Boards’ Reactions to Problems in Accounting for Income Taxes

Abstract

Accounting for income tax (AFIT) problems are among the most common and persistent of accounting problems. We examine boards’ reactions to AFIT accounting problems compared to reactions to problems originating from other areas of accounting. Specifically, we investigate executive turnover decisions surrounding announcements of control weaknesses and restatements in AFIT compared to turnover decisions around announcements of control weaknesses and restatements in other accounts. We find that CFO and CEO turnover are not statistically different around AFIT control weaknesses compared to other control weaknesses. We also find that CFO and CEO turnover is higher around AFIT restatements compared to other restatements. We find no similar pattern with auditor turnover or around other types of control weaknesses or restatements. Overall, our study suggests boards hold top executives accountable for problems occurring in AFIT differently than problems occurring in other areas of accounting.