Int. j. econ. manag. soc. sci., Vol(3), No (8), August, 2014. pp.

419-421

TI Journals

International Journal of Economy, Management and Social Sciences

www.tijournals.com

ISSN:
2306-7276

Copyright 2014. All rights reserved for TI Journals.

The Relationship between Balance Sheet Data Errors in the Financial

Reporting and Aggressive Tax Reporting
Fereydoun Zaman Namian*
Department of Accounting, Shahrood Science and Research Branch, Islamic Azad University, Shahrood, Iran.

Mohammadreza Abdoli
Department of Accounting, Shahrood Branch, Islamic Azad University, Shahrood, Iran

Farhad Dehdar
Department of Accounting, Shahrood Branch, Islamic Azad University, Shahrood, Iran.
*Corresponding author: rezazaman110@yahoo.com

Keywords

Abstract

Declared taxes
Appointed taxes
Annual adjustments
Restatement
Firm size
Financial leverage
Independent auditor

Taxes generated by the aggressive activities have the significant costs and benefits for the managers,
shareholders and the general community. However, given the correction of some financial reporting
errors in future periods and the effect of these errors on the firms' taxes and the importance of this issue,
139 companies from various industries listed in Tehran Stock Exchange- in the period between 2007
and 2011- were selected for this study. After reviewing the financial statements and collecting the
required data, simple and multiple regression methods were used to test the hypotheses and examine the
relationship between the errors in the financial reporting and aggressive tax reporting; and the stepwise
approach was used to evaluate the impact of variables and prioritize the influencing variables. The
results indicate a direct relationship between independent and control variables with dependent variable,
i.e. aggressive tax policies. Therefore, the stepwise method was used to prioritize the influencing
variables. Among all independent and control variables, the variables of the firm size and restatement of
current liabilities had the most significant impact on aggressive tax policies and the other variables were
excluded from the model due to their low impact.

1.

Introduction

Since the taxable expenditures are of the major expenses of the firms leading to the outflow of the corporate liquidity and the reduction of
shareholders dividends, tax expenditures and taxes payable are always regarded by the executives and shareholders of the companies.
Therefore, tax policies (aggressive or conservative) are of approaches that should be considered by shareholders and the whole capital
market in the evaluation of managers performance. Restatement of the financial reports has a negative influence on the relevance and
reliability of the information provided in the financial statements. However, in recent years, financial restatement is very common among
Iranian companies, so that the annual adjustments are considered as a relatively stable element of profit (loss) turnover. These adjustments
are mainly due to correcting the mistakes (errors) in the reports of the past period; and those related to the changes in accounting methods
are less observed. This can affect the reliability of the figures presented in the financial statements, in particular, the profit figure. Reza
Zare, Farzad Farzanfar and Maryam Boroumand 2013, found that the firms financial leverage is influenced by the three variables namely
the firm age, size and asset structure in the firms listed in Tehran stock exchange. Also the firms life cycle influences the managers
decisions to secure finance [7].

2.

Research Background

Abdoli , mahmoudzadeh and panahi (2013)found that the results of the research indicated that a bigger difference between declared tax and
assessed tax leads to a lower earnings persistence in companies. Moreover, in companies whose tax provision deficit is reported by an
independent auditor, earnings persistence is lower. Therefore, companies with aggressive tax policies and tax files submitted to tax
conciliation boards on an annual basis have a lower earning quality, which can be considered a disadvantage by investors assessing the
performance of the company[2]. Abdoli and Bakhshi (2013) found that the firm size has a positive effect on the tax aggressive policy [1].
Shamsi Jamkhaneh (2009) found that there is a significant relationship between declared taxable income and appointed taxable income of
the taxation units[9]. In 2013, James Cheez, found that the presence of aggressive executives has a direct relationship with evading from
taxpaying; and the increased tax shield in economic entities with aggressive executives is ultimately more valuable than economic entities
without aggressive executives[5]. Lenis and Richardson (2011) found that the presence of a high proportion of external board members
reduces aggressive and tax reducing behaviors[6]. Arabmazar et al. (2011), found a positive relationship between tax reporting and
transparent financial reporting [4]. In a research, Sajjadi et al., (2009) concluded that the size, age, and type of industry have significant
positive relationship with the quality of financial reporting [8]. Shamsul Nahar Abdollah et al., (2009) concluded that the companies with
high debt are committed to restate the financial statements [3].

Fereydoun Zaman Namian, Mohammadreza Abdoli, Farhad Dehdar *

420

International Journal of Economy, Management and Social Sciences Vol(3), No (8), August, 2014.

3.

The main hypothesis:

There is a significant relationship between corporate financial reporting errors and aggressive tax reporting.

