Financial reporting and book-tax conformity: A review of the issues

Titolo Rivista FINANCIAL REPORTING
Autori/Curatori Luca Menicacci
Anno di pubblicazione 2022 Fascicolo 2022/1 Lingua Inglese
Numero pagine 37 P. 41-77 Dimensione file 217 KB
DOI 10.3280/FR2022-001002
Il DOI è il codice a barre della proprietà intellettuale: per saperne di più clicca qui

Qui sotto puoi vedere in anteprima la prima pagina di questo articolo.

Se questo articolo ti interessa, lo puoi acquistare (e scaricare in formato pdf) seguendo le facili indicazioni per acquistare il download credit. Acquista Download Credits per scaricare questo Articolo in formato PDF

Anteprima articolo

FrancoAngeli è membro della Publishers International Linking Association, Inc (PILA)associazione indipendente e non profit per facilitare (attraverso i servizi tecnologici implementati da CrossRef.org) l’accesso degli studiosi ai contenuti digitali nelle pubblicazioni professionali e scientifiche

This work reviews accounting research on book-tax conformity (BTC) with specific reference to financial reporting issues. There is an ongoing debate in the accounting literature about the impact of BTC levels (weak/strong) on accounting quality and on tax avoidance. Policymakers have discussed at length the opportunity to reform BTC as well. Proponents of a strong BTC argue that it can deter both financial reporting ma-nipulation and aggressive tax planning by creating contrasting incentives between book earnings maximisation and taxable income minimisation. Further controls on book earnings assured by taxing authorities will reinforce such beneficial ef-fects. Opponents of a strong BTC suggest that financial accounting decisions should not interfere with tax accounting and vice versa, as financial reporting and tax reporting have different purposes. Furthermore, under a strong BTC, managers will tend to smooth earnings to minimise income taxes, thus reducing earnings in-formativeness. Even if a strand of research based on the Tax Reform Act (TRA 86) in the US corroborates the position of opponents, a large body of literature formed in international settings has not yet reached a consensus over the conse-quences of BTC. This circumstance makes BTC a relevant topic to the current de-bate on financial reporting quality.

Keywords:book-tax conformity, accounting quality, earnings management, tax avoidance.

Jel codes:H25, H26, M40, M48

  1. Alexander D. and Archer S. (1995), European Accounting Guide, 2nd Edition. (New York: Harcourt Brace and Company).
  2. Alexander D. and Archer S. (1998), European Accounting Guide, 3rd Edition. (New York: Harcourt Brace and Company).
  3. Alford A., Jones J., Leftwich R. and Zmijewski M. (1993), Relative Informativeness of Accounting Disclosures in Different Countries, Journal of Accounting Research, (Supplement 1993), pp. 183-233, DOI: 10.2307/2491170
  4. Ali A. and Hwang L. (2000), Country-specific factors related to financial reporting and the value relevance of accounting data, Journal of Accounting Research, 38, pp. 1-21, DOI: 10.2307/2672920
  5. Artsberg K. (1996), The link between commercial accounting and tax accounting in Sweden, European Accounting Review, 5(sup1), pp. 795-814,
  6. Ashbaugh Skaife H. and LaFond R. (2004), Reporting Incentives and the Quality of Non-U.S. Firms’ Working Capital Accruals., Working paper, University of Wisconsin.
  7. Atwood T.J., Drake M. and Myers L. (2010), Book-Tax conformity, earnings persistence and the association between earnings and future cash flows, Journal of Accounting and Economics, 50(1), pp. 111-125,
  8. Atwood T.J., Drake M., Myers J. and Myers L. (2012), Home Country Tax System Characteristics and Corporate Tax Avoidance: International Evidence, The Accounting Review, 87(6), pp. 1831-1860,
  9. Badertscher B.A., Katz S.P., Rego S.O. and Wilson R.J. (2019), Conforming tax avoidance and capital market pressure, The Accounting Review, 94(6), pp. 1-30,
  10. Ball R. and Shivakumar L. (2005), Earnings quality in UK private firms: comparative loss recognition timeliness, Journal of Accounting and Economics, 39(1), pp. 8 3-128,
  11. Beyer A., Cohen D.A., Lys T.Z. and Walther B.R. (2010), The financial reporting environment: Review of the recent literature, Journal of Accounting and Economics, 50(2-3), pp. 296-343,
  12. Blake J., Fortes H., Gowthorpe C. and Paananen M. (1999), Implementing the EU accounting directives in Sweden – practitioners’ views, The International Journal of Accounting, 34(3), pp. 421-438, DOI: 10.1016/S0020-7063(99)00023-0
  13. Blaylock B., Gaertner F. and Shevlin T. (2015), The association between book-tax conformity and earnings management. Review of Accounting Studies, 20(1), pp. 141-172.
