Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management
Posted: 23 Nov 2009 Last revised: 12 Jul 2016
Date Written: April 30, 2014
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: Suggested Citation