Accounting Question

Conduct research on an applied case that puts into practice the concepts learned in any one (or more) of the chapters covered in this class. Be sure to read the course objectives, as well as the learning outcomes for this activity, and be sure to satisfy at least one of them. Cite the case, add it as an attachment, and provide text that relates the case to the concepts learned. The case should come from additional sources other than the book used for this class.

You may access research cases or related documents, it may be a peer-reviewed article or a journal. The length is up to you. Master’s level quality is expected.

Must be submitted by the deadline for full credit. Must meet APA standards and be structured as follows: Title page, abstract, main body -exercise content-, conclusions and references.

The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0268-6902.htm
MAJ
21,4
372
Factors influencing a firm’s
accounting policy decisions when
tax accounting and financial
accounting coincide
Christos Tzovas
Department of Accounting and Finance, Athens University of Economics and
Business, Athens, Greece
Abstract
Purpose – This paper aims to investigate the factors that influence the accounting policy decisions of
firms operating in Greece. Emphasis is given to management’s perceptions regarding the impact that
accounting figures have upon the decision-making and opinions of firms’ stakeholders.
Design/methodology/approach – Through a survey the financial managers of the 200 largest
firms in Greece have been asked to indicate their opinions regarding the impact that reported figures
have upon firms’ stakeholders and the extent to which firms pursue specific profit-related objectives.
Findings – According to the participants in the survey accounting figures influence firms’
stakeholders’ perceptions and decision-making, and firms pursue profit-related objectives that may
not coincide with the objective of minimization of firms’ tax liability.
Research limitations/implications – Although certain measures have been taken in order to limit
the response bias, one cannot rule out the possibility that some bias have been introduced in the
responses. A further empirical investigation based upon annual reports will provide additional
evidence regarding the factors that influence firms’ reporting policies.
Practical implications – This study helps researchers in identifying the factors that shape
accounting policies of firms operating in countries with an environment similar to that of Greece.
Additionally, the findings of this study can facilitate professionals who undertake international
financial analysis.
Originality/value – The findings of this study can contribute to explaining Greek firms’ accounting
decisions. Given that the accounting environment in Greece is similar to that prevailing in many
European and non-European countries this study can provide an insight regarding the factors that
influence financial reporting choices of firms operating in these countries.
Keywords Accounting policy, Accounting, Decision making, Financial reporting, Greece
Paper type Research paper
Introduction
A firm’s accounting policy decisions are made on the basis of the economic
consequences of the alternative policies (Dhaliwal et al., 1982). According to
Holthausen and Leftwich (1983, p. 77) a firm’s reporting policy choice has economic
consequences when:
Managerial Auditing Journal
Vol. 21 No. 4, 2006
pp. 372-386
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686900610661397
. . . changes in the rules used to calculate accounting numbers alter the distribution of a firm’s
cash flows, or the wealth of parties who use those numbers for contracting or decision
making.
In addition to their use in the contracting agreements between the various parties of a
firm, reported accounting figures affect the firm’s cash flows through their impact on
the level of a company’s tax liability (Wolfson, 1993). This is the case, provided that the
same accounting treatment is used for financial reporting and tax purposes alike
(Cloyd et al., 1996). Tax planning can result in an increase in the firm’s tax saving and
consequently it can have a positive effect on a firm’s cash flows. As a consequence,
assuming rationality and efficient capital markets, an accounting policy that
minimizes taxable income should be preferred (Biddle and Lindahl, 1982; Niehaus,
1989). However, given that the reduction of a firm’s tax liability is usually accompanied
by a corresponding decrease in its reported income, tax planning, under certain
circumstances, can have serious implications for various parties involved with a firm
(Scholes et al., 1990). The unfavorable picture of the firm’s financial position that may
emerge as a result of a decrease in the level of reported figures, can have serious
consequences with regard to firm’s ability to meet its contractual and regulatory
obligations, while shareholders’ and managers’ personal wealth may be affected as
well (Matsunaga et al., 1992). These implications have been designated as the “non-tax”
costs – or financial reporting costs – of a tax reducing policy. Each party of a firm is
supposed to trade-off the tax benefits of an accounting choice, against the ensuing
non-tax costs. The outcome of this trade-off is supposed to influence a firm’s
accounting policy decisions.
The aim of this study is to provide an understanding of the factors that influence
the accounting-policy decisions of firms operating in an accounting environment in
which tax rules are used for financial reporting purposes. For this purpose, the
accounting environment of Greece has been chosen. In Greece, tax accounting and
financial accounting coincide and it is expected that tax considerations will
influence management’s accounting policy decisions. This study investigates
whether non-tax considerations can influence firms’ accounting-policy decisions and
prompts them to deviate from a tax-reducing policy. The structural characteristics
of the broader economic and business environment of Greece affect the significance
of the non-tax costs relating to a particular accounting policy decision. The
similarities of the Greek accounting and business environment with that of other
European and non-European countries means that the findings of this study may be
of some help in understanding the accounting policies of firms operating in other
countries.