  14. Blaylock B., Gaertner F. B. and Shevlin T. (2017), Book-tax conformity and capital structure, Review of Accounting Studies, 22(2), pp. 903-932,
  15. Bonacchi M., Marra A. and Zarowin P. (2019), Organizational Structure and Earnings Quality of Private and Public Firms, Review of Accounting Studies, 24(3), pp. 1066-1113,
  16. Boynton C., Dobbins P. and Plesko G.A. (1992), Earnings management and the corporate alternative minimum tax, Journal of Accounting Research, 30(Supplement), pp. 131-53, DOI: 10.2307/2491198
  17. Brune A., Thomsen M. and Watrin C. (2019), Family Firm Heterogeneity and Tax Avoidance: The Role of the Founder, Family Business Review, 31, DOI: 10.1177/0894486519831467
  18. Burgstahler D.C., Hail C. and Leuz C. (2006), The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms, The Accounting Review, 81(5), pp. 983-1016,
  19. Bushman R.M. and Smith A.J. (2003), Transparency, financial accounting information, and corporate governance. Financial accounting information, and corporate governance, Economic Policy Review, 9(1).
  20. Calegari M.J. (2000), The effect of tax accounting rules on capital structure and discretionary accruals, Journal of Accounting and Economics, 30(1), pp. 1-31. DOI: 10.1016/S0165-4101(00)00027-6
  21. Chan K.H., Lin K.Z. and Mo P.L.L. (2010), Will a departure from tax-based accounting encourage tax noncompliance? Archival evidence from a transition economy, Journal of Accounting and Economics, 50(1), pp. 58-73,
  22. Chan K.H., Lin K.Z. and Tang F. (2013), The Effects of Book-Tax Conformity, Financial Reporting Incentives, and Firm Size. Journal of International Accounting Research, 12(2), pp. 1-25,
  23. Chen S., Chen X., Cheng Q. and Shevlin T. (2010), Are family firms more tax aggressive than non-family firms?. Journal of Financial Economics, 95, pp. 41-61.
  24. Chen E., Gavious I. and Yosef R. (2013), The relationship between the management of book income and taxable income under a moderate level of book-tax conformity, Journal of Accounting, Auditing and Finance, 28(4), pp. 323-347, DOI: 10.1177/0148558X13505591
  25. Chen F., Hope O.K., Li Q. and Wang X. (2011), Financial reporting quality and investment efficiency of private firms in emerging markets, The Accounting Review, 86(4), pp. 1255-1288,
  26. Choi W.W., Gramlich J.D. and Thomas J.K. (2001), Potential Errors in Detecting Earnings Management: Reexamining Studies Investigating the AMT of 1986, Contemporary Accounting Research, 18, pp. 571-613, DOI: 10.1506/16L8-JT2V-RUTP-MBPE
  27. Christiansen M. (1996), The relationship between accounting and taxation in Denmark, European Accounting Review, 5(sup1), pp. 815-833,
  28. Coopers and Lybrand (1993), International Accounting Summaries: A Guide for Interpretation and Comparison, 2nd Edition. (New York: Wiley).
