The book–tax divide: Perceptions from the field

Wendy Heltzer and Sandra Waller Shelton

Research in Accounting Regulation, 2011, vol. 23, issue 2, 130-137

Abstract: Academics, practitioners and policymakers are engaged in a debate regarding the divide between financial statement income (“book income”) and taxable income. Some posit the divergence primarily reflects upward management of book income, while others believe it primarily reflects downward management of taxable income. Consequently, regulators believe that increased disclosure of book–tax differences, and possibly convergence of earnings measures, may help detect or prevent financial accounting fraud and/or tax sheltering. We provide new information concerning the book–tax divide, via the first large-scale study of professional perceptions concerning the book–tax divide. Based upon 781 survey respondents, we find accountants predominantly perceive the book–tax divide to be caused by both increased upward management of book income and downward management of taxable income. Our findings suggest that increased disclosure of book–tax differences, or alignment of book income with taxable income, may help detect or prevent aggressive reporting. We also find that downward management of taxable income is viewed as the primary contributor to the book–tax divide. Finally, we find a greater percentage of auditors (vis-à-vis tax professionals) believe downward management of taxable income contributes to the book–tax divide, while a greater percentage of tax professionals (vis-à-vis auditors) believe upward management of book income contributes to the book–tax divide. Thus, both disciplines “pass-the-blame”, suggesting perceptions of aggressive reporting may be more extreme than they actually are in practice.

Keywords: Book–tax divergence; Book–tax differences; Earnings management; Tax sheltering (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reacre:v:23:y:2011:i:2:p:130-137

DOI: 10.1016/j.racreg.2011.06.002

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