An Examination of Tax-Related Restatements, Aggressive Tax Reporting, and Tax-Related Material Weaknesses

• In Event: Tax

Abstract

Our study investigates the relation between tax-related restatements, aggressive tax reporting, and tax-related material weaknesses. We find the likelihood of a tax-related restatement declines for firms engaging in aggressive tax reporting. Examining restatements classified as errors and irregularities separately reveals that only error tax-related restatements are negatively associated with tax reporting aggressiveness, suggesting firms suffering from deficiencies in the tax accounting function are unable to maximize tax planning opportunities. We demonstrate aggressive tax reporting declines after a tax-related restatement, suggesting perception of increased scrutiny or a shift in tax department focus from tax planning to tax accounting. We document a positive association between tax-related restatements and tax-related material weaknesses, consistent across error and irregularity classification. Tax-related material weaknesses result in unintentional errors in tax accounting that increase the likelihood of an error and create an environment conducive to management discretion around tax reporting that increases the likelihood of an irregularity.

Authors

• Kerry Katharine Inger, Auburn University

• Michele Dawn Meckfessel, Case Western Reserve University

• John J. Maher, Virginia Tech University