  29. Coppens L. and Peek E. (2005), An analysis of earnings management by European private firms. Journal of International Accounting, Auditing and Taxation, 14(1), pp. 1-17,
  30. De Simone L. (2016), Does a common set of accounting standards affect tax-motivated income shifting for multinational firms?, Journal of Accounting and Economics, 61(1), pp. 145-165,
  31. Dechow P., Ge W. and Schrand C. (2010), Understanding Earnings Quality: A Review of the Proxies, Their Determinants and Their Consequences, Journal of Accounting and Economics, 50(2-3), pp. 344-401,
  32. Devereux M.P., Li L. and Simon L. (2014), The Elasticity of Corporate Taxable Income: New Evidence from UK Tax Records, American Economic Journal: Economic Policy, 6(2), pp. 19-53,
  33. Dhaliwal D. and Wang S. (1992), The Effect of Book Income Adjustment in the 1986 Alternative Minimum Tax on Corporate Financial Reporting, Journal of Accounting and Economics, 15(1), pp. 7-26,
  34. Dharmapala D. (2020), The Tax Elasticity of Financial Statement Income: Implications for Current Reform Proposals, National Tax Journal, 73(4), pp. 1047-1064,
  35. Desai M. (2005), The degradation of reported corporate profits, The Journal of Economic Perspectives, 19, pp. 171-193, DOI: 10.1257/089533005775196705
  36. Desai M. and Dharmapala D. (2006), Corporate tax avoidance and high-powered incentives, Journal of Financial Economics, 79, pp. 145-179,
  37. Desai M. and Dharmapala D. (2008), Tax and corporate governance: an economic approach, in Schön W. (ed.), Tax and Corporate Governance, pp. 13-30,
  38. Desai M. and Dharmapala D. (2009), Earnings management, corporate tax shelters, and book-tax alignment, National Tax Journal, 62(1), pp. 169-186,
  39. Doupnik T.S. and Salter S.B. (1995), External Environment, Culture, and Accounting Practice: A Preliminary Test of a General Model of International Accounting Development, International Journal of Accounting, 30(3), pp. 189-207.
  40. Eilifsen A. (1996), The relationship between accounting and taxation in Norway, European Accounting Review, 5(sup1), pp. 835-844,
  41. Ellul A., Jappelli T., Pagano M. and Panunzi F. (2016), Transparency, tax pressure, and access to finance, Review of Finance, 20(1), pp. 37-76,
  42. Frank M.M., Lynch L.J. and Rego S.O. (2009), Tax reporting aggressiveness and its relation to aggressive financial reporting, The Accounting Review, 84(2), pp. 467-496,
  43. Freedman J. (2004), Aligning taxable profits and accounting profits: Accounting standards, legislators and judges, eJournal Tax Research, 2, pp. 71-99.
  44. Freedman J. (2008), Financial and tax accounting: Transparency and truth, in Schön W. (ed.), Tax and Corporate Governance, pp. 71-92,
  45. Frydlender A. and Pham D. (1996), Relationships between accounting and taxation in France, European Accounting Review, 5(sup1), pp. 845-857,
  46. Garrod N., Kosi U. and Valentincic A. (2008), Asset write-offs in the absence of agency problems, Journal of Business Finance and Accounting, 35(3-4), pp. 307-330.
  47. Gavana G., Guggiola G. and Marenzi A. (2013), Evolving connections between tax and financial reporting in Italy, Accounting in Europe, 10(1), pp. 43-70, DOI: 10.1080/17449480.2013.774733
  48. Gee M., Haller A. and Nobes C. (2010), The influence of tax on IFRS consolidated statements: the convergence of Germany and the UK, Accounting in Europe, 7(1), pp. 97-122, DOI: 10.1080/17449480.2010.485382
  49. Giunta F. (2014), Detecting Earnings Manipulations: Time to think about European SMEs. A call for a Joint International Research Project, Financial Reporting, 2, pp. 5-15,
  50. Goncharov I., Werner J.R. and Zimmermann J. (2009), Legislative demands and economic realities: Company and group accounts compared, International Journal of Accounting, 44(4), pp. 334-362,
  51. Graham J.R., Raedy J.S. and Shackelford D.A. (2012), Accounting for Income Taxes: Primer, Extant Research, and Future Directions, Foundations and Trends in Finance, 7(1-2), pp. 1-157, DOI: 10.1561/0500000042
  52. Graham J.R. (2006), A Review of Taxes and Corporate Finance, Foundations and Trends in Finance, 1(7), pp. 573-691, DOI: 10.1561/0500000010
  53. Gramlich J.D. (1991), The effect of the alternative minimum tax book income adjustment on accrual decisions, Journal of the American Taxation Association, 12(1), pp. 36-56,
  54. Gruber J. and Rauh J. (2007), How Elastic Is the Corporate Income Tax Base?, in Auerbach A.J., Hines J.R. Jr. and Slemrod J. (eds.), Taxing Corporate Income in the 21st Century, pp. 140-163. (Cambridge University Press, Cambridge, UK).
