Accounting and Tax Compliance

The last years have witnessed a tremendous increase in regulation in many countries in the area of accounting, auditing, enforcement and corporate governance, aiming at increasing financial reporting quality. At the same time, tax compliance has come under close scrutiny. International institutions proposed a variety of hierarchical and co-operative procedural measures and policy recommendations to enhance tax compliance. The initiatives in both areas occur independently from each other, although financial reporting and tax returns are based on the same fundamental information, the companies financial accounting system. In particular, statutory and tax audits seem to follow different principles. For example, seeking enhanced co-operation between taxpayers and tax authority contrasts with strengthening independence and fostering professional skepticism of statutory auditors, despite they have similar objectives, a fair and reliable presentation of companies financial performance. This project seeks to gain more insight into the interdependence of financial reporting quality and tax compliance institutions. There has been little research in this interdependence and the project contributes to the literature by improving the understanding of institutions and their economic consequences. Because the issues involved are economic and legal ones, the project takes an interdisciplinary approach of accounting research and legal tax research. Legal analysis provides input to the economic modeling as well as constraints and context for the analysis, which should enable to study more realistic scenarios and offer sound explanations for potential deficiencies in the current regulation of accounting and tax compliance. The methodology used in the project is economics-based research. It builds on the analytical models literature in accounting and on the law and economics literature in legal studies, which use similar economic models based on game theory and contracting theory, thus providing many synergies between the accounting and tax law area. The resulting economic analyses provide testable hypotheses for empirical tests and more sophisticated policy recommendations. Specific research questions studied in the project include the following: (i) Interaction of auditing and enforcement of financial reporting, including audit oversight, and their effects to high-quality financial reporting; (ii) Incentive effects of co-operative tax compliance regimes and their comparison to and interaction with hierarchical tax compliance; (iii) Incentive effects of pre-clearance in both enforcement and in tax compliance, including cross-border tax assessment; and (iv) Involvement of third parties in tax assessment and collection, including incentive, liability, and efficiency effects.

Over the last years, regulation to enhance compliance in the area of accounting and taxation has increased tremendously, both on the EU and national levels. Many of the actions were triggered by prominent bankruptcies, scandals, tax avoidance schemes, and the like. While the regulations are typically effective on their own, it is an open question whether or not they increase the effectiveness of the whole enforcement system. For example, increasing public enforcement may crowd out auditing quality, or increasing tax auditing may be less effective than implementing continuous monitoring. This project considers selected enforcement mechanisms and assesses the processes involved and the effectiveness of compliance institutions jointly. It applies an interdisciplinary - a legal and an economic - analysis of interactions between different enforcement institutions. It investigates the legal framework of those institutions and uses economic modeling and empirical analyses to provide insights into the economic effects of introducing or changing the institutions. Main results are as follows. * Higher misreporting incentives of managers directly decrease financial reporting quality and increase the cost of capital of firms. However, auditors react by increasing audit quality, and this can overcompensate the effect of the higher misreporting incentives and reduce the cost of capital. * Higher corporate taxes can decrease the board of directors' monitoring of top management. Since board monitoring is a substitute to external auditing, taxes also affect auditing and the ultimate compliance incentives of management. * Stronger tax enforcement can lead to undesirable outcomes such as declaring too much tax if the institutional environment lacks sufficient legal protection. Legal protection enhances the accuracy of tax audits, but its impact on tax evasion depends on features of the legal environment, such as penalties. * Over the last years, several countries, including Austria, introduced forms of cooperative tax compliance programs. Legal and economic analyses show that the effectiveness of these programs depends on the kind of tax uncertainties, the detection probability of tax evasion, available penalties, and other legal constraints.