Knowledge that Transforms

This qualitative inquiry investigates how tax professionals understand aggressiveness in tax planning and how they position themselves on the spectrum of aggressiveness. Based on semi-structured interviews with 33 experienced Canadian tax professionals from top-10 accounting and law firms, we find that tax professionals understand aggressiveness through a web of inter-related considerations. These include creativity, complexity, legal ambiguity, and lucrativeness, associated with risks of tax audits , technical errors, disputes with tax authorities over legal interpretations, and reputational damage for the client, the tax professional, and their firm. These considerations and related risks are often a source of anxiety for tax professionals. Drawing on contemporary philosopher Charlie Kurth's distinction between “punishment anxiety” and “practical anxiety,” we identify an intricate interplay between these two forms of anxiety and a collective deliberation process involving clients and colleagues, each bringing their own risk-reward preferences, which shapes professionals' decisions of how aggressive they should be. The socio-affective conceptualization of aggressiveness that we propose in this study contributes to the tax literature by deepening our understanding of the elusive concept of tax aggressiveness. It also enriches the broader literature on accounting and finance professionals' emotions at work by documenting the analytical value of a nuanced understanding of anxiety. Furthermore, it advances the professional ethics literature by highlighting the moral significance of practical anxiety in professional judgment about risky, ethically sensitive issues.

Extreme work hours in professional service firms (PSFs) are often attributed to organizational control mechanisms such as time sheets, utilization targets, and performance evaluations. This paper introduces the concept of the entrainment cycle to explore how these controls foster professionals' compliance with extreme work patterns. The entrainment cycle explains how individuals become continuously synchronized with the collective rhythm of the organization. Drawing on 159 interviews with 81 professionals across two PSFs, the study explores how formal and normative controls synchronize individuals with the fast-paced organizational tempo. The findings reveal how bureaucratic and cultural entrainment mechanisms contribute to synchronization. Moreover, emotions and bodily responses play a critical role in making professionals internalize the organization's rhythms. Periods of synchronization trigger positive feedback loops in which heightened emotions and bodily responses reinforce individuals' attachment to work. These synchronized periods contrast with moments of desynchronization in which professionals experience negative feedback loops characterized by guilt, anxiety, and physical withdrawal symptoms. The bodily and emotional mechanisms this study reveals reinforce professionals' synchronization with collective rhythms, locking them into an entrainment cycle that perpetuates long hours and ever-intensifying work. This study offers new insights into how controls affect individuals and organizations in significant, far-reaching, and often unobtrusive ways.

In 2021, a social movement rallying retail investors unexpectedly shocked Wall Street, forcing a prominent multi-billion-dollar hedge fund to shut down one year later, after incurring massive financial losses. Social movements in financial markets have significantly developed in the wake of the 2007–09 financial crisis, resulting in the emergence of various collective actions. We analyze one recent example of such action undertaken by the r/WallStreetBets (WSB) community on Reddit, which disrupted the stock prices of several “meme stocks” (e.g., GameStop) by disseminating influential investment narratives. We analyze the 150 most upvoted Due Diligence posts on WSB and interview eight members of its community. We find that a popular expertise in investment narratives emerged, developed, and was propagated on this digital platform. WSB authors' claim to popular expertise is made in a hybrid language combining traditional financial expertise with an accessible and entertaining writing style, complemented by references to pop culture. Our analysis brings out a growing resentment among retail investors about the unfairness of financial markets, and its role in mobilizing them for collective action that challenged the existing order of things. Yet this widespread resentment did not spontaneously translate into a meaningful, sustainable collective action initiative. Our thesis is that the development of popular expertise played an instrumental role in the formation of WSB's collective action initiative targeting several perceived investment opportunities.

Auditors at all ranks should be skeptical when searching for information throughout audits. However, we lever domain learning theory from educational psychology to posit that their skepticism unlikely develops evenly across ranks, but rather depends on a supportive learning culture, a construct from the management literature. To test that perceived learning culture moderates the association between auditor rank and skeptical information search, we use a laboratory study with 166 Dutch auditors at a Big 4 firm and follow-up interviews with seven top leaders of that firm. A more supportive perceived learning culture is associated with more skeptical information search, but only in audit managers and partners - not in associates and seniors. Interviewees attribute this pattern to values acquired over time through socialization, role expectations, knowledge development, and wider task characteristics.

