Codetermination and Aggressive Reporting: Audit Committee Employee Representation, Tax Aggressiveness, and Earnings Management

Journal of International Accounting, Auditing and Taxation

55 Pages Posted: 24 Aug 2019 Last revised: 19 May 2022

See all articles by James Chyz

James Chyz

University of Tennessee, Knoxville - Department of Accounting and Business Law

Marc Eulerich

University of Duisburg-Essen, Mercator School of Management

Benjamin Fligge

University of Duisburg-Essen, Mercator School of Management

Miles A. Romney

Florida State University

Date Written: May 18, 2022

Abstract

This study uses a unique dataset from listed German companies that helps identify a granular measure of board-level codetermination to examine whether board-level codetermination (inclusion of employee representatives on the board) reduces aggressive financial and tax reporting, i.e. tax aggressiveness and earnings management. To the extent codetermination allows for effective employee monitoring of management, then it should be negatively associated with tax and financial reporting aggressiveness because prior research hypothesizes that employees prefer lower tax aggressiveness and less earnings management. Our analysis also highlights the mechanisms through which employees can monitor and influence firms’ decisions and outcomes. We find employee representation on audit committees is the most consistently influential codetermination mechanism associated with reduced tax aggressiveness and earnings management. We contribute to prior and current discussions of stronger employee rights and influences on management decisions from a board-level perspective.

Keywords: Co-Determination, Unions, Tax Aggressiveness, Earnings Management, Board, Audit Committee

JEL Classification: J53, H25, M41

Suggested Citation

Chyz, James and Eulerich, Marc and Fligge, Benjamin and Romney, Miles A., Codetermination and Aggressive Reporting: Audit Committee Employee Representation, Tax Aggressiveness, and Earnings Management (May 18, 2022). Journal of International Accounting, Auditing and Taxation, Available at SSRN: https://ssrn.com/abstract=3441342 or http://dx.doi.org/10.2139/ssrn.3441342

James Chyz

University of Tennessee, Knoxville - Department of Accounting and Business Law ( email )

Knoxville, TN
United States
865-974-1701 (Phone)

Marc Eulerich

University of Duisburg-Essen, Mercator School of Management ( email )

Lotharstrasse 65
Duisburg, 47057
Germany
00492033792600 (Phone)

HOME PAGE: http://www.msm.uni-due.de/ircg

Benjamin Fligge

University of Duisburg-Essen, Mercator School of Management ( email )

Lotharstrasse 1
Duisburg, 47048
Germany

Miles A. Romney (Contact Author)

Florida State University ( email )

Tallahasse, FL 32306
United States

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