  55. Guenther D.A. (1994), Earnings management in response to corporate tax rate changes: Evidence from the 1986 Tax Reform Act, The Accounting Review, 69(1), pp. 230-243.
  56. Guenther D., Maydew E. and Nutter S. (1997), Financial reporting, tax costs, and book-tax conformity. Journal of Accounting and Economics, 23, pp. 225-248,
  57. Hanlon M. and Heitzman S. (2010), A review of tax research. Journal of Accounting and Economics, 50, pp. 127-178,
  58. Hanlon M., Laplante S.K. and Shevlin T. (2005), Evidence on the possible information loss of conforming book income and taxable income, Journal of Law and Economics, 48, pp. 407-442, DOI: 10.1086/497525
  59. Hanlon M. and Maydew E. (2009), Book-tax conformity: Implications for multinational firms. National Tax Journal, 62(1), pp. 127-153,
  60. Hanlon M., Maydew E. and Shevlin T. (2008), An unintended consequence of book-tax conformity: A loss of earnings informativeness, Journal of Accounting and Economics, 46, pp. 294-311,
  61. Hanlon M. and Shevlin T. (2005), Book-tax conformity for corporate income: An introduction to the issues, Tax Policy and the Economy, 19, pp. 101-134,
  62. Lopez T.J., Regier P.R. and Lee T. (1998), Identifying tax-induced earnings management around TRA 86 as a function of prior tax-aggressive behavior, The Journal of the American Taxation Association, 20(2), pp. 37-56.
  63. Lynch D., Romney M., Stomberg B., Wangerin D. and Robinson J.R. (2019), Trade-offs between tax and financial reporting benefits: Evidence from purchase price allocations in taxable acquisitions, Contemporary Accounting Research, 36(3), pp. 1223-1262. DOI: 10.1111/1911-3846.12484
  64. Mafrolla E. and D’Amico E. (2016), Tax aggressiveness in family firms and the non-linear entrenchment effect, Journal of Family Business Strategy, 7, pp. 178-184,
  65. Manzon Jr G.B. (1992), Earnings management of firms subject to the alternative minimum tax, The Journal of the American Taxation Association, 14(2), p. 88.
  66. Mao C. and Wu W. (2019), Does the government-mandated adoption of international financial reporting standards reduce income tax revenue?, International Tax and Public Finance, 26(1), pp. 145-166.
  67. Mattei M.M. (2013), Comunicazione d’impresa, book-tax conformity e tax avoidance. (Milan: FrancoAngeli).
  68. Maydew E.L. (1997), Tax-induced earnings management by firms with net operating losses, Journal of Accounting Research, 35(1), pp. 83-96,
  69. McLeay S. (1999), Accounting regulation in Europe,
  70. Mills L.F. (1998), Book-Tax Differences and Internal Revenue Service Adjustments, Journal of Accounting Research, 36(2), pp. 343-356,
  71. Nakao S.H. and Gray S.J. (2018), The impact of IFRS in Brazil: The legacy of mandatory book-tax conformity, Australian Accounting Review, 28(4), pp. 482-495,
  72. Nobes C. (1998), Towards a general model of the reasons for international differences in financial reporting, Abacus, 34(2), pp. 162-186. DOI: 10.1111/1467-6281.00028
  73. Nobes C. (2008), Accounting classification in the IFRS Era, Australian Accounting Review, 18(3), pp. 191-197,
  74. Nobes C. and Schwencke H.R. (2006), Modelling the links between tax and financial reporting: a longitudinal examination of Norway over 30 years up to IFRS adoption, European Accounting Review, 15(1), pp. 63-87,
  75. Northcut W.D. and Vines C.C. (1998), Earnings Management in Response to Political Scrutiny of Effective Tax Rates, Journal of the American Taxation Association, 20(2), p. 22.
  76. OECD (2014), Addressing the Tax Challenges of the Digital Economy, OECD/G20 Base Erosion and Profit Shifting Project. OECD Publishing.
