We document that simulated corporate marginal tax rates based on financial statement data [Shevlin, T., 1990. Estimating corporate marginal tax rates with asymmetric tax treatment of gains and losses. The Journal of the American Taxation Association 11, 51–67; Graham, J., 1996a. Debt and the marginal tax rate. Journal of Financial Economics 41, 41–73] are highly correlated with simulated rates based on corporate tax return data. We provide algorithms that can be used to estimate the book or tax simulated rates when they are not available. We find that the simulated book marginal tax rate does a better job of explaining financial statement debt ratios than does the analogous tax return variable and discuss how the book-simulated rate is likely to be an appropriate measure in settings with global, long-term considerations.

We survey and interview more than 400 executives to determine the factors that drive reported earnings and disclosure decisions. We find that managers would rather take economic actions that could have negative long-term consequences than make within-GAAP accounting choices to manage earnings. A surprising 78% of our sample admits to sacrificing long-term value to smooth earnings. Managers also work to maintain predictability in earnings and financial disclosures. We also find that managers make voluntary disclosures to reduce information risk and boost stock price but at the same time, try to avoid setting disclosure precedents that will be difficult to maintain.

This paper comprehensively reviews the Accounting for Income Taxes (AFIT) literature. We begin by identifying four distinctive aspects of AFIT and briefly covering the rules surrounding AFIT. We then review the existing studies in detail and offer suggestions for future research. We emphasize the research questions that have been addressed (most of which relate to whether the tax accounts are used to manage earnings and whether the tax accounts are priced by equity market participants). We also highlight areas that have not received much research attention and that warrant future analysis.

We provide insights into earnings quality from a survey of 169 CFOs of public companies and in-depth interviews of 12 CFOs and two standard setters. CFOs believe that (i) above all, high-quality earnings are sustainable and repeatable; specific characteristics include consistent reporting choices, backing by actual cash flows, and absence of one-time items and long-term estimates; (ii) about 50% of earnings quality is driven by non-discretionary factors such as industry and macro-economic conditions; (iii) in any given period, about 20% of firms manage earnings to misrepresent economic performance, and for such firms 10% of EPS is typically managed; (iv) earnings manipulation is hard to unravel from the outside but peer comparisons and lack of correspondence between earnings and cash flows provide helpful red flags. In addition, CFOs disagree with current standard setting on a number of issues including the sheer number of promulgated rules, the top-down approach to rule-making, the neglect of the matching principle, and the emphasis on fair value accounting. They indicate that a rules-based culture makes the audit function centralized and mechanical, and hinders the development of audit professionals. A summary impression from our work is that CFOs view earnings quality as more of a single and unconditional characteristic, in contrast to current research where measures of earnings quality are strongly conditional on the decision setting. This CFO view is related to their idea of “one number” – a single earnings metric that shapes both their interactions with external stakeholders and internal decision-making.