Looks to be an interesting paper:

Abstract: There is a significant amount of research and models on ethical decision-making processes; however, there is limited research on how emotions affect ethical evaluations and decisions in an accounting context. Prior research suggests that emotions may shape ethical evaluations and choices made by individuals. This study contributes to the accounting literature by exploring the emotions an accountant may feel when evaluating earning manipulations. This study finds that accountants feel regret when evaluating earnings manipulations.

Keywords: Accounting ethics, ethical decision making, emotions.

Download it here.

Filed under: Academic research, Auditing, Ethics with tags audit quality, emotions, larry crumbley
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One of my favourite tax thinkers, not least because of his love of Pavement and cats, Daniel Shaviro has set us a challenge. He was in discussion with Reuven Avi-Yonah about the benefits of changing the system of dividend taxation. Currently dividends are paid out of post-tax earnings but then frequently carry a tax credit which can be used by the receiving shareholder as a credit against their own personal income tax. Avi-Yonah had suggested that an alternative approach would be to scrap the tax credit altogether but to allow companies to deduct the dividend in determining their taxable profits.

And this sets Shaviro thinking (emphasis is mine):

Reuven argues that dividend deduction would be more effective than imputation in encouraging the managers to pay dividends, on the ground they often don't especially care about shareholder taxes but love to get company-level deductions. Thus, even if the two methods of dividend deduction and imputation are in fact economically equivalent, the former will in fact induce greater payouts.

One could certainly challenge this view on multiple grounds, but the one I emphasized, in particular because I thought it was more of a new point, reflects accepting the basic premise (at least arguendo) but then asking what the managers really care about. A common answer, with considerable real world empirical support, would be that they appear to care more about financial accounting income than about income tax liability. So the entity-level tax benefit of dividend deductibility won't affect their behavior as strongly as Reuven anticipates unless there is an accounting benefit. But would there be?

I am not an accountant, but I've played in or near their waters often enough to realize that this is a trickier question than it may initially seem from a lawyer or economist standpoint.

Presumably the financial accounting rules would NOT be revised to allow dividend deductions against financial accounting income, even if newly made deductible against taxable income. But wouldn't financial accounting income reflect the benefit of reducing federal income tax liability through dividend payouts?

Not necessarily. An initial point to keep in mind is that financial accounting often ignores the mere deferral of federal income tax liability. In principle, under dividend deduction, the ultimate corporate tax is zero as all earnings get paid out (or at least an amount equal to taxable income, which is often less than the tax measure of earnings for dividend purposes). So it would seem that the accounting rules in the dividend deduction scenario should either (a) ignore federal taxes on the ground that they're merely temporary, at least until they escape the possibility of being reversed through net operating losses created by dividend deductions, or at least (b) ignore the difference between paying out deductible dividends this year or next year. I'm not in fact sure how it would all end up playing out, but we should recognize that (a) there would be a tricky issue for the accountants to work out and (b) there wouldn't necessarily be a straight accounting benefit for the tax liability effect.

By analogy, consider the accounting rules for the foreign earnings of U.S. companies' foreign subsidiaries. These get the U.S. tax benefit of deferral - that is, they aren't subject to U.S. tax until they actually are repatriated for tax purposes. But companies get no accounting benefit from deferral - they are treated as if the U.S. repatriation taxes were being fully paid on a current basis - unless they solemnly declare to their accountants that the funds are being "permanently" reinvested abroad. Once this happens, the potential future U.S. repatriation taxes are discounted by 100% (i.e., to zero) rather than by zero percent.

Anyway, if the timing of repatriation is effectively ignored in financial accounting on the view that it doesn't matter exactly WHEN it happens (despite the potential effect on the present value of U.S. tax liability, then the same idea might apply, albeit in a somewhat different and (at least to me) unpredictable fashion, with regard to the effect of current versus future dividend payouts on entity-level, purely domestic U.S. income tax liability.

Any accountants out there, your thoughts on this admittedly esoteric issue (either in the comments page here or by e-mail to me) would be of potential interest.

Any takers?

My initial reaction is that the IASB would love to get this on their agenda. They did start to think about moving the income statement around but abandoned the project when convergence became more important. Convergence hasn't yet produced significant changes, but I'm sure the IASB would relish reopening the debate.

