Sept. 12, 2007
Report on U.S. Senate accounting investigation cites Gleason research
A U.S. Senate sub-committee investigating several corporations for allegedly violating federal tax law is reportedly looking at numerous companies that were identified in research by a University of Iowa professor.
Cristi Gleason, assistant professor of accounting in the Tippie College of Business, worked with colleagues at the University of Texas and University of Pennsylvania to track the effects of a new accounting rule on corporate earnings.
The rule, called FIN 48, was adopted in January and requires companies to publicly disclose the amount they're holding in reserve to pay in the event the IRS audits and successfully challenges a deduction or credit the company claimed on a prior year's tax return. Before the new rule, tax reserves were not public information.
Gleason's research examined the tax liabilities at 100 large companies that were newly disclosed by FIN 48 and found many companies had set aside large amounts of money to pay tax challenges. As of Jan. 1, those companies had set aside $78 billion for tax challenges.
"These reserves are about 2 percent of assets, and so could materially affect earnings if companies prevailed against the IRS," Gleason said. The largest reserve was by Merck, which had a reserve equal to 16.6 percent of overall assets. By contrast, GE's reserve amounted to 1 percent of assets, and AT&T's to 2 percent.
Gleason said this is important because losing a tax challenge at audit might significantly reduce a company's income and cash holdings if the firm does not have adequate reserves, making the company less appealing to investors. She said the reserves also provide a window into a company's executives estimation of their company's own tax risk, which is information investors can use to affect share price.
The Senate Permanent Sub-committee on Investigations has requested at least 30 companies -- including Merck -- to provide additional information on these reserves and details of other past tax arrangements, the Wall Street Journal reported this week. (See http://online.wsj.com/article/SB118947026768923240.html -- registration is required).
Gleason's research was conducted with Jennifer Blouin of the University of Pennsylvania and Lillian Mills and Stephanie Sikes of the University of Texas. Their paper, "What Can We Learn About Uncertain Tax Benefits From FIN 48?" is available online at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=990508.
STORY SOURCE: University of Iowa News Service, 300 Plaza Centre One, Iowa City, Iowa 52242-2500