Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

Posted: 23 Nov 2009 Last revised: 12 Jul 2016

See all articles by Cristi A. Gleason

Cristi A. Gleason

University of Iowa - Department of Accounting

Morton Pincus

University of California, Irvine

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Date Written: April 30, 2014

Abstract

We investigate consequences of tax-related material weaknesses in firms’ internal controls over financial reporting. We hypothesize that the presence of internal control material weaknesses (i.e., ICMWs) over the tax function makes earnings management through the income tax accrual (Dhaliwal et al. 2004) easier to implement relative to firms with non-tax-related ICMWs. We also predict that the remediation of tax-related ICMWs has the effect of constraining earnings management through the tax accrual. The results provide support for our predictions and suggest that tax-related ICMWs are associated with greater tax-expense management.

Keywords: Tax, earnings management, internal control weakness, SOX

JEL Classification: M41, M49, H25

Suggested Citation

Gleason, Cristi A. and Pincus, Morton P.K. and Rego, Sonja O., Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management (April 30, 2014). Available at SSRN: https://ssrn.com/abstract=1509765 or http://dx.doi.org/10.2139/ssrn.1509765

Cristi A. Gleason (Contact Author)

University of Iowa - Department of Accounting ( email )

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

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

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

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