Real Effects of Financial Reporting on Innovation: Evidence from Tax Law and Accounting Standards

This study examines whether financial accounting standards moderate the effectiveness of tax policy. Specifically, we examine whether myopic managers' focus on short-term financial reporting reduces the effectiveness of tax subsidies that incentivize innovation. We employ a novel setting, the issuance of Financial Interpretation No. 48 (FIN 48), which changed the financial reporting for some important, yet uncertain, tax incentives to innovate. For firms most affected by the standard change, we find evidence of reduced investment in innovation, reduced sensitivity of investment to tax incentives, and reduced future innovative output. Consistent with earnings myopia, we find the effect is more pronounced in firms with higher levels of transient institutional ownership and newly vesting equity compensation. These results indicate financial reporting myopia has real effects on innovation and can reduce tax policy effectiveness. The results further suggest that tax policymakers should consider both financial reporting and cash flow incentives in designing policy.

Efeito tributário da adoção do ICPC 22 (IFRIC 23) nas empresas brasileiras emissoras de ADR

A aplicação da norma contábil ICPC 22 Incerteza sobre Tratamento de Tributos sobre o Lucro nas empresas brasileiras, norma equivalente ao IFRIC 23 Uncertainty over Income Tax Treatments, entrou em vigor para as demonstrações financeiras a findar-se a partir de 01 de janeiro de 2019. A ICPC 22 tem como comparação, a norma norte-americana FIN 48 - Uncertain Tax Positions (atualmente ASC 740-10), adotada no exercício de 2007 para as empresas brasileiras registradas na Bolsa de Valo-res de Nova Iorque - NYSE. Esse artigo teve por objetivo estudar os possíveis impactos tributários, decorrentes da aplicação da ICPC 22 para as empresas brasileiras emissoras dos American Depositary Receipts (ADR). Como metodologia, selecionou-se uma amostra de empresas brasileiras emissoras dos ADR, e realizou-se o teste t para amostras pareadas, considerando as hipóteses de ter havido e não ter havido efeito da adoção da ICPC 22. Analisou-se ainda as divulgações das empresas selecionadas para a amostra, antes e após a adoção da interpretação, considerando as informações trimestrais de 31 de março de 2019 e 31 de março de 2018. Como resultado do teste concluiu-se que as empresas selecionadas não tiveram qualquer impacto decorrente da adoção da ICPC 22, confirmando dessa forma, a hipótese inicial de que não haveria impacto. Apesar de algumas diferenças existentes entre a norma internacional ou ICPC 22 e a norma norte-americana FIN 48, esse artigo teve como contribuição um maior entendimento sobre os efeitos tributários da aplicação da ICPC 22/IFRIC 23 nas empresas brasileiras.

Auditor-Provided Tax Services and Accounting for Tax Uncertainty

This paper investigates the associations of auditor-provided tax services (APTS) with tax planning and audit quality using a German sample. Our findings differ from those of previous U.S. studies, which we attribute to the fact that prior to 2015, the International Financial Reporting Standards (IFRS) did not contain a clear regulation similar to FIN 48, which requires firms to reserve for tax uncertainties. We find for our IFRS sample a negative association between APTS and tax avoidance, which suggests that auditors are aware that firms might not reserve for tax uncertainties and may advise more conservative tax strategies. Additionally, we find a positive relation between the level of APTS and the sustainability of tax strategies in client firms, consistent with this conservative approach. Furthermore, our results show that APTS are positively related to audit quality for our sample. This finding suggests that auditors, being aware of remaining tax uncertainties that are not reserved for, are more reluctant to accept earnings management, which would further increase the risk of restatement. Taken together, the results of our study suggest the importance of accounting standards regarding tax uncertainties for the implications of APTS.

Pursuing Relevant (Tax) Research

ABSTRACT Successfully producing relevant research requires investment throughout one's career to acquire fresh institutional knowledge, theories, and methods. In my case, almost a decade in public accounting launched multiple papers examining the tension between financial reporting and tax planning. Some of these papers directly generated new requirements for tax compliance (Schedule M-3) and indirectly influenced new financial reporting disclosures (FIN 48). As tax accounting researchers, we have the best competitive advantage in helping tax policymakers and tax authorities distinguish real effects from reporting effects. We can use that knowledge when analyzing the 2017 tax reform, especially with the help of the American Accounting Association (AAA) to build our professional networks.

Earnings Management through Tax Reserves and Auditor-Provided Tax Services

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.