The changing relationship between tax and financial reporting in Spain

The degree of connection between tax and financial reporting is regarded as a key factor in the study of international accounting differences. The position for Spain is briefly outlined in previous research but without examination of any specific accounting issues except, in outline only, depreciation and the tax-free revaluation of assets from 1977 to 1983. The absence of a detailed study of the major tax/accounting linkages for Spain is of particular importance because the relationship is regarded as having changed dramatically in the early 1990s, from a position of tax dominance. In order to measure the links between tax and financial reporting, we adopt the methodology of Lamb et al. (1998) by assessing major accounting topics using a five-case classification shown as Table 1. We refute the proposition that suggests that the link between tax/accounting has been reduced substantially.

Incumbent audit firm-provided tax services and the clients with low financial reporting quality

This study investigates whether incumbent audit firm-provided tax services enhance or impair the likelihood of acknowledging client companies’ low financial reporting quality. In particular, we examine the association between tax-related fees and the likelihood of timely restatements, and internal control weakness disclosures among a sample of US companies that all have misstatements in financial information. The empirical findings indicate that companies paying higher tax-related fees are less likely to disclose SOX 404 internal control weakness disclosures, implying that underlying control problems are unacknowledged when incumbent audit firm provided tax-related fees are higher. However, the findings suggest that just providing both audit and tax-related services does not have an impact on audit quality per se, but rather it is the magnitude of the tax-related fees in particular that counts. We also find some evidence suggesting that companies paying higher tax-related fees have higher likelihood of restatement lags, whereas companies paying smaller tax-related fees to their audit firm restate financial statements in a timelier manner. Overall, the findings suggest that audit scrutiny of client companies with low quality financial reporting is weaker when the magnitude of tax-related fees is higher.

Endogenous Credit Cycles and Financial Dampening in an Adverse Selection Economy

We propose an adverse selection framework in which the financial sector has a dual role. It amplifies or dampens exogenous shocks and also generates endogenous fluctuations. We fully characterize constrained optimal contracts in a setting in which entrepreneurs need to borrow and are privately informed about the quality of their projects. Our characterization is novel in analyzing pooling and separating allocations in a context of multi-dimensional screening: specifically, the amounts of investment undertaken and of entrepreneurial net worth are used to screen projects. We then embed these results in a dynamic competitive economy. First, we show how endogenous regime switches in financial contracts may generate fluctuations in an economy that exhibits no dynamics under full information. Unlike previous models of endogenous cycles, our result does not rely on entrepreneurial net worth being counter-cyclical or inconsequential for determining investment. Secondly, the model shows the different implications of adverse selection as opposed to pure moral hazard. In particular, and contrary to standard results in the macroeconomic literature, the financial system may dampen exogenous shocks in the presence of adverse selection.

Neglected risks, financial innovation, and financial fragility

We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.

Neglected risks, financial innovation and financial fragility

We present a standard model of financial innovation, in which intermediaries engineer securities with cash flows that investors seek, but modify two assumptions. First, investors (and possibly intermediaries) neglect certain unlikely risks. Second, investors demand securities with safe cash flows. Financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks. Because the risks are neglected, security issuance is excessive. As investors eventually recognize these risks, they fly back to safety of traditional securities and markets become fragile, even without leverage, precisely because the volume of new claims is excessive.

Small firms, growth and financial constraints

This paper analyses the impact of different sources of finance on the growth of firms. Using panel data from Spanish manufacturing firms for the period 2000-2006, we investigate the effects of internal and external finances on firm growth. In particular, we examine three dimensions of these financial sources: a) the performance of the firms’ capital structure in accordance with firm size; b) the effects of internal and external financial sources on growth performance; c) the combined effect of equity, external debt and cash flow on firm growth. We find that low-growth firms are sensitive to cash flow and short-term bank debt, while high-growth firms are more sensitive to long-term debt. Furthermore, equity capital seems to reduce barriers to external finance. Our main conclusion is that during the start-up phase, firms are unable to increase their financial leverage and so their capital structure fails to promote correct investment strategies. However, as their equity capital increases, alternative financial mechanisms, in particular long-term debt, become available, which have a positive impact on firm growth.

Monetary policy rules and financial stress: does financial instability matter for monetary

We examine whether and how main central banks responded to episodes of financial stress over the last three decades. We employ a new methodology for monetary policy rules estimation, which allows for time-varying response coefficients as well as corrects for endogeneity. This flexible framework applied to the U.S., U.K., Australia, Canada and Sweden together with a new financial stress dataset developed by the International Monetary Fund allows not only testing whether the central banks responded to financial stress but also detects the periods and type of stress that were the most worrying for monetary authorities and to quantify the intensity of policy response. Our findings suggest that central banks often change policy

R functions for quantifying nonindependence in standard dyadic and SRM designs

Interdependence is the main feature of dyadic relationships and, in recent years, various statistical procedures have been proposed for quantifying and testing this social attribute in different dyadic designs. The purpose of this paper is to develop several functions for this kind of statistical tests in an R package, known as nonindependence, for use by applied social researchers. A Graphical User Interface (GUI) is also developed to facilitate the use of the functions included in this package. Examples drawn from psychological research and simulated data are used to illustrate how the software works.