  77. Peek E., Cuijpers R. and Buijink W. (2010), Creditors’ and Shareholders’ Reporting Demands in Public Versus Private Firms: Evidence from Europe, Contemporary Accounting Research, 27(1), pp. 49-91,
  78. Petticrew M. and Roberts H. (2006), Systematic reviews in the social sciences: A practical guide. (Blackwell Publishing), DOI: 10.1002/9780470754887
  79. Phillips J., Pincus M. and Rego S.O. (2003), Earnings management: New evidence based on deferred tax expense, The Accounting Review, 78(2), pp. 491-521,
  80. Pierk J. (2016), Are Private Firms Really More Tax Aggressive Than Public Firms?, WU International Taxation Research Paper Series, 2016-02,
  81. Pierce A. (1996), The relationship between accounting and taxation in the Republic of Ireland, European Accounting Review, 5(sup1), pp. 951-962,
  82. Plesko G.A. (2004), Corporate tax avoidance and the properties of corporate earnings, National Tax Journal, pp. 729-737,
  83. Procházka D. and Molin J. (2016), Book-tax conformity: the review of recent research and its implication for the IFRS adoption in Europe, eJournal of Tax Research, 14, p. 96.
  84. PwC and World Bank Group (2020), Paying taxes 2020, -- https://www.pwc.com/gx/en/services/tax/publications/paying-taxes-2020.html.
  85. Rocchi F. (1996), Accounting and taxation in Italy, European Accounting Review, 5(sup1), pp. 981-989, DOI: 10.1080/09638189600000063
  86. Schipper K. and Vincent L. (2003), Earnings quality, Accounting Horizons, 17, pp. 97-110,
  87. Scholes M., Wilson P. and Wolfson M. (1992), Firms’ responses to anticipated reductions in tax rates: the Tax Reform Act of 1986, Journal of Accounting Research, 30 (Suppl.), pp. 161-191, DOI: 10.2307/2491200
  88. Scholes M., Wolfson M., Erickson M., Maydew E. and Shevlin T. (2014), Taxes and Business Strategy: A Planning Approach, Fifth Edition – Global Edition. (Upper Saddle River: Pearson Prentice Hall).
  89. Schön W. (2004), International accounting standards – A “starting point” for a common European tax base?, European Taxation, 44(10), pp. 426-440.
  90. Shaviro D. (2009), Internationalization of income measures and the U.S. book-tax relationship, National Tax Journal, 62(1), pp. 155-167,
  91. Shackelford D. (2006), Testimony before the U.S. house of representatives committee on ways and means, Subcommittee on Select Revenue Measures, Corporate Tax Reform. Washington.
  92. Shackelford D.A. and Shevlin T. (2001), Empirical tax research in accounting, Journal of Accounting and Economics, 31(1-3), pp. 321-387,
  93. Sikka P. (2017), Accounting and taxation: Conjoined twins or separate siblings?, Accounting Forum, 41(4), pp. 390-405,
  94. Steijvers T. and Niskanen M. (2014), Tax aggressiveness in private family firms: An agency perspective, Journal of Family Business Strategy, 5, pp. 347-357,
  95. Sundvik D. (2017), Book-tax conformity and earnings management in response to tax rate cuts, Journal of International Accounting, Auditing and Taxation, 28, pp. 31-42.
  96. Szczesny A. and Valentincic A. (2013), Asset write-offs in private firms – the case of German SMEs, Journal of Business Finance and Accounting, 40(3-4), pp. 285-317,
  97. Tang T. (2015), Does book-tax conformity Deter Opportunistic Book and Tax Reporting? An International Analysis, European Accounting Review, 24(3), pp. 441-469. DOI: 10.1080/09638180.2014.932297
  98. Tang T. (2019), The value implications of tax avoidance across countries, Journal of Accounting, Auditing and Finance, 34(4), pp. 615-638.
  99. Tang T. and Firth M. (2011), Can book-tax differences capture earnings management and tax management? Empirical evidence from China, The International Journal of Accounting, 46(2), pp. 175-204,
  100. Van Tendeloo B. and Vanstraelen A. (2008), Earnings management and audit quality in Europe: Evidence from the private client segment market, European accounting review, 17(3), pp. 447-469, DOI: 10.1080/09638180802016684
  101. Wang S. (1994), The relationship between financial reporting practices and the 1986 alternative minimum tax, The Accounting Review, 69(3) pp. 495-506.
