The Effect of Personnel Characteristics in the Internal Accounting Control System on Discretionary Tax Accruals: Evidence from Korea

Abstract

This study examines whether the characteristics of personnel in a firm's internal accounting control system (IACS) and auditor characteristics control managers' discretionary behaviour for tax planning. The study uses a sample of 4210 firm-year observations from 2006 to 2014. The results show that managers' discretionary tax planning cannot be controlled when the personnel in charge of internal accounting control are at an optimum level or higher. On the other hand, when a CPA is included among the personnel, the manager's discretionary behaviour is somewhat controlled. Moreover, the results show that firms audited by a large accounting firm also control the manager's discretionary tax planning to some extent. Unlike previous studies that examine the effects of IACS on discretionary accruals mostly in terms of book income, this study's contribution is an examination of the effects of the characteristics of personnel in IACS on the relationship between discretionary book-tax conformity accruals and discretionary book-only accruals that can be used when the manager establishes a tax plan. Additionally, this study also provides indirect evidence that the characteristics of auditors and personnel in charge of internal accounting perform a monitoring role that controls the manager's opportunistic behaviour.