Factors giving rise to significant non-tax costs
The significance of tax benefits and non-tax costs are conditional upon certain
characteristics of a firm. A firm’s ownership structure has been hypothesized to be
associated with the magnitude of the non-tax costs that can be generated from a
tax-minimizing strategy. The management of firms characterized by a diffused
ownership and a separation between management and ownership might face
significant non-tax costs (Wolfson, 1993). The extensive use of accounting-based
contracts in these firms can induce managers to assign a great deal of importance to
the level of reported income (Klassen, 1997). Furthermore, managers’ perceptions
regarding the impact that accounting figures have on their evaluation by the external
users of accounts may make them particularly concerned about the level of reported
profits (Cloyd et al., 1996). On the other hand, for those firms in which ownership is
concentrated in the hands of a relatively small number of shareholders who actively
control the firm’s management, the necessity for using a bonus scheme is reduced,
Accounting
policy decisions
373
MAJ
21,4
374
while managers can communicate any information directly to shareholders without
having to use published financial statements (Klassen, 1997). Thus, non-tax costs may
be of lesser importance and firms are expected to pursue a more aggressive
tax-reducing policy. The findings of empirical research seem to support the argument
that in comparison to the widely-held firms, the closely-held ones are less concerned
about the non-tax consequences of their accounting choices, and they are more inclined
to implement a tax-reducing strategy (Smith, 1976; Dhaliwal et al., 1982; Hunt, 1986;
Penno and Simon, 1986; Niehaus, 1989; Scholes and Wolfson, 1992; Wolfson, 1993;
Cloyd et al., 1996; Klassen, 1997).
In Greece, as in many European countries (e.g. France, Italy), the
ownership-structure of the majority of the firms is characterized by a high level of
concentration (Nobes and Parker, 2000). In most cases the owners are actively involved
in their companies’ administration, occupying important posts within the
organizational structure of their firms (OECD, 1995; Makridakis et al., 1997;
Sykianakis, 2004). Firms’ owners can directly and effectively monitor and motivate
their subordinate managers and they do not need to employ incentive schemes. Further,
managers in such firms can communicate information regarding their performance
directly to their superior owner-managers without having to rely upon financial
statements. Under these circumstances, it is argued that the ownership-structure of
most Greek firms contributes to the adoption of an aggressive tax-reducing strategy,
since their ownership status does not appear to generate significant non-tax costs.
The use of accounting figures in a firm’s negotiations with the providers of credit
capital, and the inclusion of accounting numbers-based terms in the debt agreements,
suggest that a particular accounting choice can generate important non-tax costs
(Wolfson, 1993). Lower reported profit figures may adversely influence the banks’
credit decisions, and thus raise the cost of capital for the firm (Deakin, 1979).
Furthermore, the violation of the terms of loan agreements places a firm in technical
default, a situation that can have particularly adverse consequences for a firm
(Gopalakrishnan and Parkash, 1995). In order to reduce the likelihood that these events
will occur, firms are more likely to adopt an income-increasing accounting policy.
However, such a decision is most likely to be associated with important tax costs, since
the resulting increase in the reported income is likely to follow an increase in taxable
income (Maydew, 1997). The financial leverage of a firm is used as a proxy for the
firm’s need for debt capital, and its proximity to violating debt covenants (Christie,
1990). The more leveraged firms are expected to face higher non-tax costs, and thus
they are more likely to select the income increasing choice. Findings of empirical
research suggest that the more leveraged firms do trade-off tax benefits against
non-tax costs (Scholes and Wolfson, 1990; Sweeney, 1992; Matsunaga et al., 1992;
Smith, 1993; Maydew, 1997).
Banks are the main providers of funds for Greek companies. The dominant role of
bank credit in the financing of business enterprises is a distinct characteristic not only
of the Greek business environment, but also of many other European countries
(e.g. France, Germany). Banks have developed a close relationship with many
companies, while in certain cases they own part of the firm’s share capital. Thus, banks
in many instances may directly obtain any relevant financial information, without
having to rely upon publicly disclosed data. It has been argued that the fact that
financial accounting in many European countries has been dominated by tax
regulations and has never developed into a genuinely independent branch of
accounting can be partially attributed to the fact that when:
Accounting
policy decisions
. . . even listed companies in continental countries are dominated by banks, governments or
families, the need for published information is less clear (Nobes and Parker, 2000, p. 21).
Furthermore, in Greece the large state-controlled banks are not supposed to always
base their credit decisions on entirely objective and rational financial criteria (OECD,
1995; Papas, 1993; Makridakis et al., 1997). Consequently, the importance of public
accounting information may further diminish. Moreover, a consequence of the close
relationship between banks and companies is such that a violation of a debt covenant
may not have serious consequences for a firm. Within this context, a tax-reducing
strategy is not likely to give rise to important non-tax costs.