  102. Watrin C., Ebert N. and Thomsen M. (2014), One-Book Versus Two-Book System: Learnings from Europe, The Journal of the American Taxation Association, 36(2), pp. 55-89,
  103. Whitaker C. (2006), How to build a bridge: Eliminating the book-tax gap, The Tax Lawyer, 59.
  104. Wilson R.J. (2009), An examination of corporate tax shelter participations, The Accounting Review, 84(3), pp. 969-999,
  105. Yin G. (2001), Getting serious about corporate tax shelters: Taking a lesson from history, SMU Law Review, 54, pp. 209-237,
  106. Herrmann D. and Inoue T. (1996), Income smoothing and incentives by operating condition: An empirical test using depreciation changes in Japan, Journal of International Accounting Auditing and Taxation, 5, pp. 161-177,
  107. Holecková J. (1996), Relationship between accounting and taxation in the Czech Republic, European Accounting Review, 5(sup1), pp. 859-869,
  108. Hoogendoorn M. N. (1996a), Accounting and taxation in Europe - A comparative overview, European Accounting Review, 5(sup1), pp. 783-794, DOI: 10.1080/09638189600000050
  109. Hoogendoorn M. N. (1996b), Accounting and taxation in the Netherlands, European Accounting Review, 5(sup1), pp. 871-882, DOI: 10.1080/09638189600000056
  110. Hung M. (2001), Accounting standards and value relevance of financial statements: An international analysis, Journal of Accounting and Economics, 30, pp. 401-420,
  111. Jaruga A., Waliñska E. and Baniewicz A. (1996), The relationship between accounting and taxation in Poland, European Accounting Review, 5(sup1), pp. 883-897, DOI: 10.1080/09638189600000057
  112. Järvenpää M. (1996), The relationship between taxation and financial accounting in Finland, European Accounting Review, 5(sup1), pp. 899-914,
  113. Jones J.J. (1991), Earnings management during import relief investigation, Journal of Accounting Research, 29, pp. 193-228, DOI: 10.2307/2491047
  114. Karampinis N.I. and Hevas D.L. (2013), Effects of IFRS adoption on tax-induced incentives for financial earnings management: Evidence from Greece, International Journal of Accounting, 48(2), pp. 218-247.
  115. Keating A.S. and Zimmerman J.L. (2000), Depreciation-Policy Changes: Tax, Earnings Management, and Investment Opportunity Incentives, Journal of Accounting and Economics, 28(3), pp. 359-389.
  116. Klassen K.J. (1997), The impact of inside ownership concentration on the trade-off between financial and tax reporting, The Accounting Review, 72(3), pp. 455-474.
  117. Kothari S.P., Leone A.J. and Wasley C.E. (2005), Performance matched discretionary accrual measures, Journal of Accounting and Economics, 39(1), pp. 163-197,
  118. Kuo N. and Lee C. (2016), A potential benefit of increasing book-tax conformity: Evidence from the reduction in audit fees, Review of Accounting Studies, 21(4), pp. 1287-1326.
  119. Lamb M. (1996), The relationship between accounting and taxation: The United Kingdom, European Accounting Review, 5(sup1), pp. 933-949,
  120. Lamb M., Nobes C. and Roberts A. (1998), International variations in the connections between tax and financial reporting, Accounting and Business Research, 28, pp. 173-188, DOI: 10.1080/00014788.1998.9728908
  121. Landry S., Deslandes M., and Fortin A. (2013), Tax aggressiveness, corporate social responsibility, and ownership structure, Journal of Accounting, Ethics and Public Policy, 14, pp. 611-645,
  122. Lang M., Lins K.V. and Maffett M. (2012), Transparency, liquidity, and valuation: International evidence on when transparency matters most, Journal of Accounting Research, 50(3), pp. 729-774,
  123. Lee N. and Swenson C. (2012), Are multinational corporate tax rules as important as tax rates?, International Journal of Accounting, 47(2), pp. 155-167.
  124. Leuz C., Nanda D. and Wysocki P. (2003), Earnings management and investor protection: An international comparison, Journal of Financial Economics, 29, pp. 53-72,

Luca Menicacci, Financial reporting and book-tax conformity: A review of the issues in "FINANCIAL REPORTING" 1/2022, pp 41-77, DOI: 10.3280/FR2022-001002