Taxpayers' Tax and Financial Reporting and Auditing in a Game Theoretical Model
Wilfrid Laurier University 2000
40 Pages Posted: 27 Aug 2001
Date Written: December 2000
Abstract
In a game theoretical model, the paper analyses taxpayers' decisions on reporting both financial income and taxable income to the tax authority, and the tax authority's strategic auditing. It extends the previous research in three ways. First, we incorporate taxpayers' financial reporting decision into the model. Second, we examine taxpayers' trade-off between tax costs and non-tax costs such as the financial reporting cost. Third, we use a more general assumption on the correlation between true taxable income and underlying accounting income.
The theoretical analysis leads to three conclusions: (1) the tax authority is more likely to audit the taxpayers who are reporting high accounting income but low taxable income than those who are reporting no accounting-tax difference. (2) The tax authority is more likely to audit the taxpayers reporting low taxable income and low accounting income if they have low financial reporting costs than if they have high financial reporting costs. (3) The degree of connection between the true taxable income and the underlying accounting income affect taxpayers' reporting strategies. All the conclusions have promising implications for future empirical tests.
Keywords: Game theory, Accounting income, Taxable income, Strategic auditing, Financial reporting cost
JEL Classification: M41, H25, M49
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Detecting Earnings Management: A New Approach
By Patricia Dechow, Amy P. Hutton, ...
-
A Review of the Earnings Management Literature and its Implications for Standard Setting
-
Errors in Estimating Accruals: Implications for Empirical Research
By Daniel W. Collins and Paul Hribar
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
The Economic Implications of Corporate Financial Reporting
By John R. Graham, Campbell R. Harvey, ...
-
On the Association between Voluntary Disclosure and Earnings Management
By Ron Kasznik
-
Performance Matched Discretionary Accrual Measures
By S.p. Kothari, Andrew J. Leone, ...
-
The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors
By Ilia D. Dichev and Patricia Dechow