Last-Chance Earnings Management: Using The Tax Expense To Meet Company's Forecast
Abstract
Diwangkara (2006). Last Chance Earnings Management: Using the Tax Expense
To Meet Company's Forecast. Yogyakarta, International Program, Accounting
Department, Faculty of Economics, Islamic University of Indonesia.
The research assert t'.iat the tax expense is a powerful context in which to
study earnings management, because it is one of the last accounts closed prior to
earnings announcements. Although many pre-tax accruals must be posted in the yearend
general ledger, managers estimate and negotiate tax expense with their auditors
immediately prior to earnings announcements. The researcher hypothesizes that
changes from last year and current year effective tax rates are negatively related to
whether and how much a firm's earnings absent tax expense management miss
company's consensus forecast, a proxy for target earnings. The researcher measures
earnings absent tax expense management as current year actual tax minus last year
actual tax then divided by current year pretax income.
The researcher examines and provides general evidence that the firms that are
below the target will decrease their ETR to reach the target, which is consistent with
firms decreasing their tax expense if non-tax sources of earnings management are not
be able to achieve targets. The Researcher also f.nds that firms have a greater
incentive to avoid missing the target. Bystudying the tax expense in total, the results
provide general evidence that reported tax is not used to manage earnings in
Indonesian firms listed in JSX for year 1996-2000.
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