Yet, some significant non-tax costs can still arise. Even if economic criteria do not
always play a crucial role in banks’ credit decisions, most companies will be required to
meet some official criteria based on accounting numbers when making a loan
application. If the applying firm has a strong link with a particular bank, one cannot
rule out the possibility that the bank’s officials will tolerate some “adjusting” of
accounting figures in order to allow the firm to comply with the relevant terms. Thus, a
tendency of a firm to influence accounting figures through the choice of an appropriate
accounting policy may be reinforced. Furthermore, it cannot be assumed that all firms
enjoy the privilege of having a close relationship with a bank. As a consequence,
financial accounting considerations can still influence a firm’s accounting-policy
decisions.
Within a framework of efficiently functioning capital markets, shareholders of
public (listed) firms would prefer higher cash flows, since that would result in
higher share prices. Consequently, higher tax-savings would be preferred. This
could have been the case for Greek public firms, since the majority of them are
owner-controlled firms and stockholdings constitute a substantial proportion of the
personal wealth of the owner-managers. Yet, the perceived influence that
accounting figures may have on the firm’s share price can enhance the importance
assigned to financial reporting figures. A firm’s management might believe that
reported figures have a considerable impact on its share price. This impact may
be greater than that resulting from a possible change in the level of firm’s
tax-liability. In this case, it is possible that a firm’s management will aim to report
higher figures in order to influence its share price, despite a corresponding
increase in tax costs (Penno and Simon, 1986; Cloyd et al., 1996). Thus, public
firms are more likely, compared to the private (non-listed) ones, to prefer the
income increasing option. The fact that the owner-managers are prepared to forego
tax benefits in order to achieve higher reported earnings, does not imply that they
do not aim towards the maximization of a firm’s value, and as a consequence of
their wealth. The owners-managers believe that firm’s value is a function of the
firm’s accounting profits. As Cloyd et al. (1996, p. 39) put it:
If managers believe that stock prices react more strongly to reported income than to cash
flow, the public capital market introduces a potential non-tax cost that serves to discourage
them from [tax] conformity, even if conformity increases the firm’s expected future cash
flows.
and further:
375
MAJ
21,4
376
. . . , if new investors and creditors are willing to supply funds on terms that are affected by
reported accounting numbers, managers and existing shareholders may unanimously wish to
report high income, even at the expense of paying additional tax. That is, firm value may be
maximized by reporting higher income rather than reducing tax payments Cloyd et al. (1996,
p. 41-2).
According to the Greek financial press, accounting figures have a dominant influence
on the firm’s stock value. Furthermore, it has been asserted that it is not uncommon for
listed firms to get involved in income management through the selective application of
accounting policies. Within this context, it can be expected that a tax-reducing policy
due to its decreasing influence on the level of reported profits, can generate for the
Greek public firms some non-tax costs, which may prevent them from pursuing such
a policy.
Methodology
The above discussion indicates that management’s perceptions regarding the impact
of accounting figures on the users of accounts might generate important non-tax costs
for a firm pursuing a tax-reducing policy. A postal survey was conducted in order to
gather information relating to management’s perceptions about the influence of
accounting figures upon the users of accounts. The respondents were asked to indicate
the extent to which they believe that accounting information influences:
.
the lending decisions of the providers of debt capital; and
.
the firm’s share price.
Furthermore, this study investigates the extent to which certain profit-related
objectives were pursued. The following income-related objectives have been identified:
.
the minimization of the firm’s tax burden;
.
the reporting of profits that will influence the firm’s share price;
.
the reporting of profits that will influence the banks’ credit decisions; and
.
the reporting of profits that will enable the firm to avoid breaching the debt
covenants.
In addition, the survey gathered information regarding the participation of the major
owners in the firm’s board of directors, and their active involvement in the company’s
administration. This information can provide evidence of active control of the firm’s
affairs by its owners (Smith, 1976). Information regarding the employment of
managers’ compensation scheme has been collected. The respondents were asked to
indicate the debt/equity ratio of the firm they are working for. The firm’s debt to equity
ratio has been used as a proxy for the extent of the firm’s dependency on debt
financing, and for its closeness to breaching the accounting-numbers based terms of
lending agreements (Bradley et al., 1984; Watts and Zimmerman, 1986; Dhaliwal et al.,
1992). Furthermore, the respondents were asked to indicate whether the firm was
public or private.
