Up Next

Market-Based Solutions to Vital Economic Issues


Market-Based Solutions to Vital Economic Issues
Sep 1, 2014

The Effect of Tax Authority Monitoring and Enforcement on Financial Reporting Quality


This paper examines the relation between tax enforcement and financial reporting quality. The government, due to its tax claim on firm profits, is de facto the largest minority shareholder in almost all corporations. Therefore, the government, like other shareholders, has an interest in the accurate reporting of (taxable) income and preventing insiders from siphoning corporate funds to obtain private benefits. We hypothesize and find evidence that higher tax enforcement by the tax authority has a positive association with financial reporting quality. Further, we find that this association is generally stronger when other monitoring mechanisms are weaker. Our evidence is consistent with the predictions from the Desai, Dyck, and Zingales (2007) theory that the tax authority provides a monitoring mechanism of corporate insiders. Our paper also adds to the literature on the determinants of financial reporting quality and how the relation between accounting standards and reporting outcomes depends on country-level institutions.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.

View Working Paper View Publication on UNC Library View Publication on Journal Site

You may also be interested in: