The Information Asymmetry with SME Tax Disclosures: Should they Stay, or Should They Go?
This study examines the long-standing debate of Big GAAP vs. Little GAAP, should small and medium-sized entities (SME) be subjected to the same complex disclosure requirements as their publicly traded counterparts? This raging debate has lasted for decades. SME incur added costs to prepare these disclosures and their users must endure added training to comprehend the information provided. Many thought the convergence between GAAP and International Financial Reporting Standards (IFRS) would provide relief. However, given the convergence to IFRS is seemingly postponed for eternity, the call for increased disclosure requirements, and the economic struggles facing many SME companies today, now is the time for FASB to consider an alternative disclosure for SME. Utilizing one of the most complex footnote disclosures, rich with fruitful information, I use the tax footnotes as a barometer for change. Looking through the lenses of informational asymmetry and the Theory of Planned Behavior, I examine whether comprehension is an influencer for the intended usage of the tax disclosures. Loan officers are the largest third-party beneficiary of SME financial information and as such provide the standard for utilization. Using college students with a similar educational background as loan officers, I find that comprehension positively impacts the intended usage of the tax footnotes. I further find evidence that corporate income tax knowledge and accounting for income tax exposure are also influencers for intended usage of the tax footnotes as well. Yet, obtaining this knowledge is both timely and costly, hindering loan officers’ ability to comprehend the information in its current format and cause SME to hire outside counsel to prepare. Consequently, this study finds support for the notion of a Big GAAP/Little GAAP regime in which SMEs are subject to different reporting requirements than publicly traded companies. This is the first study to examine the struggles SME entities face with the comprehension and cost of the current state of the tax disclosures from the end-user perspective.
Accounting For Income Tax, Loan Officers, Tax, Tax Disclosures, Tax Footnotes, Theory Of Planned Behavior
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