Decomposing Changes in Deferred Tax Assets and Liabilities to Isolate Earnings Management Activities

Journal of the American Taxation Association, 2004

Posted: 18 Oct 2008

See all articles by John D. Phillips

John D. Phillips

University of Connecticut - Department of Accounting

Morton Pincus

University of California, Irvine

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Huishan Wan

University of Iowa - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: April 2004

Abstract

This paper provides evidence on the types of accounts that reveal earnings management activities. We build on Burgstahler and Dichev's (1997) evidence of earnings management to avoid an earnings decline and Phillips et al.'s (2003) findings that deferred tax expense (DTE) can be used to detect such earnings management. In particular, we investigate the relation between changes in annual earnings and changes in deferred tax asset and liability components using data hand-collected from firms' income tax footnote disclosures.

Our evidence indicates that changes in the net deferred tax liability (DTL) component related to revenue and expense accruals and reserves can be used to detect earnings management to avoid an earnings decline. In addition, we build on Joos et al.'s (2003) results and partition our sample into firm-years with positive and negative changes in net DTLs and repeat our analyses. In contrast to the Joos et al. finding that DTE can be used to detect earnings management only for firm-years in which DTE is negative, we find that both sub-samples reflect earnings management of revenue and expense accruals and reserves to report earnings increases.

Keywords: Deferred tax liabilities, Deferred tax expense, Earnings management

JEL Classification: M41, M49

Suggested Citation

Phillips, John D. and Pincus, Morton P.K. and Rego, Sonja O. and Wan, Huishan, Decomposing Changes in Deferred Tax Assets and Liabilities to Isolate Earnings Management Activities (April 2004). Journal of the American Taxation Association, 2004. Available at SSRN: https://ssrn.com/abstract=1286239

John D. Phillips

University of Connecticut - Department of Accounting ( email )

School of Business
Storrs, CT 06269-2041
United States
860-486-2789 (Phone)
860-486-4838 (Fax)

Morton P.K. Pincus

University of California, Irvine ( email )

Irvine, CA 92697-3125
United States
949-824-4062 (Phone)
949-725-2812 (Fax)

Sonja O. Rego (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812 855-6356 (Phone)

HOME PAGE: http://kelley.iu.edu/Accounting/faculty/page12887.cfm?ID=33017

Huishan Wan

University of Iowa - Department of Accounting ( email )

108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States

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