Tax authority governance and corporate internal control quality
Xiaojian Tang
College of Finance, Nanjing Agricultural University, Nanjing, China
School of Accounting, Dongbei University of Finance and Economics, Dalian, China
Search for more papers by this authorDongying Du
College of Finance, Nanjing Agricultural University, Nanjing, China
Search for more papers by this authorCorresponding Author
Ying Chen
International Business College, South China Normal University, Guangzhou, China
Correspondence
Ying Chen, International Business College, South China Normal University, Guangzhou, China.
Email: [email protected]
Search for more papers by this authorStephanie Tsui
Department of Accounting, National Chengchi University, Taipei, China
Search for more papers by this authorXiaojian Tang
College of Finance, Nanjing Agricultural University, Nanjing, China
School of Accounting, Dongbei University of Finance and Economics, Dalian, China
Search for more papers by this authorDongying Du
College of Finance, Nanjing Agricultural University, Nanjing, China
Search for more papers by this authorCorresponding Author
Ying Chen
International Business College, South China Normal University, Guangzhou, China
Correspondence
Ying Chen, International Business College, South China Normal University, Guangzhou, China.
Email: [email protected]
Search for more papers by this authorStephanie Tsui
Department of Accounting, National Chengchi University, Taipei, China
Search for more papers by this authorAbstract
Prior studies of tax enforcement neglect the effect of tax enforcement officers' discretion on corporate internal control quality. This study exploits a unique quasi-natural experimental setting of the reform of Chinese province-level tax administrative penalty discretion standards since 2016 to examine the effect of tax authority governance on corporate internal control quality. We show that tax authority governance can improve corporate internal control quality. And this positive effect is more pronounced in firms with more tax avoidance and more collusion with tax supervisors. Furthermore, further analysis shows that legal enforcement and financial reporting environment can strengthen the positive relationship between tax authority governance and corporate internal control quality. Therefore, the above results show that tax authority governance not only increases the predictability of tax violation and its consequential penalties, but also restricts tax enforcement personnel's discretionary power, thereby reducing opportunities for tax avoidance and rent-seeking behaviour.
Open Research
DATA AVAILABILITY STATEMENT
The data that support the findings of this study are available from the corresponding author upon reasonable request.
REFERENCES
- Allingham, M.G. & Sandmo, A. (1972) Income tax evasion: A theoretical analysis. Journal of Public Economics, 1(3–4), 323–338.
10.1016/0047-2727(72)90010-2 Google Scholar
- Altamuro, J. & Beatty, A. (2010) How does internal control regulation affect financial reporting? Journal of Accounting and Economics, 49(1–2), 58–74.
- Balakrishnan, K., Blouin, J.L. & Guay, W.R. (2019) Tax aggressiveness and corporate transparency. The Accounting Review, 94(1), 45–69.
- Bauer, A.M. (2016) Tax avoidance and the implications of weak internal controls. Contemporary Accounting Research, 33(2), 449–486.
- Bennedsen, M. & Zeume, S. (2018) Corporate tax havens and transparency. The Review of Financial Studies, 31(4), 1221–1264.
- Bozanic, Z., Hoopes, J.L., Thornock, J.R. & Williams, B.M. (2017) IRS attention. Journal of Accounting Research, 55(1), 79–114.
- Cao, J., Lin, B., Bernile, G. & Shu, W. (2021) The economic effects of mandated ICFR disclosure in China: an insider perspective. Asia-Pacific Journal of Accounting & Economics, 30, 1–19.
- Chalmers, K., Hay, D. & Khlif, H. (2019) Internal control in accounting research: A review. Journal of Accounting Literature, 42(1), 80–103.
10.1016/j.acclit.2018.03.002 Google Scholar
- Chetty, R., Looney, A. & Kroft, K. (2009) Salience and taxation: theory and evidence. American Economic Review, 99(4), 1145–1177.
- Committee of Sponsoring Organizations of the Treadway Commission. (2013) Internal control-integrated framework.
- Dechow, P.M., Sloan, R.G. & Sweeney, A.P. (1995) Detecting earnings management. The Accounting Review, 70(2), 193–225.
- DeFond, M. & Zhang, J. (2014) A review of archival auditing research. Journal of Accounting and Economics, 58(2–3), 275–326.
- DeFond, M.L. & Lennox, C.S. (2017) Do PCAOB inspections improve the quality of internal control audits? Journal of Accounting Research, 55(3), 591–627.
- Desai, M.A. & Dharmapala, D. (2006) Corporate tax avoidance and high-powered incentives. Journal of Financial Economics, 79(1), 145–179.
- Desai, M.A., Dyck, A. & Zingales, L. (2007) Theft and taxes. Journal of Financial Economics, 84(3), 591–623.
- Dhaliwal, D., Gleason, C. & Mills, L. (2004) Using income tax expense to achieve analysts' targets. Contemporary Accounting Research, 21(2), 431–459.
- Donohoe, M.P. & Robert Knechel, W. (2014) Does corporate tax aggressiveness influence audit pricing? Contemporary Accounting Research, 31(1), 284–308.
- Doyle, J., Ge, W. & McVay, S. (2007) Determinants of weaknesses in internal control over financial reporting. Journal of Accounting and Economics, 44(1–2), 193–223.
- Dyck, A. & Zingales, L. (2004) Private benefits of control: an international comparison. Journal of Finance, 59(2), 537–600.
- Evans, M., Houston, R., Peters, M. & Pratt, J. (2015) The financial reporting environment, reporting discretion, and earnings management: US GAAP vs. IFRS. The Accounting Review, 90(5), 1969–1994.
- Francis, J.R. & Yu, M.D. (2009) Big 4 office size and audit quality. The Accounting Review, 84(5), 1521–1552.
