The likelihood of being audited by the Internal Revenue Service has its strongest impact on laxly governed companies and fosters corporate truthfulness not just in confidential tax returns, but in public financial reports, according to new research.
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The study, which appears in the September/October issue of the American Accounting Association’s journal Accounting Review, found that a lesser degree of auditing will translate into significantly less corporate taxes paid to the federal government.
Less auditing by the IRS is probably not only bad for federal tax coffers but for shareholders as well, according to the study. The paper’s findings, along with those of a related, unpublished study, reveal that the likelihood of being audited has its strongest effect on companies whose governance is lacking.
“The idea that shareholders benefit from having their companies audited by the IRS may seem strange to some investors,” said Jeffrey Hoopes of the University of Michigan, who co-authored both studies. “Our research, however, suggests that strict tax enforcement promotes good financial reporting and tends to check managers' proclivities to divert corporate resources for their personal use under the guise of saving taxes.”Click here for the rest of the article.