We collect a novel dataset on images in Environmental, Social, and Governance (ESG) reports using deep learning and artificial intelligence (AI), to test hypotheses arising from experimental literature that visual impression management enhances audience perception. We further combine AI and manual methods to contrast images that lack information content (“generic images” evoking broad ESG themes) against images with information content (“specific images” depicting firm-specific ESG activities). We hypothesize and find that firms (1) operating in socially problematic industries (e.g., “sinful”, polluting, or controversial industries), (2) issuing less extensive textual ESG disclosures, and (3) experiencing poor ESG performance tend to use more images, especially generic images, consistent with strategic motivations. We then examine the impact of image usage on stakeholders, observing unduly enhanced perception in retail traders but seldom in institutional investors. We observe that ESG award committees reward specific images and penalize generic images. Our results show that ESG report visual impression management affects stakeholders in the real world, though its impact can be overcome by attention and expertise.

We examine the dynamic nature of the information content of aggregate earnings. Specifically, we examine how changes in supply elasticity affect the relation between aggregate earnings and future inflation. Using total capacity utilization to capture supply elasticity, we find that aggregate earnings are more informative about inflation when the supply is inelastic. This finding aligns with the investment demand hypothesis—higher aggregate earnings drive increased investment, pushing inflation higher, when supply is relatively inelastic. Furthermore, when we consider market outcomes such as three-month Treasury yields and aggregate stock returns, the role of supply elasticity pervades. That is, we find that aggregate earnings are more informative for market outcomes primarily when supply is inelastic. Finally, the relation between aggregate earnings and gross domestic product (GDP) also varies with the economy’s supply elasticity. Our findings highlight supply elasticity as a critical factor in interpreting the macroeconomic signals in aggregate earnings.

Abstract A primary argument against fair value measurement is the lack of verifiability, where verifiability is defined as consensus in measurement by independent parties. We evaluate this argument by investigating trends in the consensus of reported fair values. Our findings indicate that consensus increased between 2005 and 2019, as evidenced by reductions in the fair value range and standard deviation. Further analyses suggest that enhanced data availability—driven by public dissemination of trade information—serves as a mechanism for this trend. We also document that securities subject to testing by larger external auditors with more resources to take advantage of enhanced data availability are associated with a stronger trend in increasing consensus. Finally, this trend appears to be stronger in situations when management has a heightened opportunity to record a biased estimate. While conventional arguments express concern over management’s ability to manipulate fair values, our results demonstrate patterns consistent with improved verifiability.

Abstract We use unique disclosures in the insurance industry to examine whether client-engaged specialists (i.e., external actuaries) affect opportunism within the claim loss reserve. Using a fixed-effects approach, we find that external actuaries significantly affect the opportunism in the claim loss reserve, approaching half the effect of the auditor. With respect to actuary characteristics, we find a positive (negative) association between actuary permissiveness (actuary size) and opportunism in the claim loss reserve. In additional analyses, we find that the relation between actuary permissiveness and claim loss reserve opportunism is stronger when insurers have incentives to opportunistically manage the claim loss reserve. This relation continues to persist in the presence of high-quality auditors. Overall, we provide evidence suggesting that client-engaged external actuaries can be used to support opportunistic claim loss reserve estimates.

Abstract The Dodd-Frank Act expands bank managers’ reporting requirements to federal agencies, particularly relating to banks’ financial losses should common market and macroeconomic shocks occur. To comply with this regulation, bank managers have engaged in consulting arrangements (referred to as regulatory consulting). We examine the financial reporting quality implications associated with hiring external auditors for these services. We find banks with auditor-provided regulatory consulting, relative to banks without, have higher financial reporting quality as measured by loan loss provision validity. Consistent with knowledge spillover benefits accruing to financial audit teams, we find more pronounced effects in the fourth versus interim quarters and more frequent income-reducing Y9-C restatements. We also find auditor responsiveness to PCAOB inspections improves the effectiveness of regulatory consulting. Overall, our results suggest regulatory consulting improves the audits of estimates in judgmental financial statement accounts, despite regulatory concerns that these services may impair auditor independence.

Abstract We use publicly available information to estimate the country location of multinational firms’ cash holdings, examine why investors discount the value of cash held overseas, and examine whether that discount changes after the Tax Cuts and Jobs Act (TCJA) of 2017. We provide three main results. First, our firm-year foreign cash estimates are reasonably accurate, evidenced by high correlations with simulated data and proprietary country-level data, high adjusted R 2 when explaining a firm’s total cash holdings, and the ability to replicate prior findings. Second, we demonstrate that investors value foreign cash holdings more negatively than domestic cash holdings when the cash is held in high agency-cost countries. Finally, we find that investors no longer appear to discount foreign cash after the TCJA, when the U.S. moved from a worldwide to a quasi-territorial taxation system.