- Giannetti, M., Liao, G., You, J. & Yu, X. (2021) The externalities of corruption: evidence from entrepreneurial firms in China. Review of Finance, 25(3), 629–667.
- Gleason, C.A., Pincus, M. & Rego, S.O. (2017) Material weaknesses in tax-related internal controls and last chance earnings management. The Journal of the American Taxation Association, 39(1), 25–44.
- Graham, L. & Bedard, J.C. (2015) Internal control deficiencies in tax reporting: A detailed view. Accounting Horizons, 29(4), 917–942.
- Gupta, S. & Lynch, D.P. (2016) The effects of changes in state tax enforcement on corporate income tax collections. The Journal of the American Taxation Association, 38(1), 125–143.
- Hoitash, U., Hoitash, R. & Bedard, J.C. (2009) Corporate governance and internal control over financial reporting: A comparison of regulatory regimes. The Accounting Review, 84(3), 839–867.
- Hoopes, J.L. & Mescall, D. (2012) Pittman. Do IRS audits deter corporate tax avoidance? The Accounting Review, 87(5), 1603–1639.
- Huang, H., Wang, T. & Zhan, Z. (2019) From business tax to value-added tax: the effects of reform on Chinese transport industry firms. Australian Accounting Review, 29(1), 158–176.
- Jin, Z. & Huang, C. (2021) Tax enforcement and corporate donations: evidence from Chinese “Golden tax phase III”. China Journal of Accounting Studies, 9(4), 526–548.
10.1080/21697213.2022.2053375 Google Scholar
- Khurana, I.K. & Raman, K.K. (2004) Litigation risk and the financial reporting credibility of big 4 versus non-big 4 audits: evidence from Anglo-American countries. The Accounting Review, 79(2), 473–495.
- Kim, J.B., Lee, E., Tang, X. & Zhang, J. (2023) Collusive versus coercive corporate corruption: evidence from demand-side shocks and supply-side disclosures. Review of Accounting Studies, 28(4), 1929–1970.
- Krishnan, J. (2005) Audit committee quality and internal control: an empirical analysis. The Accounting Review, 80(2), 649–675.
- Kubick, T.R., Lockhart, G.B., Mills, L.F. & Robinson, J.R. (2017) IRS and corporate taxpayer effects of geographic proximity. Journal of Accounting and Economics, 63(2–3), 428–453.
- Li, C., Sun, L. & Ettredge, M. (2010) Financial executive qualifications, financial executive turnover, and adverse SOX 404 opinions. Journal of Accounting and Economics, 50(1), 93–110.
- Li, Z., Wang, B., Wu, T. & Zhou, D. (2021) The influence of qualified foreign institutional investors on internal control quality: evidence from China. International Review of Financial Analysis, 78, 101916.
- Liu, B., Huang, W., Chan, K.C. & Chen, T. (2022) Social trust and internal control extensiveness: evidence from China. Journal of Accounting and Public Policy, 41(3), 106940.
- Liu, C., Lin, B. & Shu, W. (2017) Employee quality, monitoring environment and internal control. China Journal of Accounting Research, 10(1), 51–70.
10.1016/j.cjar.2016.12.002 Google Scholar
- Nessa, M., Schwab, C., Stomberg, B. & Towery, E. (2016) How do IRS resources affect the tax enforcement process? In: Proceedings. Annual conference on taxation and minutes of the annual meeting of the National tax Association (Vol. 109, pp. 1–50). National tax Association. Available from: https://www.jstor.org/stable/26816578
- Shavell, S. (1993) The optimal structure of law enforcement. The Journal of Law and Economics, 36, 255–287.
- Shu, W., Chen, Y., Lin, B. & Chen, Y. (2018) Does corporate integrity improve the quality of internal control? China Journal of Accounting Research, 11(4), 407–427.
10.1016/j.cjar.2018.09.002 Google Scholar
- Simone, D.L., Ege, M.S. & Stomberg, B. (2015) Internal control quality: the role of auditor-provided tax services. The Accounting Review, 90(4), 1469–1496.
- Slemrod, J. (2004) The economics of corporate tax selfishness. National Tax Journal, 57(4), 877–899.
- Tang, X., Du, D., Xie, L. & Lin, B. (2022) Does the standardisation of tax enforcement improve corporate financial reporting quality? China Journal of Accounting Studies, 10(4), 481–502.
10.1080/21697213.2022.2143684 Google Scholar
- Tang, X., Tsui, S. & Lo, K.T. (2020) Local institutional environment and stock Price crash risk: evidence from China. The Singapore Economic Review, 20, 1–22.
10.1142/S0217590821400014 Google Scholar
- Wang, F., Xu, L., Zhang, J. & Shu, W. (2018) Political connections, internal control and firm value: evidence from China's anti-corruption campaign. Journal of Business Research, 86, 53–67.
- Wang, X., Fan, G. & Yu, J. (2021) China market index report by province (2021). Beijing: Social Sciences Academic Press in China. (in Chinese).
- Wang, Z., Singh-Ladhar, J. & Davey, H. (2019) Business tax to value-added tax reform in China. Pacific Accounting Review, 31(4), 602–625.
- Zhang, J., Huo, Z., Zeng, Y., Tang, X. & Rui, O.M. (2021) Corporate value added tax avoidance. Accounting Forum, 45(4), 338–362.
- Zhang, Y., Zhou, J. & Zhou, N. (2007) Audit committee quality, auditor independence, and internal control weaknesses. Journal of Accounting and Public Policy, 26(3), 300–327.
- Zhao, L. (2023) The effect of tax authority enforcement on earnings informativeness. The European Accounting Review, 32(1), 197–216.
