Financial Accounting Blog

Tuesday, November 11, 2003

Inflated Earnings leads to inflated taxable income. A recent study looked into this issue and found that companies that inflate their earnings pay additional taxes.
[the authors] studied firms that restated their financial statements in conjunction with a Securities and Exchange Commission (SEC) allegation of accounting fraud during the period 1996 to 2002. For the 27 firms in the study, the authors estimate that the average firm paid $11.84 million to the Internal Revenue Service on overstated earnings, which is the equivalent of $0.11 in additional income taxes per $1 of inflated pre-tax earnings. This implies that some managers believe that $1 of overstated accounting earnings is more valuable than $0.11 of cash.