Do Private Tax Disclosures Affect the Quality of Public Financial Reporting?

ABSTRACT This study investigates whether increased private tax disclosures have implications for the quality of firms’ public financial reporting in the context of Schedule UTP. I find that firms revert from being over-reserved to being adequately reserved post-Schedule UTP, suggesting increased relevance of tax reserve accounting. Additional analyses further reveal that firms report more neutral tax settlements and fewer tax-reserve-related tax rate reconciliation items post-Schedule UTP. In terms of firms’ opportunistic behavior, I find that firms may substitute tax expense management for other accrual management post-Schedule UTP, implying that although Schedule UTP may have, to some extent, achieved the goal intended by FIN 48, this could come at the cost of reduced quality of other accruals. Overall, this study provides consistent evidence that increased private tax disclosures have positive externalities on tax reserve accounting.