Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)


The Impact of Income Smoothing on Tax Profit: An Applied Study to a Sample of International Companies

Author(s): Qassim Mohammed Abdullah Al Baaj, Salim Awad Hadi Al-Zabari, Abbas Alwan Shareef Al Marshedi

During economic turbulence, companies are under pressure that makes them turn to account department in attempt to control the frustrations by changing the financial information to their desired level. When the management oversees that the targeted level cannot be managed from the initial planning, they result to decree the figure in earning. This type of management practice to change the accounting records is called income smoothing. When other conditions are identical, the management usually prefers smoothed income than genuine income that fluctuate greatly. Smoothed income allows the firms to evade discounting in the capital market that brings undesirable consequences with the stakeholders. Income smoothing or earning management can be classified into real discretion and technical accounting policy. In real discretion, the management achieves the targeted number of figures by changing transactions between the firm and stakeholders. Technical accounting policy allows the management to change the accounting estimates or accounting policies. In this paper, the concept of income smoothing will be analyzed, and the term "big baths" used to leeway information presented in the financial statements will be shown. The researchers consider that firms in japan, companies in the Tehran stock exchange in Iran and American banks all engage in smoothing income using accounting policy. This will provide a platform to show biased accounting introduced by the management and learn the ways to remove this bias by linking the knowledge to financial analysis. The purpose of the research is to show the true situation from the biased results in firms, a basic step to enterprise value assessment and financial ratio analysis.