The Links between Accounting and Tax Reporting: The Case of Bad Debt Expense in the Italian Context

Abstract

This study shows the way tax rules, rather than accounting ones, affect the measurement of receivables for the purpose of preparing the financial statements of Italian private (unlisted) companies according to national accounting standards. Through the distribution approach, it shows that Italian companies are likely to account for bad debt expense that corresponds to the maximum tax-deductible amount. Considering that the impact of tax rules on the preparation of the financial statements may affect the quality of earnings, the main implication of the findings of this study is that the earnings reported by Italian companies are not unconditionally informative regarding the company"s performance. In other words, they may be of poor quality. As a result, they should be interpreted with caution by those who use financial statement information.

Do Ownership Structure Characteristics Affect Italian Private Companies’ Propensity to Engage in the Practices of “Earnings Minimization” and “Earnings Change Minimization”?

“…7, No. 6;2015 and by the desire to avoid too negative or too positive levels of earnings arousing criticism from public opinion or the higher levels of government.…”

“…7, No. 6;2015 Figure 2 shows the frequency distribution of earnings changes (defined as the difference between the reported earnings of fiscal year t and the reported earnings of fiscal year t-1, scaled to total assets of fiscal year t-2). It is characterized by peaks of observations in correspondence to the first negative interval (-0.00250-0) (-1) and the first positive interval (0-0.0025) (+1), a marked discontinuity and a convex shape both to the left of the first negative interval and to the right of the first positive interval.…”

“…7, No. 6;2015 the ownership structure is available; companies that are not controlled by an industrial company, i.e., an industrial company that owns more than 50% of the shares (in order to exclude companies belonging to industrial groups). In the database, the number of companies that meet the above selection criteria amounts to 14,147.…”

The impact of financial difficulties on earnings management strategies: The case of Italian non-listed firms

“…The focus is on firms experiencing financial problems, rather than firms facing bankruptcy, as financial distress does not necessarily lead to bankruptcy (Habib et al, 2013). The context is interesting as Italian non-listed firms predominantly employ debt rather than equity to finance their operations (Poli, 2013a;Poli, 2015), and therefore such firms could have incentives to mask poor financial performance otherwise their access to credit may be impaired. Our research should provide some context for both academics and practitioners when analysing the reliability of financial information in Italian non-listed firms suffering from financial distress risk.…”

Is gender diversity in ownership structure related to private Italian companies propensity to engage in earnings management practices?

“…In countries such as Italy (Gavana et al, 2013;Poli, 2015b), where there is a close alignment between accounting and tax rules, if there are no other factors that lead people to manifest different behaviors, companies are likely to engage in EM and ECM practices (Coppens and Peek, 2005;Marques et al, 2011). This is due to the impact of two fiscal incentives that work in oppos ite directions.…”