Interim Effective Tax Rate Estimates and Internal Control Quality

Posted: 24 Jun 2019

See all articles by Sean T. McGuire

Sean T. McGuire

Texas A&M University - Department of Accounting

Stevanie S. Neuman

University of Missouri at Columbia - School of Accountancy

Sarah C. Rice

Texas A&M University - Mays Business School

Date Written: May 7, 2019

Abstract

This study examines whether the volatility of interim estimates of the annual effective tax rate (ETR) provides ex ante information about the quality of firms’ internal control environments. Recent research suggests that some firms selectively disclose internal control weaknesses (ICWs). Given the negative consequences associated with ICWs, it is important for capital market participants to be able to identify firms with ineffective internal controls in a timely manner. We find that firms with more volatile annual ETR estimates are more likely to report both tax- and non-tax-related ICWs in the current year. Our results also indicate that the volatility of annual ETR estimates declines following the remediation of tax-related ICWs, but not following the remediation of non-tax-related ICWs. In addition, we find that ETR volatility in the current year is associated with the likelihood that a firm will report an ICW in the following year. Finally, we provide evidence that the volatility of annual ETR estimates is associated with the likelihood that a firm has an undisclosed ICW. In combination, our results suggest that the volatility of interim estimates of the annual ETR provides an ex ante signal of the likelihood that a firm’s internal controls are ineffective.

Keywords: internal control effectiveness, interim financial statements, tax expense, effective tax rates, internal control weaknesses, restatements, internal control weakness remediation

JEL Classification: M40, M41, M42, M49

Suggested Citation

McGuire, Sean T. and Neuman, Stevanie S. and Rice, Sarah C., Interim Effective Tax Rate Estimates and Internal Control Quality (May 7, 2019). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3406093

Sean T. McGuire

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

Stevanie S. Neuman (Contact Author)

University of Missouri at Columbia - School of Accountancy ( email )

College of Business
Columbia, MO 65211
United States

Sarah C. Rice

Texas A&M University - Mays Business School ( email )

Wehner 401Q, MS 4353
College Station, TX 77843-4218
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
89
PlumX Metrics