3.1 The first sub-hypothesis:

There is a significant relationship between the errors reported incorporate current assets and their aggressive tax reporting.
3.2The second sub-hypothesis:
There is a significant relationship between the errors reported incorporate current liabilities and their aggressive tax reporting.

4.

Research Variables:

Type of Variable

Name of Variable

Dependent variable

Tax aggressive policy

(difference between declared taxes
and appointed taxes)

Abbreviation

Source

Ti,t

Explanatory notes to financial statements

tax savings

Restatement of current assets

Independent variable

PPA

Restatement of current liabilities

Financial leverage

Report on corporate balance sheets

Leverage

Firm size

Size

Control variables

Report on corporate balance sheets

Type of the auditor's opinion

Opinion

Paragraph of independent auditor for

taxes

5.

Research Model
=

+ (

)+ (

)+ (

)+ (

)+

)+ (

Lny =logarithm of the difference between declared and appointed taxes

=intercept
Lnx1 =logarithm of the restatement of current assets
Lnx2 =logarithm of the restatement of current liabilities
Lnc1 =logarithm of the financial leverage
Lnc2 =logarithm of the firm size
Lnc3 =logarithm of the type of independent auditor's opinion
Lnc4 =logarithm of the paragraph of independent auditor for the taxes

6.

Results:

Hypothesis

Variable

Correlation
Coefficient

R2

Sig

Significance
of regression

Beta

Sig

Acceptance
or rejection
of hypothesis

Sub-hypothesis 1

Restatement of
current assets

0.484

0.234

35.487

0.000

Confirmed

0.484

0.000

Confirmed

Sub-hypothesis 2

Restatement of
current
liabilities

0.591

0.349

62.185

0.000

Confirmed

0.591

0.000

Confirmed

421

The Relationship between Balance Sheet Data Errors in the Financial Reporting and Aggressive Tax Reporting
International Journal of Economy, Management and Social Sciences Vol(3), No (8), August, 2014.

7.

Results of the main hypothesis:

In companies with more errors in financial reporting, differences between declared and appointed taxes are more than companies that are
less prone to errors in financial reporting. This is particularly important due to this fact that the errors in financial reporting include the
correction of errors or frauds in prior periods; and although it is difficult to detect that the financial statements have been restated
deliberately or inadvertently due to correction of prior period errors or they are resulted from fraud or false-accounting, the results of this
study suggest a direct relationship between these errors and tax aggressiveness and they are consistent with the findings of Arab Mazar et
al., (2011). Also, as the management has an essential role in financial restatement, the current research is consistent with the studies of Mr.
James(2013), professor of the University of Tennessee, on the fundamental role of corporate management and corporate tax aggressiveness.
However, the present study has been newly conducted and little research has been done in this area.

7.1 The results of the first sub-hypothesis:

More differences between the declared taxes and appointed taxes are observed in the reports of companies with more restated current
assets. As current assets of the companies include significant and important items such as inventories, orders and pre-payments, accounts
receivable and etc., proper and unmistakable recording of these figures is of great importance and their restatement may confuse the users
of the financial statements and thus lower their confidence level which should be more considered by the auditors.

7.2 Results of the second sub- hypothesis:

More differences between the declared taxes and appointed taxes are observed in the reports of companies with more restated current
liabilities. Our research indicated that this hypothesis is more powerful than the first sub- hypothesis and it affects the tax aggressiveness
more. Current liabilities also include important items such as accounts payable, financial reserves and etc. Managers can postpone paying
taxes to an acceptable level through restating these items in the financial statements, especially financial reserves and given the low level of
tax crimes and the lack of adequate skilled manpower in the Department of Finance, they can finally work towards greater profitability and
liquidity of the company with the aggressive tax policy.
Finally, the results of this study is somewhat consistent with the results of the study conducted by Shams al -Nahar Abdullah et al., (2009 )
which found that the firms with high debt levels are committed to restate the financial statements.

8.

Results from entering the control variables:

The results from entering control and independent variables into the model, based on stepwise method, revealed that the effect of the firm
size control variable is more than the other variables, so that after the entering all of the six independent and control variables into the
model, two variables of the firm size and restatement of current liabilities had the most effect on aggressive tax policies. The remaining
variables were excluded from the model due to their low effects. However, the effect of other variables was also significant, but they were
excluded due to their less contribution compared with the aforementioned two variables.
Because of tax savings, economic entities with aggressive executives will have years with more income than the economic entities without
aggressive executives. Considering the fact that the large companies are more interested in hiring aggressive executives than small firms,
the results of the study conducted by Mr. James is consistent with and in the direction of the results obtained by us.
However, given the importance of the issue of tax and financial reporting errors, and also due to the low number of articles in this field,
further research is needed to be conducted.

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