Boards' Reactions to Accounting for Income Tax Failures

Abstract

In this paper, we examine boards’ reactions to accounting for income tax (AFIT) failures compared to other types of accounting failures in an attempt to better understand AFIT and how it functions within a firm. Specifically, we investigate executive turnover decisions surrounding the announcement of AFIT control weaknesses and AFIT restatements compared to other types of control weaknesses and restatements, respectively. Relying on attribution theory and the uniqueness of AFIT, we argue and find that executive turnover is lower after AFIT control weaknesses compared to other control weaknesses and that executive turnover is higher after AFIT restatements compared to other restatements. We find no similar pattern among stock market reactions or auditor turnover, or around other types of control weaknesses and restatements. Overall, our study suggests that board perceptions of AFIT failures is different than other failures due to the unique characteristics and functions of AFIT.

Keywords: Taxes, CFO Turnover, CEO Turnover, Control Weaknesses, Restatements