That said, the tax treatment of dividends should be irrelevant from a financial reporting point of view. Its position in the income statement reflects the discretion management has over whether to declare a dividend (or not). If it became tax deductible, the tax charge would drop, leading possibly to higher distributions. However, that's not to say that the IASB wouldn't be open to alternative methods of presentation that made company managers look better.

Does anyone have an alternative view? Please drop by Daniel's website and let him know.

Filed under: Academic research, Taxation with tags corporation tax, daniel shaviro, dividends, reuven avi-yonah, us
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The House of Lords Economic Affairs Committee has started publishing the transcripts of its hearings into audit.

The first two are now available, featuring four of the UK's accountancy bodies - ICAEW, ICAS, ACCA and CIMA - and three academics - Professors Mike Power, Vivien Beattie and Stella Fearnley.

And if you want to watch Jonathan Hayward (Independent Audit),  Stephen Kingsley  (FTI)  Dr Gunnar Niels (Oxera) and the ever-surprising Tim Bush, who appeared in front of the committee today, you can do so here (though I had some trouble with the sound on this video).

Filed under: Academic research, Auditing, Institutes with tags acca, cima, house of lords, icaew, icas, michael power, stella fearnley, tim bush, vivien beattie
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Your holiday viewing continues here. The ICAEW's 2010 PD Leake lecture is now available as a web cast. This is very nice for those of us who couldn't get along last Thursday.

It was given by Gregory Waymire of Emory University on the subject of financial stability.  Waymire was trying to find out if IFRS can really be blamed for the financial crisis.  And he concludes that there's no evidence that it can.  As you'll know, I basically agree with him.  Waymire puts the idea to the sword, actually, which is quite fun.

Catch up with it for yourself here.

Filed under: Academic research, Accounting, Institutes with tags emory university, gregory waymire, ifrs, pd leake
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Ritchie gets all soppy about the recently announced physics Nobel laureates:

Of course, such research would be considered utterly pointless under a neoliberal cuts regime. It will go. No time for such frivolity: only proven commercial applications must be allowed.

But that’s because neoliberals don’t understand the true nature of the human condition. Or creativity.

And that lack of understanding; their incomprehension of the capacity to make a mistake and learn from it; their inability to see anything except an absolute cash value will be their downfall, at cost to us all.

Basically, he's arguing that the capitalist system, with its absurd demands for research to have a purpose or some sort of possible payback before it gets funding, doesn't work.

Why then, did both laureates leave their native Russia to seek employment in the UK?  Presumably the opportunities for frivolous research must have been far more widespread in Russia?  Whereas the UK has the tricky Research Assessment Exercise (being replaced by the REF) which allocates research funding according to its "quality", which must make it much more difficult to follow whimsical research ideas.  Perhaps because, yet again, Ritchie's blather has been weighed up in the balance and found seriously wanting.

Filed under: Academic research, Current issues, Other blogs with tags nobel laureates, research assessment exercise, richard murphy
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Ritchie, busy little beaver that he is, has issued another policy paper, this time on VAT.  The title of Is VAT regressive and if so why does the IFS deny it? alone should leave you little doubt as to where Ritchie lies on the issue.  Needless to say, he's wrong.

His conclusion that VAT is regressive is largely based on his observation that, on an analysis of VAT paid as a proportion of income by quintile, the poorest quintile pays 12.1% of their income in VAT whereas the richest quintile pays 5.9%.  This is a slam-dunk, right?

Wrong.  The Office for National Statistics paper from which he draws these statistics ¹ takes great pains to stress that it is not always valid to compare VAT to gross income:

Carrera (2010) ² presented some of the most common alternative methods that were used to fund expenditure in households where their expenditure was at least twice the level of their disposable income. For these households the most common source of funds was savings, followed by credit/store cards and then loans. This may be due to a number of reasons. For example, the bottom decile in particular includes some groups who have, or report, very little income (for example people not currently in employment and some self-employed people). For some people this spell of very low income may only be temporary and, during this period, they may continue with previous patterns of spending. Secondly, some types of one-off receipts are not included as income in this analysis, for example, inheritance and severance payments. Finally, the income and expenditure data are measured in different ways in the LCF, and either could be affected by measurement errors of different kinds (see Appendix 2, paragraph 6).

Carrera is even blunter.  She concedes Ritchie's point, noting that "indirect taxes are progressive in expenditure distribution, but regressive in income distribution."