The validity and the reliability of the research instrument were examined by
applying the tests proposed in the relevant literature (Nachmias and Nachmias, 1976;
Stelltiz et al., 1976; Sekaran, 1992). That examination indicated that both the validity
and the reliability of the questionnaire were on an adequate level. Besides, a pilot study
and a test of the questionnaire were conducted. An issue that surfaced during the pilot
study was that some of the issues raised within the survey could have been perceived
as “sensitive” ones. A potential recipient of the questionnaire might have believed that
by answering certain questions in a particular way they ran the risk of exposing their
firm to the accusation that it had implemented an earnings management policy in order
to achieve certain objectives. It has already been mentioned that according to the Greek
financial press many firms – especially the listed ones – apply this kind of policy in
order to influence their firms’ stock price. As a consequence, recipients of the
questionnaire might have been reluctant to respond in the questionnaire. Even in the
case that they had responded in the survey, there was the possibility that they might
have provided politically correct answers. Therefore, it could have been argued that
some bias was introduced in the responses. A measure that was taken in order to deal
with that issue was to assure the participants of the anonymity of their responses.
In the covering letter of the posted questionnaires an assurance of anonymity was
provided. Moreover, a stamped envelope was enclosed, which the participants were
advised to use in order to post the completed questionnaire. Thus, it was not feasible for
the researcher to identify the respondents. In that way the anonymity of the respondent
was safeguarded. Those measures aimed to limit the potential bias to the lowest
possible level. Despite those measures, one cannot rule out the possibility that some
bias was introduced in the data.
The questionnaires were posted to the financial managers of the 200 largest
industrial firms operating in Greece, classified on the basis of their turnover. Of
the 200 questionnaires that were mailed out, 63 were returned completed and
usable. The response rate, therefore, is 31 percent. Some of the returned
questionnaires were only partially completed, but were usable with regard to most
questions. Thus, the sample size for responses to individual questions varies with
a maximum of 63.
If the response rate is not sufficiently high, the extent to which the sample is
representative of the whole population should be assessed and taken into consideration
in the analysis of the responses to the survey. Moser and Kalton (1993) maintain that if
the response rate is above the range of 20-30 percent, the danger that a serious bias has
been introduced in the sample is limited. As mentioned above the response rate was
31 percent. Thus, it can be argued that the probability that the data is seriously biased
may not be high. Yet, the issue of the non-response bias was examined. According to
Moser and Kalton (1993), a convenient way to assess the extent to which the sample is
representative of the population of interest is to include certain questions in the
questionnaire, the responses to which can be subsequently checked against the
population data. For this survey, the analysis of the non-response bias was based upon
the sector distribution of the responding firms. The sector distribution of the
respondent firms was not significantly different from the sector distribution for the
population of the 200 largest industrial firms operating in Greece.
Findings
All but one of the respondents were working for firms which had a highly concentrated
ownership, while in most cases major shareholders are members of the board of
directors, and they actively participate in the firm’s administration[1]. Most of the
respondent firms do not employ accounting-based bonus schemes. The control status
Accounting
policy decisions
377
MAJ
21,4
378
of the responding firms may partially explain the relatively limited use of bonus
schemes by the responding firms, since bonus schemes are more likely to be used when
there is a separation between ownership and management. It seems, therefore, that for
the majority of the responding firms, their ownership/control status is unlikely to give
rise to significant non-tax costs. Such a conclusion is consistent with the argument
developed previously that the ownership structure of the Greek firms is not likely to
generate significant non-tax costs.
The leverage characteristics of firms, and whether the firms are public or private,
are factors that are more likely to give rise to significant non-tax costs. A tax-reducing
strategy can give rise to non-tax costs when the firm’s managers believe that
the resulting reduction in the level of reported profits will adversely influence the
perceptions of the external users of accounts. Most of the respondents (76 percent)
believe that the accounting information has a substantial effect on the banks’
loan decisions, while the majority of the respondents (59.5 percent) believe that the
accounting figures have a significant effect on the share price – , i.e. “great
extent”-“considerable extent” (Table I). About 93 percent of the respondents from listed
firms believe that accounting figures have a significant effect – “great extent” and
“considerable extent” – on a firm’s share price. Only one respondent from a listed firm
has replied that the firm’s share price is not affected at all by the published accounting
information (Table II).
Within this context, it has been investigated whether firms aim to achieve
profit-related objectives that contradict the objective of the minimization of the tax
liability. A considerable proportion of the respondent firms which aim to reduce the level
of their tax liability, also aim in the same time period to achieve profit related objectives
Scale: extent
Table I.
Impact of accounting
figures
1 ¼ great
2 ¼ considerable
3 ¼ some
4 ¼ minimal
5 ¼ not at all
Scale: extent
Table II.
Impact of accounting
figures upon share prices
1 ¼ great
2 ¼ considerable
3 ¼ some
4 ¼ minimal
5 ¼ not at all
Banks’ lending decisions
Frequency
Percentage
31
17
11
–
4
63
49.2
27.0
17.5
–
6.3
100.0
Public firms
Frequency
Percentage
5
9
–
–
1
15
33.3
60.1
–
–
6.6
100.0
Share prices
Frequency
Percentage
10
12
3
1
11
37
27.0
32.4
8.0
2.6
30.0
100.0
Private firms
Frequency
Percentage
5
3
3
1
10
22
22.7
13.6
13.6
4.5
45.5
100.0
which, under certain circumstances, can be considered as contradictory to this objective
(Table III). When a firm aims to report profits that will positively influence:
.
its share price;
.
the bankers’ credit decisions; and
.
will enable the firm to avoid technical violation, it is more likely that it will prefer
higher profits.
