The Effects of IFRS Adoption on the Association between the Provision of Tax Services by Incumbent Auditors and Earnings Management: Evidence from Korea

다국어 초록 (Multilingual Abstract)

Firms are expected to recognize more unrealized gains or losses on their financial statements when IFRS is adopted. As current tax law does not permit the recognition of unrealized gains or losses, book tax conformity is expected to decline when IFRS is adopted. I examine whether more unrealized gains or losses recognition on the book would actually result in lower book-tax conformity (higher book-tax income difference) and larger earnings management (higher discretionary accruals). Lower book-tax conformity is expected to have the most noticeable earnings management impact on the firms with tax services provided by incumbent auditors since those firms pursue explicitly both higher book income and lower taxable income. The results of this paper show that unrealized gains or losses significantly increase both book-tax income difference and discretionary accruals when they are interacted with tax service fee by incumbent auditors. The significant impacts are mostly due to unrealized gains or losses on nonfinancial assets than on financial assets. I argue that adoption of IFRS and extended recognition of unrealized gains or losses could result in more earnings management at least for the firms with tax services provided by incumbent auditors.

참고문헌 (Reference)

1 전규안, "조세비용과 비조세비용의 상충관계가 재무보고이익과 세무보고이익의 차이에 미치는 영향" 한국회계학회 29 (29): 29-56, 2004

2 정운오, "세무조정자료의 분석을 통해 살펴본 우리나라 기업의 재무이익과 세무이익의 차이" 한국회계학회 31 (31): 203-, 2006

3 고종권, "세금비용과 비세금비용이 재무보고이익과 세무보고이익의 차이에 미치는 영향" 한국회계학회 28 (28): 75-104, 2003

4 Francis, J., "The Role of Big 6 Auditors in the Credible Reporting of Accruals" 18 (18): 17-34, 1999

5 Manzon, G., "The Relation between Financial and Tax Reporting Measures of Income" 55 : 175-214, 2002

6 Frankel, R., "The Relation between Auditors’ Fees for Nonaudit Services and Earnings Management" 77 (77): 71-105, 2002

7 Choi, W., "The Provision of Tax Services by Incumbent Auditors and Earnings Management: Evidence from Korea" 20 (20): 2008

8 U.S. Department of the Treasury, "The Problem of Corporate Tax Shelters:Discussion, Analysis and Legislative Proposals" US Government Printing Office 1999

9 Mills, L., "The Influence of Tax and Nontax Costs on Book-tax Reporting Differences: Public and Private Firms" 23 (23): 1-19, 2001

10 McNichols, M., "Research Design Issues in Earnings Management Studies" 19 : 313-345, 2000

11 Matsumoto, D., "Management’s Incentives to Avoid Negative Earnings Surprises" 77 (77): 483-514, 2002

12 KASB (Korean Auditing Standards Board)., "Korean Auditing Standards"

13 Ball, R., "Incentives versus Standards: Properties of Accounting Income in Four East Asian Countries, and Implications for Acceptance of IAS" 36 (36): 235-270, 2003

14 Myers, J., "Exploring the Term of the Auditor-client Relationship and the Quality of Earnings: A Case of Mandatory Auditor Rotation?" 78 : 779-799, 2003

15 Petersen, M., "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches" Northwestern University 2007

16 Samuelson, P.A., "Economics. Vol. 13" McGraw-Hill 1989

17 Chang, S., "Economic Performance of Group-affiliated Companies in Korea: Intergroup Resource Sharing and Internal Business Transaction" 43 : 429-448, 2000

18 Phillips, J., "Earnings Management: New Evidence based on Deferred Tax Expense" 78 (78): 491-521, 2003

19 Abbott, L., "Earnings Management, Litigation Risk, and Asymmetric Audit Fee Responses" 25 (25): 85-98, 2006

20 Van Tendeloo, B., "Earnings Management under German GAAP versus IFRS" 14 (14): 155-180, 2005

21 Ashbaugh, H., "Do Nonaudit Services Compromise Auditor Independence? Further Evidence" 78 : 611-639, 2003

22 DeChow, P., "Detecting Earnings Management" 70 (70): 193-225, 1995

23 Chung, H., "Client Importance, Nonaudit Services, and Abnormal Accruals" 78 (78): 931-955, 2003

24 Mills, L. F., "Bridging the Reporting Gap: A Proposal for more Informative Reconciling of Book and Tax Income" 56 (56): 865-893, 2003

25 Hanlon, M., "Auditors use the Information in Book-tax Differences?" University of Michigan and George Mason University 2005