The International Journal of Accounting

Synopsis

The research problem

This study investigates the relationship between the incentive of Japanese non-profit organizations to avoid losing their tax-exempt status and the extent of tax-motivated expense allocation.

Motivation

Prior studies have shown that for joint overhead expenses, organizations can lower their tax burden by transferring costs from non-taxable to taxable activities. However, tax authorities may also investigate non-profits that report excessive profits without incurring expenses for non-taxable activities and penalize them by depriving them of their tax-exempt status. This deprivation of tax exemptions specific to non-profit organizations causes serious problems for such organizations in terms of the economic impact of increased income taxes and the loss of social value from donors. In Japan, non-profit organizations are deprived of tax-exempt status if the ratio of expenses from taxable activities to total expenses (TaxExpRatio) exceeds a regulatory threshold of 50%. We estimated the tax-motivated expense allocation and non-taxable activities, defining the term TaxExpRatio before the allocation as TRBA. In addition, we assumed that a larger board of directors has a stronger incentive to protect the non-profit’s tax-exempt assets because individuals or organizations that provide resources to non-profits often become board members, who thus conduct stronger monitoring to avoid losing the tax-exempt status.

The test hypotheses

We hypothesized that when the TRBA exceeds the regulatory threshold, non-profits allocate less discretionary expense to taxable activities. We further posited that board size moderates the relationship between the TRBA exceeding the regulatory threshold and allocation of discretionary expenses to taxable activities.

Target population

We specifically considered the Japanese regulatory environment related to public-interest incorporated associations and foundations (PIIAs and PIIFs, referred to as Japanese non-profit organizations), which are tax-exempt organizations engaged in a wide range of public work.

Adopted methodology

We estimated the expense allocated from non-taxable to taxable activities in a non-profit organization based on Hofmann (2007) and Omer & Yetman (2007). We also estimated regressions using pooled cross-sectional and ordinary least squares (OLS) regression models.

Analysis

By using 12,027 firm-year observations (4,763 distinct non-profit organizations in Japan), we estimated the regression model for the incentive to avoid losing tax-exempt status in non-profit organizations.

Findings

We found that non-profits with TRBA over the regulatory threshold tend to allocate less expenses to taxable activities. In addition, the empirical results show that the relationship between TRBA over the regulatory threshold and allocated expenses to taxable activities is moderated by board size. This finding suggests that larger boards in non-profit organizations are more incentivized to reduce tax avoidance behavior that may result in losing their tax-exempt status.

Synopsis

The research problem

This study examines the effects of board size and board independence, as well as the interaction effect between board independence and CEOs/CFOs on corporate governance disclosure practices.

Motivation

Despite corporate governance (CG) reforms around the world, research evidence indicates that the levels of corporate governance disclosures (CGDs) in developing countries remain poor due to weak institutions and corporate governance systems. In particular, the corporate boards as a key mechanism of CG and the board nomination processes in East Africa remain largely opaque and dominated by majority shareholders, chief executive officers, and chief finance officers (CEOs/CFOs), giving rise to opportunistic behaviors that may be detrimental to firm value. The distinctive feature of the board nomination process/CG system in East Africa has implications for monitoring and corporate governance disclosure practices and compliance and calls for systematic research in this under-explored subject.

Hypotheses

H₁: The association between board size and corporate governance disclosure will be positive.

H₂: The association between board independence and corporate governance disclosure will be positive.

H_3a: The presence of the CEO on the nomination/remuneration committee will negatively moderate the relationship between board independence and corporate governance disclosure.

H_3b: The presence of the CFO on the nomination/remuneration committee will negatively moderate the relationship between board independence and corporate governance disclosure.

H_3c: The presence of the CEO and CFO on the nomination/remuneration committee will negatively moderate the relationship between board independence and corporate governance disclosure.

Target population

Stakeholders including firm managers, practitioners, regulatory authorities, policymakers, and investors.

Adopted methodology

Ordinary least squares (OLS), fixed-effects model, and system generalized method of moments (GMM).

Analyses

Using a large and hand-collected dataset comprising 1000 firm-year observations from 2007 to 2017 in East Africa, this study develops a corporate governance disclosure index (CGDI) of East Africa consisting of 164 provisions. To test our hypotheses, this study adopts three analytical approaches, namely OLS and fixed-effects (FE) regressions and the two-stage system GMM to address the endogeneity concerns.

Findings

We find that large boards and independent directors are associated with greater disclosure of CG information. Our analysis suggests that CEO/CFO power negatively moderates the link between board independence and corporate governance disclosure, unlike those environments with stronger institutions and corporate governance systems. Thus, firms whose CEO and CFO are involved in remuneration or nomination committees disclose less CG information. The combined effect of the CEO and CFO on selection and remuneration committees and an independent board in reducing corporate disclosure appears more pronounced for the post-financial crisis period compared with the crisis period.

Synopsis

The research problem

This paper sought to ascertain whether IFRS adoption approaches impact accounting quality. Specifically, as some countries utilize IFRS without modifications while others modify IFRS to suit their local context, we aimed to test whether these differences in IFRS adoption approaches have implications for accounting quality.

Motivation

Prior studies focused on the impact of IFRS adoption on accounting quality without considering the different approaches used by the adopting jurisdictions. Such differences affect the version of IFRS utilized at the country level. We refer to jurisdictions as adopters of IFRS when the IASB’s version of IFRS is utilized without modifications. In contrast, jurisdictions where the IFRS standards are modified at the national or regional level are called adapters. We also recognize the role of enforcement; thus, we first examined whether IFRS adoption and enforcement influence accounting quality. Second, we compared the accounting quality for adopters and adapters of the standards.

The test hypotheses

Our first hypothesis is that the quality of enforcement has a stronger effect on accounting quality than the adoption of IFRS. Second, adapters will have higher accounting quality than adopters of IFRS.

Target population

We focused on the reporting of companies in African countries. These jurisdictions have not been sufficiently examined in prior studies.

Adopted methodology

We use panel data estimation, specifically, random-effects model.

Analyses

We examined accounting quality for pre- and post-IFRS reporting based on 3946 firm-year observations from six African countries over 18 years. Our analysis of the adoption approach is based on 3736 firm-year observations for companies utilizing IFRS. Except for Egypt, which used a modified version of IFRS, other countries in our sample utilized the IASB’s version of IFRS. Using various standard metrics for accounting quality (earnings management, timely loss recognition, and value relevance), we ascertained whether adaption is associated with higher accounting quality compared to adoption.

Findings

The results indicate that IFRS adoption and enforcement proxy are not associated with accounting quality, but other institutional factors are. Adoption of the standards is less important for accounting quality than the existing institutions. With regard to the adoption approach used, adopters demonstrated higher accounting quality for accounting-based measures, less income smoothing, and more timely loss recognition than the adapters. The adopters also exhibited greater value relevance, which suggests that their reporting was better able to capture information that affects firm value. The adoption approaches may influence different dimensions of accounting quality, and the resulting differences are important for users, companies, and standard setters to consider.