International Journal of Business, Management and Commerce (IJBMC)

This study analyses the relevance of tax consideration in earnings management (EM) by proposing a framework that integrates tax planning and tax disclosure aspects, in real earnings management (REM) model. Tax planning plays a core part in EM, whereby both tax planning and EM attempt to minimize the tax expenses. The quality of tax disclosure mitigates the agency problem, thus reducing the EM. In line with the political cost hypothesis, prior studies concluded that companies with a high tax burden tended to manage earnings; therefore, a positive relationship between tax planning and REM exists. However, increasing the transparency in the tax disclosure would likely mitigate the problem of information asymmetry, and thus, according to the Agency Theory, there is an inverse relationship between the REM and tax disclosure. It is hoped that tax consideration would add to EM literature and enhance a better understanding of EM in the real world.