 48 period; however, tax reserves are still utilized by both large and non-large firms to smooth earnings. Moreover, evidence is provided that the auditor who provides more tax services facilitates large firms’ earnings smoothing in the post-FIN 48 period, implying independence impairment. But this behavior does not exist within non-large firms, arguably because the auditor does not compromise independence for less important clients.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:jfr:afr111:v:6:y:2017:i:4:p:217

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