Abstract

http://ssrn.com/abstract=2320808
 
 

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Assessing Financial Reporting Risk in the Income Tax Accrual


Preeti Choudhary


Georgetown University

Allison Koester


Georgetown University

Terry J. Shevlin


University of California-Irvine

June 9, 2014

Georgetown McDonough School of Business Research Paper

Abstract:     
We develop a new measure of tax-related financial reporting risk. Our measure, which we refer to as tax accrual quality, is based on variation in the extent to which the income tax accrual maps into income tax-related cash flows. We interpret a lack of mapping as estimation error and thus higher tax-related financial reporting risk. We show that poor tax accrual quality is associated with proxies that capture greater judgment and complexity in applying GAAP which increase estimation error in the tax accrual. We document that poor tax accrual quality is associated with future tax-related financial statement restatements and tax-related internal control material weaknesses. Finally, we demonstrate that earnings better capture a firm’s economic performance (as reflected in contemporaneous stock returns) when tax accrual quality is better. All of our empirical results related to tax accrual quality are incremental to working capital accruals quality. We conclude by suggesting how researchers could use our tax accrual quality measure to address research questions related to financial reporting risk in the income tax accrual.

Number of Pages in PDF File: 62

Keywords: financial reporting risk; accrual quality; accounting for income taxes

JEL Classification: M41

working papers series





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Date posted: September 6, 2013 ; Last revised: June 12, 2014

Suggested Citation

Choudhary, Preeti and Koester, Allison and Shevlin, Terry J., Assessing Financial Reporting Risk in the Income Tax Accrual (June 9, 2014). Georgetown McDonough School of Business Research Paper . Available at SSRN: http://ssrn.com/abstract=2320808 or http://dx.doi.org/10.2139/ssrn.2320808

Contact Information

Preeti Choudhary
Georgetown University ( email )
McDonough School of Business
Washington, DC 20057
United States

Allison Koester (Contact Author)
Georgetown University ( email )
McDonough School of Business
Washington, DC 20057
United States
202.687.6461 (Phone)
HOME PAGE: http://explore.georgetown.edu/people/apk29/

Terry J. Shevlin
University of California-Irvine ( email )
Paul Merage School of Business
Irvine, CA 92697-3125
United States
206-550-9891 (Phone)
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