However, Ritchie's point is invalid, because it presumes that individuals have the whole of their gross income at their disposal.  In fact, as a direct result of our progressive direct taxation system, richer people must pay a greater share of their income as tax than poorer people.  From the ONS figures for 2008-09, we learn that the top quintile pays 24.7% of their income in direct taxes, whereas the bottom quintile pays only 11.3% ³.  This means that the top quintile has only 75.3% ⁴ available to spend on indirect taxes, whereas the bottom quintile has a much greater 88.7% ⁵.  Much more valid, and as identified in the ONS document, is to look at VAT as a proportion of disposable income and of expenditure.  This produces results that are, basically, progressive - at 7% of expenditure ⁶.

Yep, that's all in the ONS paper.  You see, you might have got the impression from reading Ritchie's briefing paper that the idea that VAT is progressive is all a wicked plot from the evil Institute for Fiscal Studies.  Yet, every single analysis in the IFS paper has a direct parallel in the article by the ONS.

The ONS paper, as highlighted above, also serves to rebut an entire section in Ritchie's paper entitled "Do the poorest really have savings?" ⁷  Carrera's paper draws upon the Living Costs and Food Survey, which asks households about their sources of income.  Savings are identified as a source within that survey ⁸.  So, again, his criticism of the IFS is ill-founded and, in any case, should be directed at the ONS.

Filed under: Academic research, Other blogs, Taxation with tags institute for fiscal studies, office for national statistics, progressive, regressive, richard murphy, vat
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There are people over at t'Guardian's CIF who seem to believe that I am somewhere to the right of Genghis Khan.  And, you know me - I hate to disappoint - so it's with some sadness that I read the media coverage of a story about how much money you need to be able to participate in society in the UK.  And it has sparked coverage like this:

A single person in Britain needs a gross income of at least £14,400 in 2010 for a minimum acceptable standard of living, says the Joseph Rowntree Foundation (JRF).

A couple with two children needs at least £29,200, the JRF added, in a research report which aims to show "what ordinary members of the public think is needed - not just to survive but to take part in society".

Remarkably, for figures so divorced from reality, there's not a Ritchie to be seen.  These figures come from a report from the Joseph Rowntree Foundation and written by three academics from Loughborough University, entitled "A minimum income standard for the UK in 2010."

First up, it's not immediately clear how these figures tie up to the headline £14,400 and £29,200.  Looking at the couple with two children, they apparently "need" £673.08 per week, which works out at an income (after income tax but before council tax and VAT) of £35,000 per year, or about £50,000 or so jointly pre-tax.

I say "need" deliberately.  Because these figures are used by the JRF, on a "net of rent, council tax and childcare" basis to beat up honest middle class taxpayers, because they go on to compare these levels of income with benefits as if to point out that it's all our fault that these people don't have enough to participate in society with. And, meantime, I'm pondering whether the time to participate in society wasn't back when they were at school...

If it's a comparison against benefits we're going for, then we need to do a line-by-line assessment against reality:

• Food.  £107.13 a week is complete nonsense.  My family of two adults plus two children lives an idyllic middle class existence on £80 a week. Saving: £27.13 a week.
• Alcohol.  £6.49 a week.  Errrr, I don't think so.  If you're asking other people to hand over their hard-earned cash to you, you can drink tap water.  If you want alcohol, you'll have to earn your own money, thank you very much. Saving: £6.49 a week.
• Personal goods and services. £29.20 a week. Again, if you want to spend on yourself, you can earn it yourself.  Incidentally, our 'food' budget includes all 'personal goods' spending too, so the benefit recipient doesn't need this as well.  Saving: £29.20 a week.
• Other travel costs. £39.38 a week.  Again, we spend about £25 a week for both our travel cards, so this looks very much overbaked.   Apparently the MIS includes taxis, which sounds very extravagant for people who are supposed to be living on other people's charity.  Saving: £14.38 a week.
• Social and cultural participation. £104.73 a week.  I do get this one. You have to have some money to spend on yourself.  But there's no way on this earth that you can justify £104.73 a week.  About £10 a week sounds more like it, for a saving of £94.73 a week.

The JRF "benefits-like" MIS is £381.17 a week.  Our savings, which total £171.93 per week, bring the MIS down to £209.24 per week.  Considering that Income Support, Child Benefit and Child Tax Credit actually total £235.29 per week, this means that our benefit claimants are actually receiving over £25 a week, or some 12%, more than the rebased MIS.

