Private SME accounting in Poland. Does bank lending influence their accounting and financial reporting practice?

Abstract

Using data from private Polish Small and Medium-sized Entities (SMEs) for 2003-2013, I investigate in this paper the influence of bank borrowing on their book-tax conformity and accounting practices. In order to verify the importance of the link between tax law and the accounts of private firms, I created variables capturing the records according to local GAAP and I separated records in line with tax rules reflecting the impact of tax law on the accounting practices. Besides the book-tax differences measurement proposed by Watrin et al. (2014), I applied Tang's (2015) approach to estimate book-tax conformity that captures permanent and temporary book-tax differences. I find that bank lending increases the book-tax conformity of profitable firms. Tax avoidance applied by borrowers has a lower impact on book-tax differential than in the case of non-borrowers. Moreover, the findings indicate that monitoring by lenders force SMEs to adopt more advanced accounting practices by adhering to the prudence principle. This allows lenders to learn more about the ability of borrowers to repay loans thanks to more informative earnings. However, only 22.5% of borrowers applied accounting standards that are not recognized by tax law.