Accounting
policy decisions
379
Higher profits, however, lead to higher taxable income.
It is likely that firms’ management attempts to achieve simultaneously more
than one objective regarding the level of reported profits. Zmijewski and Hagerman
(1981) argued that a firm’s management may pursue a number of objectives
regarding reporting figures, and thus it may aim to achieve a compromise between the
different – or even conflicting – objectives.
An alternative explanation for the tendency of the respondent firms to pursue
the tax-minimization objective along with other profit-related objectives may be
that these objectives are not actually contradictory. In order to investigate this
alternative, the association between the extent to which a firm aims to minimize
its tax liability, and the extent to which it aims to achieve other profit-related
objectives, has been examined. When the responses are negatively correlated, and
the firm continues to aim to achieve the two objectives, an indication is provided
that the firm aims to achieve a compromise between them. In this case, an
indication is provided that a firm may actually trade-off tax benefits against
non-tax costs. If the responses are positively correlated, it can be inferred that
either the firm aims to achieve a compromise between different profit-related
objectives, or the relevant objectives are not necessarily conflicting. In order to
investigate this issue the Mantel-Haenszel test has been employed. The results of
the Mantel-Haenszel test are reported in Table IV.
Number
Firms that aim to reduce tax liability, and to influence firm’s share prices
Firms that aim to reduce tax liability, and to influence the banks’ credit decisions
Firms that aim to reduce tax liability, and to avoid a technical violation
11
26
28
Table III.
Firm’s profit-related
objectives
Mantel-Haenszel Sign of
test
relationship Df p-value
Reduction of tax liability and influence share prices
Reduction of tax liability and influence banks’ credit
decisions
Reduction of tax liability and avoid violating debt
covenants
0.2006
Negative
1
0.65
3.1233
Positive
1
0.07
6.2943
Positive
1
0.01
Table IV.
The association between
profit related objectives
MAJ
21,4
380
No significant association exists between the extent to which a firm aims to reduce
its tax liability and the extent to which it aims to report profits that will influence
its share price. The relevant relationship has been investigated for the public firms
only. Again the association is far from significant (0.833 . 0.05). This result may
indicate that the respondents may believe that cash flows have not had a dominant
influence on share prices. For public firms, a tax-reducing strategy will generate
non-tax costs providing that the firm’s executives believe that the share prices are
influenced more by reported profits than by cash flows. Almost all of the
responding firms are owner-controlled, and capital-ownership constitutes a
substantial proportion of owners’ personal wealth. If the owner-managers of listed
firms believe that cash flows have a greater impact on share price, they will prefer
the reduction of tax liability, because such a decision increases their wealth.
Therefore, a positive association would have been expected between the extent to
which a firm aims to report profits that will influence its share price and the extent
to which it aims to reduce its tax liability. In fact, as reported in Table V, most of
the public firms do not aim at all to reduce their tax liability. Besides, it appears
that a considerable proportion of the public firms (66 percent) aim – at least to an
extent – to report profits that will influence their share price. A further analysis of
the responses in the survey, suggests that the managers of listed firms aims to a
lesser extent, in comparison to the managers of the non-listed firms, to the
minimization of firm’s tax liability (Table VI).
The fact that the public firms are concerned about their share price, and less
concerned about the reduction of their tax liability, provides an indication that the
public firms are likely to face significant non-tax costs, which may discourage a firm
from fully exploiting potential tax benefits.
The positive relationship that exists between the extent to which a firm aims to
reduce its tax liability and the extent to which it aims to report profits which will
Scale: extent
1 ¼ great
2 ¼ considerable
3 ¼ some
4 ¼ minimal
5 ¼ not at all
Table V.
Table VI.
The extent to which
public and private firms
aim to reduce their tax
liability
Public firms
Private firms
The extent to which public firms aim
To reduce their tax liability
To influence share price
Frequency
Percentage
Frequency
Percentage
–
1
3
2
9
15
–
6.7
20.0
13.3
60.0
100.0
2
3
5
–
5
15
13.2
20.0
33.4
–
33.4
100.0
Mean rank
U-statistic
Z-score
Two-tailed p
39.50
29.66
247.5
21.9153
0.0555
enable it to positively influence the banks’ loan decisions ( p: 0.07 . 0.05), and avoid
the violation of debt covenants ( p: 0.01 , 0.05), may imply that a firm may aim to
achieve a compromise between the relevant profit-related objectives (Table IV).
