Effects of IFRS on Accounting Quality and Tax Aggressiveness: Evidence from Canadian Mandatory Adoption
Abstract
This study investigates the effects of mandatory adoption of the International Financial Reporting Standards (IFRS) on accounting quality and tax aggressiveness. Accounting quality is epitomized as the combined relevance and reliability of the reported financial information to investors (value relevance), and the faithfulness with which firms report those numbers (financial reporting aggressiveness). The tax aggressiveness component presents an original work on the effects of IFRS adoption by using unique Canadian data to assess IFRS as a determinant of tax aggressiveness.
The study draws from the disclosure and bounded rationality theories to explain the effects of the new standard. I argue that if the additional disclosures required under IFRS are specific and useful, then they must increase value relevance, consistent with the disclosure theory and the findings in Sabac, Scott and Wier (2005). Based on the logic of the bounded rationality theory, I also argue that firms will satisfice economic self-interest in their financial and tax reporting due to constraints. My study uses difference-in-differences techniques following prior studies, and employs multi-models, including models of Ohlson (1995) and Balachandran and Mohanram (2011) for value relevance; Barth, Landsman and Lang (2008) and Ahmed, Neel and Wang (2013) for financial reporting aggressiveness; and modified Hoopes, Mescall, and Pittman (2012) model for tax aggressiveness.
This study finds that value relevance and financial reporting aggressiveness increased for the IFRS adopters in post-adoption period consistent with the disclosure and the bounded rationality theories. These findings suggest that mandatory IFRS adoption has both positive and negative effects on accounting quality. The study fails to find evidence of increase in corporate tax aggressiveness. I argue that the likelihood of audit and potentially high penalties for tax non-compliance constrained the ability of firms to engage in tax aggressiveness after adopting IFRS, in line with the logic of the bounded rationality theory. Contrary to the concerns by the tax authority, corporate tax aggressiveness did not increase for firms that mandatorily adopted IFRS in Canada. Finally, the theories of disclosure and bounded rationality explain the effects of mandatory IFRS adoption on accounting quality and tax aggressiveness.
Description
Keywords
Accounting, Business Administration--Management
Citation
Okafor, O. N. (2015). Effects of IFRS on Accounting Quality and Tax Aggressiveness: Evidence from Canadian Mandatory Adoption (Doctoral thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca. doi:10.11575/PRISM/25824