Given that the state demands money from taxpayers on threat of prison, it is axiomatic that the amount paid in benefits truly reflects a fair minimum to participate in society.  The JRF figures are grossly overinflated, leading to an unrealistic expectation of the amount of benefit that society should fund.  In line with the general perception that benefits already act as a disincentive to work, my adjustments serve to show that they could be cut and still leave enough for people to participate actively in society.

PS: I had a good laugh at the childcare figure of £199 a week.  WTF?  Where do these people do their childcare... Eton?

Filed under: Academic research, Politics, Taxation with tags council tax, guardian, joseph rowntree foundation, loughborough university, tax credits, welfare benefits
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Some fabulous prose from our greatest living tax academic, Judith Freedman. Ritchie, watch and learn. This is from a publication the Smith Institute put out while it wasn't being Gordon Brown's poodle.  And she's writing about the problem for giving tax breaks to encourage social outcomes.

In this way, the prize for behaving “well” is often seen to be a reduction in taxation. This sits uneasily with the idea that tax is the fair price to be paid for participating in a civilised society. Further, the creation of an environment in which tax is associated with tax planning and there is active encouragement to take tax considerations into account when making everyday decisions tends to reduce the stigma that might otherwise attach to the use of artificial constructions entered into for tax purposes, since it appears to the taxpayer to be a normal part of the way our rather incomprehensible tax system operates.

Filed under: Academic research, Taxation with tags gordon brown, judith freedman, smith institute, tax avoidance
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No, not the beginning to a lewd joke, at least not as far as I know, but yet another academic paper being presented at this year's American Accounting Association annual conference.

The Virgin and the Dynamo: An Empirical Evaluation of Knowledge Production in Academic Accounting is by Timothy J. Fogarty (Case Western Reserve University).  And it covers the following:

ABSTRACT: How accounting knowledge is created is a question of endless fascination. The paper grapples with one primary issue. Is accounting research properly characterized as the scholarly work of a single academic? Or is it a team process such that the efforts of individuals are only an input to a larger dynamic. For these purposes, the mainstream accounting literature is contrasted with critical accounting. The results show that whereas critical accounting remains the handicraft of individuals, mainstream accounting has adopted more machine-like characteristics. This is reflected in the size of author groups and how credit is distributed across groups. Changes over a relatively short time are documented, and is consistent with this divergent development.

What this has to do with either dynamos or virgins is left as an exercise for the reader.  Unfortunately there's no full text available, so you'll just have to e-mail Fogarty - unspoonerise fimothy.togarty@case.edu - and ask him for yourself if you're curious.

Filed under: Academic research with tags american accounting association, timothy fogarty
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One of the concurrent sessions at this year's American Accounting Association conference is this one:

7.5 Operating an Accounting Blog
Moderator: Bill McCarthy, Michigan State University
(Specialized Knowledge and Applications — 1.5 CH)

Panelists:
David Albrecht, The Summa (Concordia College)
Joe Hoyle, Teaching Financial Accounting (University of Richmond)
Ed Ketz, Accounting Cycle (The Pennsylvania State University)
Francine McKenna, re: The Auditors
Tom Selling, The Accounting Onion

It's tempting to go all evil faerie over this - waaah, why didn't they invite me?!  But, I'm over it now, so here are my thoughts on the panelists:

Albrecht's blog is a must-read.  The Accounting Onion is good quality and thoughtful, if a little dry.  re: The Auditors is good for a laugh - McKenna seems to want to end up like Richard Murphy, and all too often tends to let the story get in the way of facts or reason.  And I'm afraid I hadn't heard of the other two.

This should be a fascinating discussion, and one that I hope one of the five will take upon themselves to summarise, if the AAA don't do it themselves.

Filed under: Academic research, Other blogs with tags accounting onion, american accounting association, david albrecht, francine mckenna
35663 Comments »http%3A%2F%2Fwww.fcablog.org.uk%2F2010%2F06%2Fpanel-session-on-accounting-blogs%2FPanel+session+on+accounting+blogs2010-06-30+09%3A55%3A44Christie+Malryhttp%3A%2F%2Fwww.fcablog.org.uk%2F%3Fp%3D3566