Alternatively, it may indicate that the two profit-related objectives are not conflicting.
It should be pointed out that for the more leveraged firms the pursuit of an
income-increasing policy may not necessarily lead to an increase in its tax liability,
since it is likely that the firm’s heavy debt burden will have a decreasing impact on the
firm’s effective tax rates. A highly leveraged firm will most likely have high interest
expenses that can significantly contribute in sheltering its taxable income, while the
adverse economic conditions are likely to have generated tax credits in the form of
operating losses carried forward (Deangelo and Masoulis, 1980; Auerbach and Poterba,
1987, in Feldestein, 1987; Johnson and Dhaliwal, 1988; MacKie-Mason, 1990; Dhaliwal
et al., 1992). A heavily leveraged firm, due to the increased tax shields from which it
may benefit, will have the latitude to follow an income increasing policy without
having to be particularly concerned about the tax costs of such a choice. The argument
developed above should not lead to the conclusion that firms aiming to raise debt
capital are not facing significant non-tax costs. The highly leveraged firms are not the
only companies in need of debt capital. Besides, the fact that a firm is highly leveraged
does not mean that it is heavily indebted. Previously reported results indicate that the
accounting information plays an important role in the banks’ credit decisions. Thus,
the firms that aim to raise debt capital on favorable terms may be compelled to follow
an income increasing policy despite the ensuing increase in the tax costs. A further
analysis of the responses indicates that the more leveraged firms aim, to a greater
extent than the less leveraged firms, to report profits which will enable them to
influence the banks’ loan decisions, and to avoid violating the debt covenants
(Table VII). In both cases, the level of significance is well below the threshold of 0.05.
Thus, a firm’s decision to pursue a tax-reducing strategy can generate important
tax costs.
Accounting
policy decisions
381
Conclusions
The present study investigated the factors that influence the accounting-policy
decisions of the industrial firms operating in Greece. A postal survey was
undertaken in order to identify these factors. Although measures have been taken
Debt/total assets ratio
0.0-0.4
Association between firm’s leverage ratio and the extent to which a firm aims
To influence banks’ credit decisions
Great extent-some extent
14
Minimal – not at all
25
Mantel-Haenszel test: 8.22854
Df: 1
To avoid violating debt covenants
Great extent-some extent
20
Minimal – not at all
20
Mantel-Haenszel test: 4.79542
Df: 1
0.4-0.8
17
6
p-value: 0.00
18
5
p-value: 0.02
Table VII.
MAJ
21,4
382
in order to limit the bias to the lowest possible level, one cannot rule out the
possibility that some bias was introduced in the data. The analysis of the
responses have provided some indication that the accounting policy decisions of
Greek firms can be explained on the basis of the perceived economic consequences
of these choices. It seems that tax considerations and the ensuing non-tax costs
may influence the financial reporting choices of Greek firms. The participants in
the survey believe that accounting figures influence the perceptions and the
decision-making of the external users of accounts. Furthermore, it seems that they
aim to achieve profit-related objectives, which can be in conflict with the objective
of tax minimization. The non-tax costs that result from a tax-reducing policy may
force many firms to deviate from an adherence to such a policy. The firm’s
leverage characteristics, and whether the firm is public or private, are factors that
are more likely to give rise to significant non-tax costs, while the ownership
structure of the majority of Greek firms is not likely to give rise to important
financial reporting costs.
This study may contribute in understanding the factors that shape the
accounting policy decisions not only of firms operating in Greece, but also of firms
in countries with an accounting environment similar to that of Greece. Most Greek
firms are characterized by concentrated ownership, while they are particularly
dependent on bank financing. Furthermore, in Greece financial accounting figures
are used for tax purposes as well. In many European and non-European countries
the broader business environment possesses similar characteristics. A
comprehension of the rationale that dictates the accounting policy decisions of
firms in these countries will foster not only academic research, but it may also
facilitate international accounting and financial analysis, which play a crucial role
in most investing and financing decisions. This issue gains further importance due
to the increasing globalization of world economy in general, and the integration of
the European economy in particular.
The present study is a step in the process of acquiring an insight into the
factors that affect firms’ financial reporting choices. Further empirical investigation
is required in order to acquire a more comprehensive view of the elements
that form the accounting policy decisions of firms. In particular, a thorough
investigation is required regarding the way tax considerations and
financial-accounting policies articulate with each other and influence firms’
accounting policy-decisions. This research project provided some indication that
Greek firms’ reporting policies may constitute a part of tax-planning strategy
aiming to reduce firms’ tax liability. The investigation of the elements of a tax –
reducing strategy involving the substitution between alternative tax shields can be
the focus of a future research project. In such an analysis it is important to take
into consideration the impact that accounting policy choices have upon firms’ cash
flows, while an aspect that is essential to be examined is the stock prices reactions
to alternative reporting policies.
