The International Journal of Accounting

Synopsis

Research problem

We investigate whether accountants’ cognitive reflection ability affects how they assess the probabilistic numerical thresholds of the probabilistic expressions probable, remote, virtually certain, and reasonable certainty in the context of international financial reporting standards.

Theoretical reasoning

In the psychology literature, impulsivity is associated with aggressive behavior, and reflective individuals are more prone than impulsive individuals to access slow and effortful (Type 2) reasoning in order to overcome the initial response provided by fast and impulsive (Type 1) reasoning. Considering that accounting conservatism requires a higher degree of verification to recognize events that increase rather than decrease net assets, we argue that impulsivity is associated with aggressive accounting and reflectivity is associated with a conservative interpretation of probabilistic expressions.

Test hypothesis

Reflective accountants are more conservative than their impulsive peers when making numerical assessments of probabilistic expressions associated with accruing or disclosing an event.

Target population

Accounting professionals, including preparers, auditors, and tax analysts.

Adopted methodology

We collected data from 569 accounting professionals using a survey questionnaire, in partnership with the Brazilian Accountants Association (Conselho Federal de Contabilidade, or CFC), a federal agency with the mandate of guiding, regulating, and supervising the accounting profession in Brazil, to assess professionals’ cognitive reflection ability, collect their demographic characteristics, and evaluate their assignment of numerical values to probabilistic expressions.

Analyses

We employed $t$-tests, median tests, and standard deviation tests; we also conducted several robustness tests that replicated our main results.

Findings

Our results confirm that reflective accountants are more conservative in their probability assessments than their impulsive peers. Our findings have three main implications. First, standard-setters could avoid the use of or develop guidance about terms with low communication efficiency. Second, analysts and standard-setters should consider that the comparability of accounting information across firms depends on the preparers’ cognitive reflection ability. Third, we present an additional explanation (accountants’ cognitive reflection ability) for accounting conservatism and differences in the interpretation of uncertainty expressions.

The research problem

We evaluated the effectiveness of statutory auditors as a tax inspection mechanism and examine a regulation change that occurred in Greece. In 2011, the Greek State passed a directive requiring that statutory auditors audit and certify the tax compliance of medium and large firms, and issue a Tax Compliance Report (TCR).

Motivation

The evidence on the auditors’ effect on tax avoidance is quite limited. Our research setting constitutes a unique quasi-natural experiment to evaluate auditors’ effectiveness and firms’ tax avoidance behavior under a new tax compliance regime.

The test hypothesis

We tested the following hypothesis: Tax avoidance was significantly reduced in the post-TCR period for firms subject to TCR.

Target population

Our target population consisted of firms that are subject to audits from statutory auditors for tax compliance purposes.

Adopted methodology

We employed a difference-in-differences design with Greek firms subject to TCR as the treated group and the rest of the Greek firms as the control group. We examined potential differences from the TCR enforcement for the two groups.

Analysis

Our main analysis presents results for the treated and the control groups regarding their non-conforming and conforming tax avoidance behavior in the pre- and the post-TCR period. Non-conforming refers to activities that reduce taxable income but leave book income unaffected, whereas conforming tax avoidance refers to activities that reduce both taxable income and book income. Additional analysis evaluates the effect of Big 4 audit firms, increased audit effort, and assignment of the TCR to the financial statements’ auditor.

Findings

Our empirical results suggest that non-conforming tax avoidance for treated firms (i.e., firms subject to tax audits) significantly decreased in the post-TCR period compared with that of the control sample (i.e., firms not subject to tax audits). Conversely, conforming tax avoidance increased. This evidence suggests that treated firms switched from non-conforming to conforming tax avoidance activities. Our results hold irrespective of the size of the audit firm that performed the TCR program, but we find that increased audit effort to accomplish the TCR program and the assignment of the TCR to the auditor who also audited the financial statements had an incremental impact on the reduction of non-conforming tax avoidance.

Synopsis

The research problem

The extant audit market concentration (AMC) literature is quite scattered, which makes it challenging to comprehend the current state of knowledge and to highlight the areas that require further exploration. An improved understanding of AMC and its possible effects require a comprehensive review of the AMC literature, since no such review has yet been published. Therefore, our paper intends to: (a) synthesize the empirical work in the AMC literature; (b) determine the limitations in the ways AMC has been investigated; (c) identify avenues of inquiry that could guide future thinking on AMC; and (d) develop insights into how future AMC investigations can be further developed.

Motivation

The most noticeable developments in AMC occurred after the audit firm megamergers of the 1980s and 1990s and Andersen’s demise in 2002. This trend toward fewer and larger suppliers of auditing services has sparked intense debate about the costs and benefits of AMC. However, the literature provides mixed evidence on the determinants and consequences of AMC.

Adopted methodology

A structured literature review [Massaro, M., Dumay, J., & Guthrie, J. (2016). On the shoulders of giants: Undertaking a structured literature review. Accounting, Auditing and Accountability Journal, 29(5), 767–801. https://doi.org/10.1108/AAAJ-01-2015-1939] was employed to review the extant AMC literature.

Analyses

We analyzed 108 empirical papers published in 39 peer-reviewed quality accounting and auditing journals in the English language over a 55-year period (1967 to mid-2021).

Findings

The analysis suggests a consistent rise in AMC levels, leading to a tight oligopoly and, in rare cases, to a duopoly, across countries and over time. Studies of audit pricing and audit quality comprise the predominant part of the literature, and these report mixed findings as to whether AMC facilitates monopolistic pricing and allows audit-quality-threatening behaviors. This could be attributed to several factors, including the focus on short-term effects of AMC; substantial variations in how concentration was measured; and misguided use of proxies for audit competition and audit quality. The review identifies four key limitations that circumscribe our understanding of AMC: (a) the lack of investigation into the actual dynamic rivalry among audit firms; (b) great reliance on the positivistic approach and quantitative methods, and the lack of use of explicit theories aside from economic theories; (c) a focus on the audit of publicly listed companies in the United States, the U.K., and Australia; and thus; (d) the absence of key organizational settings and central regions in the AMC debate. To counter these limitations, this review puts forward possible future research avenues that can help to advance our understanding of AMC to address emerging challenges in the field.