Reporting and Recording of Contingent Tax Liabilities
Posted: 27 Jun 2000
Date Written: May 1, 2000
This paper studies the reliability of mandatory contingent liability disclosure. Contingent liabilities introduce substantial uncertainty about future earnings and the value of the firm, but little public data are available on the demands by external claimants. We use confidential audit adjustments from the Internal Revenue Service for the largest publicly-traded industrial firms to study the reliability of tax contingent liability disclosure. We find that although the content of footnotes disclosing tax contingencies is limited, disclosure is related to the magnitude of the external claim as well as the final settlement of the contingency. This suggests that contingent liability reporting is consistent with SFAS No. 5. Further, we find that firms record a provision for contingent liabilities related to proposed adjustments. This provision, which involves high information asymmetry between shareholders and managers, suggests future research regarding taxes and earnings management.
JEL Classification: M41, M43, M45, H25, H26
Suggested Citation: Suggested Citation