Note
1. The descriptive statistics about the responses in the survey have been provided to the editor
of the journal and they are available upon request.
References
Auerbach, A.J. and Poterba, J.M. (1987), “Tax-loss carryforwards and corporate tax incentives”,
in Feldestein, M. (Ed.), The Effects of Taxation on Capital Accumulation, The National
Bureau of Economic Research Project Report, University of Chicago Press, Chicago, IL,
pp. 305-43.
Biddle, G. and Lindahl, F.W. (1982), “Stock price reactions to LIFO adoptions: the association
between excess returns and LIFO taxes savings”, Journal of Accounting Research,
pp. 551-88.
Bradley, M., Jarrell and Kim, E.H. (1984), “On the existence of an optimal capital structure: theory
and evidence”, Journal of Finance, Vol. 39, pp. 857-78.
Christie, A.A. (1990), “Aggregation of test statistics: an evaluation of the evidence on
contracting and size hypotheses”, Journal of Accounting & Economics, Vol. 12,
pp. 15-36.
Cloyd, B.C., Pratt, J. and Stock, T. (1996), “The use of financial accounting choice to support
aggressive tax positions: public and private firms”, Journal of Accounting Research, Vol. 34
No. 1, pp. 23-43.
Deakin, E.B. (1979), “An analysis of differences between non-major oil firms using unsuccessful
efforts and full cost methods”, The Accounting Review, October, pp. 722-34.
DeAngelo, H. and Masoulis, R. (1980), “Optimal capital structure under corporate and personal
taxation”, Journal of Financial Economics, Vol. 7, pp. 3-29.
Dhaliwal, D.S., Salamon, G.L. and Smith, E.D. (1982), “The effect of owner versus management
control on the choice of accounting methods”, Journal of Accounting & Economics, July,
pp. 77-117.
Dhaliwal, D.S., Trezevant, R. and Wang, S. (1992), “Taxes, investment-related tax shields and
capital structure”, Journal of the American Taxation Association, pp. 1-21.
Feldestein, M. (Ed.) (1987), The Effects of Taxation on Capital Accumulation, The
National Bureau of Economic Research Project Report, University of Chicago Press,
Chicago, IL.
Gopalakrishnan, V. and Parkash, M. (1995), “Borrower and lender perceptions of
accounting information in corporate lending agreements”, Accounting Horizons, Vol. 9
No. 1, pp. 13-26.
Holthausen, R.W. and Leftwich, R.W. (1983), “The economic consequences of accounting choice:
implications of costing contracting and monitoring”, Journal of Accounting & Economics,
Vol. 5, pp. 77-117.
Hunt, H.G. III (1986), “The separation of corporate ownership and control: theory, evidence and
implications”, Journal of Accounting Literature, Vol. 5, pp. 85-124.
Johnson, B.W. and Dhaliwal, D. (1988), “LIFO abandonment”, Journal of Accounting Research,
Vol. 26 No. 2, pp. 236-72.
Klassen, K.J. (1997), “The impact of inside ownership concentration on the trade-off between
financial and tax reporting”, The Accounting Review, Vol. 72 No. 3, pp. 455-74.
Mackie-Mason, J.K. (1990), “Do taxes affect corporate financing decisions?”, Journal of Finance,
Vol. 45, pp. 1471-93.
Makridakis, S., Calogirou, Y., Papagianakis, L. and Trivellas, P. (1997), “The dualism of Greek
firms and management: present state and future implications”, European Management
Journal, pp. 381-402.
Accounting
policy decisions
383
MAJ
21,4
384
Matsunaga, S., Shevlin, T. and Shores, D. (1992), “Disqualifying dispositions of incentive stock
options: tax benefits versus financial reporting costs”, Journal of Accounting Research,
Vol. 30.
Maydew, E.L. (1997), “Tax-induced earnings management by firms with net operating losses”,
Journal of Accounting Research, Vol. 35 No. 1, pp. 83-96.
Moser, C. and Kalton, G. (1993), Survey Methods in Social Investigation, 2nd ed., Dortworth,
Aldershot.
Nachmias, D. and Nachmias, C. (1976), Research Methods in the Social Sciences, Edward Arnold,
London.
Niehaus, G.R. (1989), “Ownership structure and inventory method choice”, The Accounting
Review, Vol. LXIV No. 2.
Nobes, C. and Parker, R. (2000), Comparative International Accounting, 6th ed., Financial
Times-Prentice Hall, Upper Saddle River, NJ.
Organisation for Economic Co-operation and Development (1995), Economic Survey: Greece
1995, OECD, Paris.
Papas, A. (1993), European Financial Reporting: Greece, Routledge, London.
Penno, M. and Simon, D.T. (1986), “Accounting choices: public versus private firms”, Journal of
Business Finance & Accounting, Vol. 13 No. 4, pp. 561-8.
