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The relation between aggressive financial reporting and aggressive tax reporting: Evidence from ex-Arthur Andersen clients

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  • Heltzer, Wendy
  • Mindak, Mary P.
  • Shelton, Sandra W.

Abstract

We investigate the economic trade-offs managers face due to conflicting incentives to report high financial statement book income and, at the same time, report low taxable income. Our setting involves Houston clients of Arthur Andersen (AA), who have been shown to exhibit a culture of aggressive financial reporting. Using our sample of AA Houston clients, we test two competing theories: (1) firms which have a culture of aggressive financial reporting are also aggressive in their tax reporting, versus (2) firms which are willing to pay real dollars (taxes) to report higher financial statement earnings. We do not find support for either theory. Instead, our findings suggest a middle-ground: firms may exhibit a culture of aggressive financial reporting without impacting their relative tax reporting. Our findings not only shed light on the intersection of financial and tax reporting, but they also add to the extant literature involving the culture of AA. To the best of our knowledge, this is the first paper to investigate the tax ramifications of AA’s culture of aggressive financial reporting.

Suggested Citation

  • Heltzer, Wendy & Mindak, Mary P. & Shelton, Sandra W., 2012. "The relation between aggressive financial reporting and aggressive tax reporting: Evidence from ex-Arthur Andersen clients," Research in Accounting Regulation, Elsevier, vol. 24(2), pages 96-104.
    • Handle: RePEc:eee:reacre:v:24:y:2012:i:2:p:96-104
    DOI: 10.1016/j.racreg.2012.05.001
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    References listed on IDEAS

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    1. Gopal V. Krishnan, 2005. "Did Houston Clients of Arthur Andersen Recognize Publicly Available Bad News in a Timely Fashion?," Contemporary Accounting Research, John Wiley & Sons, vol. 22(1), pages 165-193, March.
    2. Paul K. Chaney & Kirk L. Philipich, 2002. "Shredded Reputation: The Cost of Audit Failure," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 40(4), pages 1221-1245, September.
    3. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    4. Edward L. Maydew & Douglas A. Shackelford, 2005. "The Changing Role of Auditors in Corporate Tax Planning," NBER Working Papers 11504, National Bureau of Economic Research, Inc.
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