LAWRENCE ZELENAK, Duke University School of Law
Email: aclark@law.duke.edu

When tax returns were prepared with pencil and paper-in an era now gone forever-Congress did not impose income tax provisions of great computational complexity on large numbers of taxpayers, in the belief that it was unreasonable to require average taxpayers (or their paid preparers) to struggle with computationally complex provisions. As return preparation software gradually replaced the pencil in recent decades, the complexity constraint weakened and eventually disappeared. Congress has responded by imposing unprecedented computational complexity on large numbers of taxpayers, primarily through the expanded scope of the alternative minimum tax and the proliferation of phase outs of credits, deductions, and exclusions. This response would not be problematic, if the only objection to computational complexity were the difficulty of performing the calculations-a difficulty overcome by the widespread adoption of software. Unfortunately, computationally complex provisions generally constitute bad tax policy, even apart from computational concerns. For taxpayers faced with a welter of computationally complex provisions, the income tax is a black box, the inner workings of which are beyond their comprehension. This undermines both the political legitimacy of the tax system and the ability of taxpayers to engage in informed tax planning. In response to the demise of the complexity constraint, argues this Essay, Congress should develop a self-imposed constraint against the enactment (or survival) of computationally complex provisions of widespread applicability.

KENNETH JOHN REICHELT, Louisiana State University, Baton Rouge - Department of Accounting
Email: reichelt@lsu.edu
DECHUN WANG, Texas A&M University
Email: dwang@mays.tamu.edu

Our paper examines whether audit quality is higher for industry audit specialists at the national and city-office levels using the framework developed in Ferguson et al. [2003] and Francis et al. [2005]. We find that auditors who are both national and city-specific industry specialists have clients with the lowest abnormal accruals, suggesting that joint national and city-specific industry specialists have the highest audit quality. In addition, we find some evidence that abnormal accruals of firms audited by city-industry specialists alone (without also being national specific industry specialists) are lower than those audited by non-industry specialists. Using alternative measures of audit quality, we find that when the auditor is both a national and a city-specific industry specialist, its clients are less likely to meet or beat analysts’ earnings forecasts by one penny per share and more likely to be issued a going-concern audit opinion. Together these results provide consistent evidence that audit quality is higher when the auditor is both a national and city-specific industry specialist, suggesting that auditors’ national positive network synergies and the individual auditors’ deep industry knowledge at the office level are jointly important factors in delivering higher audit quality.

MICHELA CORDAZZO, Free University of Bozen-Bolzano - School of Economics
Email: michela.cordazzo@unibz.it

The mandatory conversion to IFRS (International Financial Reporting Standards) has represented much more than a change in accounting rules, and firms’ main concern has been to understand the extent to which accounting differences between national GAAP and IFRS could affect their reported performance. The purpose of the paper is to address this concern by providing empirical evidence of the nature and the size of the differences between Italian accounting principles and IFRS. The total and individual differences between Italian GAAP and IFRS are identified and quantified in the reconciliations of net income and equity of companies listed on Borsa Italiana, in order to show the major consequences of the conversion to IFRS on accounting practices. The empirical results indicate a more relevant total impact of such a transition on net income than equity. The analysis of individual adjustments shows a greater discrepancy between Italian GAAP and IFRS in the accounting treatment of intangible assets, income taxes, and business combinations with reference to both net income and equity; while the individual reported differences in provisions, financial instruments, and leases evidence a significant impact only on equity.