Abstract

The purpose of this study is to test the behavior of earnings management around tax investigation. Tax investigation is the event with high probability of the firms's trying earnings management. The firms who omitted tax income will reduce the risk of tax investigation by reducing the difference between accounting earnings and tax earnings using earnings management.As a result of analysis, the following findings were obtained：The discretionary current accruals kept getting higher for three years before tax investigation. But after tax investigation, the discretionary current accruals went down to zero. For years around tax investigation, the discretionary current accruals of control firms were significantly zero.These findings mean that earning management is related to tax investigation, and the behavior of earnings management changes before and after tax investigation. It is suggested that earnings management is the firms' own decision－making of reducing the difference between accounting earnings and tax earnings. <Key words> tax investigation, earnings management, discretionary current accruals

Keywords

• tax investigation
• earnings management
• discretionary current accruals

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