The Red Flags of Tax Reporting on the Market Value

Abstract

The aim of this paper is to provide empirical evidence of the red flags in the level of tax reporting among the Shariah Compliance companies in Bursa Malaysia. The convenience sampling method was employed among 123 Shariah compliance companies of Bursa Malaysia. Meanwhile, the investigation period in this study had covered twelve years of continuous data, starting from the year 2001 until the year 2012. This study adopted the Current Based Model to calculate the level of Effective Tax Rate (ETR) as an independent variable while the firm values as dependent variable. It was revealed that due to the Creative Accounting strategies, there is a possibility of tax fraud occurring during the calculation of taxation level. These activities, which were applied in implementing tax planning mechanisms is however allowed by the GAAP under MFRS. As is commonly known, the purpose of tax reporting is to safeguard the interest of potential shareholders; however, these practices of aggressive tax planning strategies will result in differing perceptions from tax payers' and potential shareholders' perspectives. Therefore, aggressive tax planning strategies could be a red flag to financial fraud activities. Thus, this study would disclose some evidence on how financial fraud could be revealed from tax reporting strategies.