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.