A recent study by Dr. Tom Omer, professor and Delmar Lienemann Sr. Chair of Accounting, at the University of Nebraska–Lincoln College of Business Administration finds an unintended consequence of getting better information to investors by the Securities and Exchange Commission (SEC) may result in U.S. firms paying more taxes – up to $3 billion of additional federal, state and foreign government taxes in a single year. The study, entitled “The Effects of Regulatory Scrutiny on Tax Avoidance: An Examination of SEC Content Letters,” appears in the November/December issue of The Accounting Review
, the top journal for accounting research.
The higher tax payments stem from a directive in the Sarbanes-Oxley Acts of 2002 which directs the SEC to review financial reports of companies every three years. If filings appear deficient or need clarification, the SEC issues comment letters to acquire more information aimed at helping investors sort through financial details of a company. Omer’s research found when a company received a comment letter dealing with taxes, they typically increased their provision for income taxes.
“The SEC is solely responsible for how firms present financial statements to investors, and not about whether companies are paying their taxes,” said Omer. “The comment letters occur when the SEC demands more clarity in financial disclosures. There is real tension that goes on when those requests are made.”
In the survey of nearly 3,000 comment letters over nine years, about 30 percent dealt with tax issues. Even though the purpose of the letters was not to increase tax payments, Omer believes they have that effect.
“Even if a company did not get a comment letter, they probably still react when firms in the same industry get them. They see similar companies targeted for non-disclosure and tend to migrate to like positions. More disclosure drives firms to be careful regarding paying taxes,” he said.
Omer explained that while the SEC and Internal Revenue Service do not communicate directly, the work the SEC provides creates a connection.
“Corporations are very sensitive about turning over information on taxes. They must be somewhat concerned it will draw in another agency to start asking questions,” he said.
Article co-authors include Daniel Lynch of the University of Wisconsin-Madison, Michael Mayberry of the University of Florida and Thomas Kubick of the University of Kansas, who received his doctorate in accounting from the UNL School of Accountancy in 2011.