University of Oulu

The use of deferred tax components in detecting earnings management : evidence from finnish public firms

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Author: Artemov, Andrey1
Organizations: 1University of Oulu, Oulu Business School, Department of Accounting, Accounting
Format: ebook
Version: published version
Access: open
Online Access: PDF Full Text (PDF, 1.5 MB)
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Language: English
Published: Oulu : A. Artemov, 2018
Publish Date: 2018-06-07
Physical Description: 71 p.
Thesis type: Master's thesis
Tutor: Middleton, Alexandra
Reviewer: Sahlström, Petri
Middleton, Alexandra


The purpose of the thesis is to explore the usefulness of information from deferred tax disclosures in detecting earnings management. A deferred tax disclosure is seen as a dashboard that informs users of accounts influenced the most by managerial judgement. This study contributes to the literature in the several ways. Firstly, unlike the vast majority of previous research, it provides empirical evidence outside of the USA. Finland was chosen as a country with a high quality of the institutional environment and comparably low levels of earnings management among public firms. My empirical analysis covers a decade (2007–2016), which is almost the entire period since the adoption of IFRS by the country in 2005. Data on the composition of deferred taxes used in the analysis were not available via any of the databases and thus were hand-collected from firms’ annual reports. To mitigate potential bias resulting from mergers, acquisitions, divestitures, or discontinued operations, only the changes in deferred taxes that flow through the income statement are considered. Besides, the new classification of deferred tax components is developed and applied. I formulate hypotheses in relation to earnings management around two earnings targets: reaching positive earnings (avoidance of a loss) and exceeding the prior year’s earnings (avoidance of an earnings decline). Each of the two sets of hypotheses consists of three sub-hypotheses that focus on the usefulness of total net deferred tax liability, deferred tax component related to provisions and reserves, and deferred tax component related to “other” temporary differences. I doubt the usefulness of total net deferred tax liability in detecting earnings management because of its heterogeneous composition. The study extends previous research on the use of deferred tax component related to provisions and reserves in detecting earnings management. Deferred tax disclosures are not fully transparent in terms of sources of temporary differences, and a considerable part of deferred taxes is hidden behind the label of “other”. The testing of this category of deferred taxes is conducted for the first time. The obtained results show that only change in deferred tax component related to provisions and reserves provides important information on earnings management to avoid an earnings decline. Thus, a significant change in this component of deferred taxes can be used as a complementary indicator of possible earnings management for users of financial information. Although, given the relatively small number of observations, the significance of the obtained results is rather moderate. Another limitation of such types of studies is an assumption that tax accounts are free from manipulation, so changes in deferred taxes properly highlight managerial discretion over book accounts.

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Copyright information: © Andrey Artemov, 2018. This publication is copyrighted. You may download, display and print it for your own personal use. Commercial use is prohibited.