Scholes, M.S. and Wolfson, M.A. (1990), “The effects of taxes on corporate reorganisation
activity”, Journal of Business, January, pp. S141-S164.
Scholes, M.S. and Wolfson, M.A. (1992), Taxes and Business Strategy: A Planning Approach,
Prentice-Hall, Englewood Cliffs, NJ.
Scholes, M.S., Wilson, G.P. and Wolfson, M.A. (1990), “Tax planning, regulatory capital
planning, and financial reporting strategy for commercial banks”, Review of Financial
Studies, Vol. 3, pp. 625-50.
Sekaran, U. (1992), Research Methods for Business: A Skill-Building Approach, 2nd ed., Willey,
New York, NY.
Smith, C.W. Jr (1993), “A perspective on accounting-based debt covenant violations”, The
Accounting Review, Vol. 68 No. 2, pp. 289-303.
Smith, E.D. (1976), “The effect of the separation of ownership from control on accountancy policy
decision”, The Accounting Review, October, pp. 707-23.
Stelltiz, C., Wrightsman, L.S. and Cook, S.W. (1976), Research Methods in Relations, Holt Rinehart
and Winston, New York, NY.
Sykianakis, N. (2004), “Factors affecting Greek FDI in the Balkans: the case of ice-cream
industry”, Archives of Economic History, Vol. XV No. 2, pp. 85-107.
Sweeney, A. (1992), Debt-Covenant Violations and Managers’ Accounting Strategies, unpublished
manuscript, Harvard University, Cambridge, MA.
Watts, R.L. and Zimmerman, J.L. (1986), Positive Accounting Theory, Prentice-Hall, Englewood
Cliffs, NJ.
Wolfson, M. (1993), “The effects of ownership and control on tax and financial reporting policy”,
Economic Notes by Monte dei Paschi di Siena, Vol. 22 No. 2, pp. 318-32.
Zmijewski, M.E. and Hagerman, R.L. (1981), “An income strategy approach to the positive theory
of accounting standard setting choice”, Journal of Accounting & Economics, Vol. 3,
pp. 129-49.
Appendix. The descriptive statistics of the responses to the questionnaire
survey
Ownership structure
Family controlled
Widely held
Owned by a bank
Subsidiary of a Greek firm
Subsidiary of an overseas firm
Concentrated ownershipa
Other ownership statusb
Private and public firms
Public firms
private firms
Major shareholders’ membership in
the board of directors
Major shareholders are members of
the board of directors
Major shareholders are not
members of the board of directors
Major shareholders’ active
participation in firm’s management
Major shareholders do participate
actively in firm’s management
Major shareholders do not
participate actively in firm’s
management
Employment of bonus schemes
The firm uses a bonus scheme
The firm does not use a bonus
scheme
The basis on which bonus payments
are calculated
Bonus is based on accounting
figures
Bonus is not based on accounting
figures
Proportion of firm’s total assets
that are financed by debt financing
(percent)
0-20
20-40
40-60
60-80
80-100
Frequency
Percentage
28
1
1
9
10
13
1
63
44.4
1.6
1.6
14.3
15.9
20.6
1.6
100.0
15
48
63
23.8
76.2
100.0
51
81.0
12
19.0
63
100.0
50
79.4
13
63
20.6
100.0
20
31.7
43
63
68.3
100.0
11
7
61.1
38.9
18
100.0
25
15
18
5
–
63
39.7
23.8
28.6
7.9
–
100.0
Accounting
policy decisions
385
(continued)
Table AI.
MAJ
21,4
386
Frequency
Profit-related objectives
Scale: extent
1 ¼ great
2 ¼ considerable
3 ¼ some
4 ¼ minimal
5 ¼ not at all
Mean
Std. deviation
Mode
n
Table AI.
Percentage
Minimization
Influence
of tax liability firm’s share
price
5 (8)
3 (6)
8 (13)
5 (10)
17 (27)
10 (19)
6 (9)
3 (6)
27 (43)
30 (59)
63 (100.0)
51 (100.0)
3.67
4.02
1.37
1.32
5
5
63
51
Influence
banks’ credit
decisions
15 (24)
25 (40)
11 (17)
3 (5)
9 (14)
63 (100.0)
2.46
1.31
2
63
Avoid breaching
the debt
covenants
5 (8)
14 (22)
19 (30)
4 (6)
21 (34)
63 (100.0)
3.35
1.36
3
63
Notes: aThis category refers to firms for which the majority of share capital is controlled by a
restricted numbers of shareholders – not more than 8-10 – who are not members of the same family;
b
one of the respondent firms has been partially controlled by a governmental agency; numbers in the
brackets indicate percentage
Corresponding author
Christos Tzovas can be contacted at: ctzovas@aueb.gr
To purchase reprints of this article please e-mail: reprints@emeraldinsight.com
Or visit our web site for further details: www.emeraldinsight.com/reprints
Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.