Essays in financial reporting, tax, and politics

This dissertation contains three essays on financial reporting, tax, and politics. The first essay explores whether the tax authority is able to generate spillover effects for auditors. The IRS can generate spillover effects for auditors, as a strong IRS increases manager’s incentives to comply with tax regulations, which causes auditors to reduce the assessment of audit risk. The main result in this essay is consistent with this prediction, as auditors demand lower audit fees in IRS districts where firms report higher GAAP effective tax rates. The second essay explores whether a firm’s commitment in providing disaggregated accounting information disciplines managers such that they provide more disaggregated forward looking disclosures. As of 1998, SFAS 131 allows US firms to withhold audited profitability accounting information on geographical segments. The results in this essay are consistent with a disciplining role for geographical segment information as the results indicate that firms that do not show commitment in continuing to provide segmented profitability accounting information reduce their disaggregated forward looking disclosures on foreign operations in the MD&A. The third essay explores whether firms use executive compensation to compensate managers for contributing their personal money to the political process. The results seem consistent with this expectation as firms that used corporate funds for contributing to politics, but were unable to do so after the adoption of the Bipartisan Campaign Reform Act (BCRA) in 2002, increased their executive cash compensation. These firms increase salaries even more when investors react very negatively to the adoption of BCRA.