Sovereign default, domestic banks and financial institutions

We present a model of sovereign debt in which, contrary to conventional wisdom, government defaultsare costly because they destroy the balance sheets of domestic banks. In our model, better financial institutionsallow banks to be more leveraged, thereby making them more vulnerable to sovereign defaults.Our predictions: government defaults should lead to declines in private credit, and these declines should belarger in countries where financial institutions are more developed and banks hold more government bonds.In these same countries, government defaults should be less likely. Using a large panel of countries, we findevidence consistent with these predictions.

La Imatge fidel de les unions temporals d'empreses UTE

En l’article es fa una revisió actual de les unions temporals d’empreses (UTE), per tal de veure si la informació comptable que presenten és fidedigne. En primer lloc, es defineix la unió temporal d’empreses, i es detalla l’origen històric, les característiques i els objectius de l’UTE. Seguidament es presenta la regulació comptable i fiscal que afecta a les UTE, i es detalla el que pauta l’adaptació del Pla general comptable de les empreses constructores en relació amb les UTE i la problemàtica derivada de les operacions en empreses d’aquest sector que tantes UTE realitzen. També es ressalta en l’article la responsabilitat de l’UTE i les Normes comptables internacionals relacionades amb les UTE. Finalment es presenten els resultats d’una anàlisi d’estats financers de trenta empreses constructores que habitualment realitzen UTE, per comprovar el seguiment que fan de l’adaptació sectorial del Pla general comptable de les empreses constructores i la informació que donen de les UTE. L’última part de l’article fa referència a les conclusions, i és en aquesta part on s’apunta que la informació comptable de les UTE ha de millorar notablement, ja que actualment és una informació poc transparent, insuficient i dispersa.

Creative accounting: Some ethical issues of macro- and micro-manipulation

This paper examines two principal categories of manipulative behaviour. The term'macro-manipulation' is used to describe the lobbying of regulators to persuadethem to produce regulation that is more favourable to the interests of preparers.'Micro-manipulation' describes the management of accounting figures to produce abiased view at the entity level. Both categories of manipulation can be viewed asattempts at creativity by financial statement preparers. The paper analyses twocases of manipulation which are considered in an ethical context. The paperconcludes that the manipulations described in it can be regarded as morallyreprehensible. They are not fair to users, they involve an unjust exercise ofpower, and they tend to weaken the authority of accounting regulators.

Creative accounting: Nature, incidence and ethical issues

This paper explores the nature and incidence of creative accounting practiceswithin the context of ethical considerations.It explores several definitionsof creative accounting and the potential and the range of reasons for acompany's directors to engage in creative accounting. Later the paperconsiders the various ways in which creative accounting can be undertaken andsummarizes some empirical research on the nature and incidence of creativeaccounting. The ethical dimension of creative accounting is discussed, drawingevidence from several empirical studies. The paper concludes with the analysisof possible solutions for the creative accounting problem.

Accounting information and the prediction of farm viability

Until recently farm management made little use of accounting and agriculture has been largely excluded from the scope of accounting standards. This article examines the current use of accounting in agriculture and points theneed to establish accounting standards for agriculture. Empirical evidence shows that accounting can make a significant contribution to agricultural management and farm viability and could also be important for other agents involved in agricultural decision making. Existing literature on failureprediction models and farm viability prediction studies provide the starting point for our research, in which two dichotomous logit models were applied to subsamples of viable and unviable farms in Catalonia, Spain. The firstmodel considered only non-financial variables, while the other also considered financial ones. When accounting variables were added to the model, a significant reduction in deviance was observed.

Manipulation of earnings reports in Spain - some evidence

Accounting regulation is a highly topical issue for listed companies in Europe. From 1 January 2005 all companies listed in the EU member states are required to produce financial reports compliant with international accounting standards. Financial reports will be comparable with each other only if full compliance with the international standards can be ensured. Historically, however, an enduring weakness of the international standard-setting regime has been its inability to enforce compliance with its standards. There is a danger that implementation and compliance will be variable across the adopting countries, and that deeply ingrained national reporting practices will persist. The purpose of this paper is to examine some distinctive elements of Spanish financial reporting practices. Spanish financial reporting by major companies demonstrates a tendency towards quite overt manipulation of the earnings figures. The research reported in the paper firstly identifies four common earnings manipulation practices, and then proceeds to examine their incidence in the financial statements of the IBEX-35 companies over a three year period.