Investigating the relationship between tax avoidance and reckless financial reporting in companies listed on Tehran Bahadur Stock Exchange

Academic Thesis for Master's Degree

Field: Accounting Major: Accounting

Abstract

In this research, the relationship between avoidance and reckless financial reporting in companies listed on the Tehran Stock Exchange has been investigated. The statistical sample of the research included 140 companies during the period of 2011 to 2019. In this research, it examines the relationship between tax avoidance through the effect of three factors: the effective cash tax rate, the long-term effective cash tax rate, and the permanent tax discrepancy with reckless financial reporting. In this research, the descriptive method of correlation type and the more research method of Kibi have been used, multivariate linear regression model is used to test the hypotheses, and EVIEWS statistical software has been used to analyze the data. The research findings indicate the existence of a direct relationship between tax avoidance through the three factors of cash effective rate, long-term cash effective tax rate and permanent discrepancy with reckless financial reporting. That is, we come to the conclusion that companies with bold financial reporting will have more tax avoidance than companies with stability in reporting. Key words: tax avoidance, cash effective tax rate, long-term cash effective tax rate Introduction This research seeks to investigate the relationship between tax avoidance and bold financial reporting in companies. In this research, we seek to find answers to these questions: will business units that have bold financial reporting have more tax avoidance than companies that have stability in financial reporting? But the thing to think about is that these expenses, which are the responsibility of the company's shareholders, are not always in their interest, and the expenses of tax avoidance will be greater than its benefits in some cases. Because there is a risk that these cases will be discovered by the Ministry of Finance and the company will be fined, and that the managers will incur a lot of expenses to do this, which sometimes includes their own interests, and none of these expenses are in the interest of the shareholders. Stability and quality in financial reporting may increase public accuracy in the available information about the investments made by the managers and operational decisions of the company. External transparency, such as financial analysis, also plays an important role in monitoring the performance and behavior of company managers. Therefore, the financial transparency of companies reduces the risks caused by expropriation of shareholders from their wealth by opportunistic managers. In order to better clarify the relationship between reasonable financial reporting and tax avoidance, two related reasons are stated in particular: First, the existence of the relationship between reasonable financial reporting and tax avoidance may be the basis for informing the tax authorities. Company managers perform various activities to avoid tax and reduce company tax, carrying out such activities such as using tax exemptions or tax bonuses as well as extensive tax avoidance planning does not provide specific business purposes for companies, but the only goal of managers is to avoid paying taxes. In growing economies where there are strong conflicts and differences between owners and representatives, managers are provided with a good opportunity to provide opportunities for opportunism and abuse of company profits. Second, as has been discovered from the great financial corruption of Enron and other similar examples, there is a great potential in companies to pursue profit-seeking purposes and avoid paying taxes in any way possible. But in the meantime, only a few studies show that investors have responded negatively to tax avoidance activities and have ignored such opportunities. The main goal implies that the interaction of the Ministry of Economic Affairs and Finance with the Stock Exchange Organization and the Accounting Standards Development Committee and the Society of Certified Public Accountants will help to identify high-risk tax payers. 1-2-Statement of the problem Tax avoidance, which reduces the outflow of cash from the company to the government, has been considered as a value for shareholders since the past. The general perspective of tax avoidance implies that opportunistic managers who seek to avoid paying taxes, look for financial abuses through financial reporting and mostly do this for their personal benefits.. Quality in financial reporting facilitates monitoring of managers' performance by shareholders. However, despite the lack of quality in financial reporting, shareholders' control and supervision over managers will decrease. Also, opportunistic managers use other methods and techniques to pay less tax, which will incur costs for company owners. The lack of coordination between accepted accounting principles and tax laws provides the opportunity for companies to simultaneously manage their book profit up and their taxable profit down. Therefore, this research seeks to investigate the relationship between tax avoidance and reckless financial reporting in Hami companies. This research addresses the question of whether companies with reckless financial reporting have more tax avoidance or not. Cohen (2006) financial reporting quality model is used to measure financial reporting boldly.

1-4- Importance and necessity of research

Companies must be able to meet the expectations of investors in order to obtain resources, and also according to the law, they must pay government rights, one of the most important of which is tax. Based on this, since the return of the owners decreases with the payment of taxes, this issue leads to a decrease in the motivation of investors to buy shares and invest. The management's lack of attention to reducing the costs caused by the imposition of taxes and the lack of effort in determining the taxable income will cause the transfer of resources from the owners to the government. With this description, the expectation of the owners is that in order to prevent the transfer of their wealth to the government, the management will take steps to identify the accounting profit more conservatively, in the meantime, the company's stock price will not only not decrease, but also increase. For this reason, company managers are looking for ways to meet the expectations of investors, so that they can reduce the tax payable by the economic unit and prevent the reduction of the company's efficiency. One of these tools is tax avoidance, which in order to do it as well as possible and achieve its main goal, which is to increase the company and the wealth of the owners, they should increase the quality of reporting along with tax avoidance activities. Among the reasons and importance of examining the relationship between tax avoidance and reckless financial reporting of companies are two issues: 1- Examining the relationship between reckless financial reporting and tax avoidance, which may lead to clarifying the relationship between tax avoidance and abuse by people within the organization. to be The management may implement various types of tax programs to reduce the cost of taxes imposed on the company, and this issue only increases the risk of lack of transparency of the company, and there is no other economic purpose except to create confidence for the abuse of external people. (Desai and Dharmapala 2007)[1].

2- With the revelation of scandals and management sabotage in companies such as Enron and a number of others, it became clear that the potential for abuse and waste of owners' resources is high in companies that use vague and non-transparent tax avoidance activities. Because in those cases, under the pretext of not revealing the real profit of the company, they hide their self-interested behavior. Studies and researches also show that very few owners react positively to tax avoidance activities with high ambiguity. However, there are documents that show that, from the point of view of investors, tax avoidance programs are valuable and important, and more importantly, they attach great importance to the value creation of tax avoidance activities for the business unit. (Gleason and Miller 2002)[2].

In the present research, an attempt has been made to examine the relationship between tax avoidance and reckless financial reporting. The pressure of unfavorable economic conditions in the country's current situation on companies and the efforts of business units to maintain their survival in the industry and not to lose market share, causes the owners to be careful in cash outflows. One of these outflows is paying taxes, and according to the aforementioned, companies are looking to pay less taxes by using legal methods.