Do Auditors Constrain Intertemporal Income Shifting in Private Companies?

Accounting and Business Research, Forthcoming

34 Pages Posted: 24 May 2018 Last revised: 2 Jul 2019

See all articles by Henrik Höglund

Henrik Höglund

Hanken School of Economics

Dennis Sundvik

Hanken School of Economics

Date Written: May 29, 2018

Abstract

This study investigates the association between private company auditing and intertemporal income shifting. Using a large reduction in the Finnish corporate tax rate as a strong incentive for income shifting and financial statement data coupled with proprietary information from the tax authorities, we analyse accruals and cost stickiness of small private companies. Our results reveal significant differences in accrual income shifting between audited and unaudited companies, but only among companies that on average could anticipate the tax reduction the most. Further, we find auditors to restrict sticky selling, general, and administrative cost behaviour that we hypothesize is associated with illegal actions. Additional tests expose a nontrivial number of incorrectly unaudited companies which are the ones mostly associated with income shifting. Taken together, our study highlights the effects of audit exemption and the importance of enforcement while also suggesting that the audit process is value adding for the tax authorities.

Keywords: audit exemption, cost stickiness, earnings management, tax incentive

JEL Classification: H25, H26, M41, M42

Suggested Citation

Höglund, Henrik and Sundvik, Dennis, Do Auditors Constrain Intertemporal Income Shifting in Private Companies? (May 29, 2018). Accounting and Business Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3178958

Henrik Höglund

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

Dennis Sundvik (Contact Author)

Hanken School of Economics ( email )

PB 287
Helsinki, Vaasa 65101
Finland

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