The relation between aggressive financial reporting and aggressive tax reporting: Evidence from ex-Arthur Andersen clients |
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Authors: | Wendy Heltzer Mary P Mindak Sandra W Shelton |
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Institution: | 1. Baksan Neutrino Observatory, Institute for Nuclear Research RAS, 361609 Neutrino, Russia;2. V.N. Karazin Kharkiv National University, 61022 Kharkiv, Ukraine;3. Joint Institute for Nuclear Research, 141980 Dubna, Russia;4. Max Planck Institute for Nuclear Physics, 69117 Heidelberg, Germany;1. School of Economics and Management, Beijing Jiaotong University, Beijing 100044, China;2. School of Business, Renmin University of China, Beijing 100872, China;3. Department of Finance, Western Kentucky University, Bowling Green, KY, United States;4. School of Banking and Finance, University of International Business and Economics, Beijing 100872, China |
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Abstract: | We investigate the economic trade-offs managers face due to conflicting incentives to report high financial statement book income and, at the same time, report low taxable income. Our setting involves Houston clients of Arthur Andersen (AA), who have been shown to exhibit a culture of aggressive financial reporting. Using our sample of AA Houston clients, we test two competing theories: (1) firms which have a culture of aggressive financial reporting are also aggressive in their tax reporting, versus (2) firms which are willing to pay real dollars (taxes) to report higher financial statement earnings. We do not find support for either theory. Instead, our findings suggest a middle-ground: firms may exhibit a culture of aggressive financial reporting without impacting their relative tax reporting. Our findings not only shed light on the intersection of financial and tax reporting, but they also add to the extant literature involving the culture of AA. To the best of our knowledge, this is the first paper to investigate the tax ramifications of AA’s culture of aggressive financial reporting. |
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