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Book‐Tax Differences and Inland Revenue Audit Adjustments in New Zealand

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  • Jennie Cho
  • Jilnaught Wong
  • Norman Wong

Abstract

Using confidential data from US manufacturing firms' tax returns and Inland Revenue Service (IRS) audit adjustments, Mills (1998) tests, and finds support for, her hypothesis that IRS audit adjustments increase as the book‐tax differences increase. We test Mills' hypothesis using confidential data obtained from the New Zealand Inland Revenue (hereafter Inland Revenue). Confidential data provide the key variable of interest, Inland Revenue's proposed audit adjustment, which is not available from public sources. These data provide the exact audit adjustment amounts, eliminating measurement errors inherent in proxy variables, and enable a temporal alignment of the book‐tax differences with the Inland Revenue audit adjustments, thereby enhancing the internal validity of the relation between book‐tax differences and Inland Revenue audit adjustments. Because the results of our study using New Zealand data, another time period, a more diverse set of firms, and a different institutional environment are consistent with those of Mills, we argue for the generalizability of Mills' hypothesis that proposed audit adjustments are positively related to the excess of book income over taxable income.

Suggested Citation

  • Jennie Cho & Jilnaught Wong & Norman Wong, 2006. "Book‐Tax Differences and Inland Revenue Audit Adjustments in New Zealand," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(9‐10), pages 1650-1667, November.
    • Handle: RePEc:bla:jbfnac:v:33:y:2006:i:9-10:p:1650-1667
    DOI: 10.1111/j.1468-5957.2006.00646.x
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    References listed on IDEAS

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    Cited by:

    1. Anastasia Kraft & Kerstin Lopatta, 2016. "Auditor fees, discretionary book-tax differences, and tax avoidance," International Journal of Economics and Accounting, Inderscience Enterprises Ltd, vol. 7(2), pages 127-155.
    2. Kovermann, Jost & Velte, Patrick, 2019. "The impact of corporate governance on corporate tax avoidance—A literature review," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 36(C), pages 1-1.
    3. Evers, Maria Theresia & Meier, Ina & Nicolay, Katharina, 2017. "The implications of book-tax differences: A meta-analysis," ZEW Discussion Papers 17-003, ZEW - Leibniz Centre for European Economic Research.
    4. Bradley Blaylock & Bradley P. Lawson & Michael A. Mayberry, 2020. "Taxable income, future profitability, and stock returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 858-881, July.
    5. Andrew Yim, 2009. "Efficient Committed Budget for Implementing Target Audit Probability for Many Inspectees," Management Science, INFORMS, vol. 55(12), pages 2000-2018, December.
    6. Tang, Tanya & Firth, Michael, 2011. "Can book-tax differences capture earnings management and tax Management? Empirical evidence from China," The International Journal of Accounting, Elsevier, vol. 46(2), pages 175-204, June.
    7. Pais, Cláudio & Dias, Cláudia Afecto, 2022. "The implications of book-tax conformity and tax change for the earnings management of Portuguese micro firms," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 46(C).
    8. Anna Görlitz & Michael Dobler, 2023. "Financial accounting for deferred taxes: a systematic review of empirical evidence," Management Review Quarterly, Springer, vol. 73(1), pages 113-165, February.
    9. Luo, Bing, 2019. "Effects of auditor-provided tax services on book-tax differences and on investors' mispricing of book-tax differences," Advances in accounting, Elsevier, vol. 47(C).

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