In the complex world of corporate finance, tax compliance stands out as one of the trickiest areas to navigate. Here is where financial strategies and regulations meet.  

In this environment, companies are like tightrope walkers. They must balance their desire for tax savings with the need to satisfy regulators.

Dr. Mollie Adams, assistant professor in Missouri State University’s School of Accountancy, explores this realm in depth. She seeks to understand the tax planning behaviors of businesses and their implications on financial performance and regulatory compliance.

Her research journey is like a detective story for the financially curious. Adams specializes in tax compliance issues and financial reporting. She goes beyond looking at numbers to uncover the stories they tell. 

“I want to deepen understanding of how businesses are doing from a financial perspective.”

She has published more than 10 journal articles on topics, such as tax-related issues, the free cash flow concept (cash a business has left over after covering expenses and debt payments) and improving accounting education.

Examining tax data

Her latest co-authored paper, “Tax-Related Restatements and Tax Avoidance Behavior,” was published in the Journal of Accounting, Auditing and Finance in 2024. The research involved a deep dive into corporate tax strategies. 

Adams began collaborating with Drs. Kerry Inger, Michele Meckfessel and John Maheron on this study in 2017. They reviewed 228 companies’ public financial data. They also examined reports from the Securities and Exchange Commission website for Form 8-K – which announces a significant event – and for Form 10-K – which provides a comprehensive overview of the company’s business. 

They sought to determine if companies that aggressively avoid taxes are more likely to face financial restatements, or when a company revises its financial statements to correct an error to provide more accurate information. 

“This could lead to reputational and regulatory consequences for corporations,” Adams said.  

What the data revealed

In a key finding, Adams and her co-researchers discovered both high and low extremes of tax avoidance raise the risk of errors in tax-related financial reporting.  

Companies that are either ultra-aggressive or ultra-conservative are both more likely to make mistakes on their financial statements than companies that take a moderate approach. This action results in a tax-related restatement.  

The researchers found that when companies focus on paying less in taxes, they may compromise the quality of their financial reporting. Adams notes this is often done to avoid detection by the IRS, which reviews financial statements for tax compliance. On the flip side, companies with low tax avoidance often have weaker corporate governance.  

Corporate governance is how a company is directed and controlled. It involves the rules and processes that guide decision-making, management and accountability to the company’s owners and stakeholders. 

“A weak corporate governance means a company’s systems are not working well to manage taxes the way shareholders expect,” Adams said. “This can also lead to lower-quality financial reporting.”  

Inger, a professor in the School of Accountancy at Auburn University, believes the study’s results help firms better understand how their tax planning can affect financial reporting. 

“We also suggest that investors in firms with low tax avoidance should push for better tax planning afterward,” Inger said.

Impact on everyday lives

Adams’ work to highlight corporate tax practices is not just for number crunchers. It has real-world implications for people who save and invest their money.

She believes it is important for individual investors to know how corporate tax planning can affect the net realized return for companies, which ultimately impacts the performance of the companies’ stocks. 

“Many people invest their retirement funds in the stock market. As shareholders, it’s good to think about what we really want corporations we’re invested in to be doing.”

When companies pay less taxes through tax planning, for example, it can increase their profits. These profits can then boost the value of investments in the stock market. 

“But, if their actions go too far, there can be negative consequences. So, companies need to find a balance,” Adams said. 

Moreover, when a firm must issue a tax-related restatement to fix errors in financial statements, this can affect stock prices, too. 

“While restatements are necessary to ensure accurate financial reporting, a pattern of issuing restatements can erode investors’ confidence in a company’s standard reporting procedures.” 

“When a company issues a tax restatement, it means its original financial statements were incorrect and didn’t accurately show the company’s financial situation. This can lead to various consequences, such as a decline in the company’s stock price,” Adams said.  

Enhancing accounting education

As an educator, Adams also conducts research to improve the teaching and learning of accounting. She creates case studies and other tools for faculty members to use in their classrooms. These materials help engage students in their learning. 

A recent example is “La Maison des Comptables: A Tax Research, Data Management and Visualization Case.” Adams developed the case study with Inger and two other Auburn professors. It won the 2023 American Taxation Association’s Teaching Innovation Award. 

“The case contains multijurisdictional tax research and data tasks. We designed it for use in graduate accounting curriculums,” Adams said. 

It is based on a simulated business scenario involving a California winery. Students must research tax rules for online alcohol sales. Then, they apply the rules to fictional sales data and use data analytics to make business recommendations. 

What sets this case apart is its ability to connect various accounting disciplines. It also bridges the gap between tax and accounting information systems curricula. The study gives students a holistic understanding of critical business processes. 

“The process of creating and refining an educational case can take many years,” Adams said. “My co-authors and I worked on this case since 2019. We put in the effort we do because we believe well-crafted case studies are vital in accounting education.”