The Impact of Increased Disclosure Requirements and the Standardization of Accounting Practices on Earnings Management Through the Reserve for Income Taxes

Posted: 18 Jun 2015

See all articles by Sonja O. Rego

Sonja O. Rego

Indiana University - Kelley School of Business - Department of Accounting

Richard A. Cazier

University of North Texas

Xiaoli (Shaolee) Tian

Georgetown University - Department of Accounting and Business Law

Ryan J. Wilson

University of Oregon

Date Written: March 2015

Abstract

We examine whether the regulatory changes required by the Sarbanes-Oxley Act of 2002 (SOX) and Financial Accounting Standards Board Interpretation No. (FIN) 48 reduced the propensity for earnings management through the reserve for income taxes. Given prior evidence that firms use this reserve to manage earnings to beat the consensus analyst forecast, the regulatory changes implemented by both SOX and FIN 48 allow us to study the effects of accounting regulation on earnings management. We find that neither SOX nor FIN 48 reduced earnings management through the reserve for income taxes. Thus, in contrast to research that examines whether SOX affected nontax, accrual-based earnings management, our results suggest managers continue to take advantage of their discretion over the accounting for income taxes to beat the consensus analyst forecast in both the post-SOX and post-FIN 48 periods.

Keywords: Tax reserves, Tax cushion, FIN 48, Earnings management, Change in accounting standard

JEL Classification: M41, M49

Suggested Citation

Rego, Sonja O. and Cazier, Richard A. and Tian, Xiaoli (Shaolee) and Wilson, Ryan J., The Impact of Increased Disclosure Requirements and the Standardization of Accounting Practices on Earnings Management Through the Reserve for Income Taxes (March 2015). Review of Accounting Studies, Vol. 20, No. 1, 2015; Kelley School of Business Research Paper No. 15-47. Available at SSRN: https://ssrn.com/abstract=2619308

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

Richard A. Cazier

University of North Texas ( email )

College of Business Administration
P.O. Box 305219
Denton, TX 76203
United States
940-369-8612 (Phone)

Xiaoli (Shaolee) Tian

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

Ryan J. Wilson

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

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