The impact of increased disclosure requirements and the standardization of accounting practices on earnings management through the reserve for income taxes

Richard Cazier, Sonja Rego (), Xiaoli Tian and Ryan Wilson
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Richard Cazier: Texas Christian University
Sonja Rego: Indiana University
Xiaoli Tian: The Ohio State University
Ryan Wilson: University of Oregon

Review of Accounting Studies, 2015, vol. 20, issue 1, No 14, 436-469

Abstract: Abstract We examine whether the regulatory changes required by the Sarbanes–Oxley Act of 2002 (SOX) and Financial Accounting Standards Board Interpretation No. (FIN) 48 reduced the propensity for earnings management through the reserve for income taxes. Given prior evidence that firms use this reserve to manage earnings to beat the consensus analyst forecast, the regulatory changes implemented by both SOX and FIN 48 allow us to study the effects of accounting regulation on earnings management. We find that neither SOX nor FIN 48 reduced earnings management through the reserve for income taxes. Thus, in contrast to research that examines whether SOX affected nontax, accrual-based earnings management, our results suggest managers continue to take advantage of their discretion over the accounting for income taxes to beat the consensus analyst forecast in both the post-SOX and post-FIN 48 periods.

Keywords: Tax reserves; Tax cushion; FIN 48; Earnings management; Change in accounting standard (search for similar items in EconPapers)
JEL-codes: H25 M41 M48 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-014-9302-y

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