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Tax Aggressiveness and Accounting Fraud


  • Accepted by Philip Berger. We appreciate constructive comments on an earlier version of this paper from Andy Bauer, Paul Beck, Amy Dunbar, Scott Dyreng, Steve Gill, Jeffrey Hoopes, Devan Mescall, Tom Omer, Stephen Powers, Casey Schwab, and participants at the ATA Annual Meeting and the AAA Annual Meeting. Hou Qingchuan and Franklin Hao provided excellent research assistance. Petro Lisowsky (Jeffrey Pittman) gratefully acknowledges generous financial support from the PricewaterhouseCoopers Faculty Fellowship (Canada's Social Sciences and Humanities Research Council, the CMA Professorship, and the Chair in Corporate Governance and Transparency).


There are competing arguments and mixed prior evidence on whether firms that are aggressive in their financial reporting exhibit more or less tax aggressiveness. Our research contributes to resolving this issue by examining the association between aggressive tax reporting and the incidence of alleged accounting fraud. Relying on several proxies for tax aggressiveness to triangulate our evidence, we generally find that tax aggressive U.S. public firms are less likely to commit accounting fraud. However, we caution that our results are sensitive to how tax aggressiveness is measured. More specifically, four (two) of the five (three) proxies for firms’ effective tax rates (book-tax differences) load positively (negatively) during the 1981–2001 period, implying that fraud firms are less tax aggressiveness. Our inferences persist when we isolate the 1995–2001 period in which accounting impropriety steeply rose and corporate tax compliance steeply fell. Moreover, we continue to find that tax aggressive firms are less apt to fraudulently manipulate their financial statements when we apply factor analysis to identify tax avoidance with a common factor extracted from the underlying proxies and match on propensity scores to ensure that the fraud and nonfraud samples have very similar nontax characteristics.