Financial Reporting, Tax Costs, and Book-Tax Conformity

Abstract

We investigate the role of book-tax conformity in firms' financial reporting activities using a unique set of publicly traded firms that were forced to switch for tax purposes from the cash method to the accrual method. Prior to the mandated change, little tension existed between tax planning and financial reporting goals for these firms. After the change, recognition criteria for tax and financial reporting purposes became more alike, increasing the tension between financial reporting and tax objectives. Our results suggest that required use of the accrual method for tax purposes causes firms to slow their income recognition for financial statement purposes.