Study of Association between Deferred Tax Expense and Financial Restatements

• Main Authors: Ju-En Li, 李如恩
• Other Authors: CHANG,HUI SHAN
• Format: Others
• Language: zh-TW
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/26023230671347210849

碩士 === 中原大學 === 會計研究所 === 97 === One of the financial statement's functions is to provide information of firms’ future profitability to investors for decision making. The main purpose of this study is to analyze whether firms been asked by Securities and Future Bureau to restate their financial statements use deferred tax expenses to manage their reported earnings. This study analyzes the relation between a company’s deferred tax expenses and the possisibility of financial restatement. From prior study, we know that managers use discretionary accruals for earning management for financial reporting purpose. They manage earnings to reach some goals (such as avoiding reported earnings decline). Nevertheless, managers are willing to raise book income but not taxable income. This study examines whether deferred tax expenses can detect financial restatement, as well as that auditor and users of financial statement can detect financial restatement via deferred tax expense. The empirical research of this study shows that if deferred tax expense is higher then the possibility of the financial restatement is also higher. The results show that deferred tax expenses can be an indicator of detection of financial restatemenst. Firms want to increase book income but not taxable income. Restatement firms are not willing to pay extra tax as a result of earnings management, and thus, by using the difference between accounting standards and tax rules, increase fims’ deferred tax expense. For firms with positive income before tax, while deferred tax expense is higher, the probability of the financial restatement is also higher. The result indicates that firms use deferred tax expense to engage in earnings management. They manipulate the timing of recognition of revenue and expense according to the difference between accounting standard and tax rules. On the one hand firms have reached the earnings goals, on the other hand they also postpone paying tax for cash flow planning. Finally, our results show that, while the deferred tax expenses in the preceding year is higher, the probability of the financial restatement is also higher for fims with positive income before tax. Financial restatements firms intending to embellish financial statements engage in earnings management by understating taxable income and inflating accounting income in preceding year, which in turn increase deferred tax expense.