IDEAS home Printed from https://ideas.repec.org/a/spr/futbus/v7y2021i1d10.1186_s43093-021-00083-8.html
   My bibliography  Save this article

The detection of earnings management through a decrease of corporate income tax

Author

Listed:
  • Kawa Wali

    (Salahaddin University-Erbil)

Abstract

This paper explores the manner in which Dutch and German listed companies were able to manage earnings by the decline in corporate income tax toward the end of the 2000s. In addition, a recent article examines the existing state of earnings management at a European level in the Netherlands and Germany. This empirical study sampled 1350 firm-years for the Netherlands and 1850 firm-years for Germany between 2000 and 2018. The study indicated that those firms with larger prospect tax savings appeared to exercise earnings management to hasten discretionary accruals. In view of the income-reducing impact these discretionary deductions have on financial statements, the findings show corporate income taxes are a significant incentive. Since companies can reduce tax costs by deferring income tax to a subsequent year and lower the tax tariff cycle, theoretically, this tax reform incentivizes management to manage their earnings with the purpose of minimize tax payments. More research is needed into the impact of tax compliance on declining earnings management in this area.

Suggested Citation

  • Kawa Wali, 2021. "The detection of earnings management through a decrease of corporate income tax," Future Business Journal, Springer, vol. 7(1), pages 1-12, December.
    • Handle: RePEc:spr:futbus:v:7:y:2021:i:1:d:10.1186_s43093-021-00083-8
    DOI: 10.1186/s43093-021-00083-8
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1186/s43093-021-00083-8
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1186/s43093-021-00083-8?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mihir A. Desai, 2005. "The Degradation of Reported Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 171-192, Fall.
    2. Douglas Shackelford & Joel Slemrod & James Sallee, 2011. "Financial reporting, tax, and real decisions: toward a unifying framework," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 18(4), pages 461-494, August.
    3. Jones, Jj, 1991. "Earnings Management During Import Relief Investigations," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 193-228.
    4. Scholes, Ms & Wilson, Gp & Wolfson, Ma, 1992. "Firms Responses To Anticipated Reductions In Tax Rates - The Tax-Reform Act Of 1986," Journal of Accounting Research, Wiley Blackwell, vol. 30, pages 161-185.
    5. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    6. Patricia M. Dechow & Amy P. Hutton & Jung Hoon Kim & Richard G. Sloan, 2012. "Detecting Earnings Management: A New Approach," Journal of Accounting Research, Wiley Blackwell, vol. 50(2), pages 275-334, May.
    7. DeFond, Mark L. & Jiambalvo, James, 1994. "Debt covenant violation and manipulation of accruals," Journal of Accounting and Economics, Elsevier, vol. 17(1-2), pages 145-176, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Edosa Joshua Aronmwan & Sebastine Abhus Ogbaisi, 2022. "The nexus between standalone risk committees and tax aggressiveness: evidence from Nigeria," Future Business Journal, Springer, vol. 8(1), pages 1-12, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Karampinis, Nikolaos I. & Hevas, Dimosthenis L., 2013. "Effects of IFRS Adoption on Tax-induced Incentives for Financial Earnings Management: Evidence from Greece," The International Journal of Accounting, Elsevier, vol. 48(2), pages 218-247.
    2. Sundvik, Dennis, 2017. "Book-tax conformity and earnings management in response to tax rate cuts," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 28(C), pages 31-42.
    3. Huai Zhang & Jin Zhang, 2023. "Political corruption and accounting choices," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 443-481, March.
    4. Diogo Batista da SIlva & António Cerqueira & Elísio Brandão, 2017. "Earnings Management Dynamics in Portuguese Listed Firms," FEP Working Papers 587, Universidade do Porto, Faculdade de Economia do Porto.
    5. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    6. Hunt, Alister & Moyer, Susan E. & Shevlin, Terry, 1996. "Managing interacting accounting measures to meet multiple objectives: A study of LIFO firms," Journal of Accounting and Economics, Elsevier, vol. 21(3), pages 339-374, June.
    7. Sundvik Dennis, 2017. "A review of earnings management in private firms in response to tax rate changes," Nordic Tax Journal, Sciendo, vol. 2017(1), pages 151-161, January.
    8. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    9. Pavol Durana & Lucia Michalkova & Andrej Privara & Josef Marousek & Milos Tumpach, 2021. "Does the life cycle affect earnings management and bankruptcy?," Oeconomia Copernicana, Institute of Economic Research, vol. 12(2), pages 425-461, June.
    10. Carlos J.O. Trejo-Pech & Richard N. Weldon & Michael A. Gunderson, 2016. "Earnings Management through Specific Accruals and Discretionary Expenses: Evidence from U.S. Agribusiness Firms," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 64(1), pages 89-118, March.
    11. Ramesh Chandra Das & Chandra Sekhar Mishra & Prabina Rajib, 2018. "Firm-specific Parameters and Earnings Management: A Study in the Indian Context," Global Business Review, International Management Institute, vol. 19(5), pages 1240-1260, October.
    12. Timothy A. Seidel & Chad A. Simon & Nathaniel M. Stephens, 2020. "Management bias across multiple accounting estimates," Review of Accounting Studies, Springer, vol. 25(1), pages 1-53, March.
    13. Manu Gupta & Inder K. Khurana & Raynolde Pereira, 2008. "Legal Inforcement, Short Maturity Debt, and the Incentive to Manage Earnings," Journal of Law and Economics, University of Chicago Press, vol. 51(4), pages 619-639, November.
    14. Juan García Lara & Beatriz Osma & Evi Neophytou, 2009. "Earnings quality in ex‐post failed firms," Accounting and Business Research, Taylor & Francis Journals, vol. 39(2), pages 119-138.
    15. Joseph B. Omonuk & Jean Baptiste Koffi Dodor, 2016. "Do US electric utilities use industry-specific generally accepted accounting principles to manage earnings?," International Journal of Economics and Accounting, Inderscience Enterprises Ltd, vol. 7(2), pages 101-115.
    16. Debra Jeter & Lakshmanan Shivakumar, 1999. "Cross-sectional estimation of abnormal accruals using quarterly and annual data: effectiveness in detecting event-specific earnings management," Accounting and Business Research, Taylor & Francis Journals, vol. 29(4), pages 299-319.
    17. Muhammad Kaleem Khan & Yixuan Qin & Chengsi Zhang, 2022. "Financial structure and earnings manipulation activities in China," The World Economy, Wiley Blackwell, vol. 45(8), pages 2593-2621, August.
    18. Anagnostopoulou, Seraina C. & Tsekrekos, Andrianos E., 2013. "Do firms that wish to be acquired manage their earnings? Evidence from major European countries," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 57-68.
    19. Li Yu (Colly) He & Sue Wright & Elaine Evans, 2018. "Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 555-574, November.
    20. Frerich Buchholz & Kerstin Lopatta & Karen Maas, 2020. "The Deliberate Engagement of Narcissistic CEOs in Earnings Management," Journal of Business Ethics, Springer, vol. 167(4), pages 663-686, December.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:futbus:v:7:y:2021:i:1:d:10.1186_s43093-021-00083-8. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.