Accounting quality vs auditor choice under strong tax-GAAP conformity: the case of Brazil

Brazilian companies with a Big 4 auditor have better accounting quality than those with a local auditor, when quality is measured either by compliance with GAAP or by conservatism. However, the cross-sectional pattern of discretionary accruals—often used to measure accounting quality—is unrelated to quality in Brazil. In fact companies with Big 4 auditors tend to recognize income more aggressively than companies with a local auditor. This is the opposite of what happens in other countries and is consistent with local auditors interpreting the tax code (rather than GAAP) more aggressively than Big 4 auditors due to the strong linkage that exists between the Brazilian tax code and financial reporting standards. (Seattle, August 2006)

Repeated tax amnesties with self-selected parameters

This paper presents a “real options” solution to the amnesty decision problem of an honest firm facing repeated amnesties with self-selected parameters. Among self-selected parameters are the payment plan and the use of loss carryforwards to offset interest and penalties. Numerical examples illustrate properties of the optimal solution, including the fact that postponement can be optimal when learning occurs over time. The real options approach produces the optimal accept/reject decision and values for self-selected parameters which will be useful for managers faced with similar opportunities and for tax administrators interested in assessing the reaction of firms to different amnesty programs. (Seattle, July 2006)