Accounting students' likelihood of compliance with tax preparation standards.(Report)

Abstract

The current study examines the likelihood that accounting students will comply with the AICPA's enforceable Statements on Standards for Tax Services (SSTS). A sample of 224 accounting students completed a questionnaire including SSTS scenarios. Overall, a significant portion of accounting students was not likely to follow the standards on five out of six scenarios. A group of students that received specific instruction in SSTS was not more likely to comply with them compared to a group that did not learn the standards. In addition, there were differences based on gender, age and class grade in the likelihood of compliance.

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Accounting professionals have faced increasing pressures from regulators and the public in the wake of corporate accounting scandals a few years ago. The American Institute of Certified Public Accountants (AICPA) has emphasized the need for accountants to focus on their responsibilities to the public. In the areas of tax preparation and tax planning, these responsibilities are framed within the framework of Statements on Standards for Tax Services (SSTS). These standards, effective since 2000, represent enforceable codes of conduct by CPAs in tax return preparation and tax planning.

The purpose of this paper is to investigate accounting students' likelihood of following these tax standards. Accounting students represent future CPAs and their perception of tax standards, after being exposed to them, can give an insight into their perception of the importance of such standards. Hume, Larkins, and Iyer (1999) investigated tax professionals' compliance with Statements on Responsibilities in Tax Practice (SRTP), which were advisory in nature and were superseded by the enforceable SSTS. However, in Hume et al. (1999), one possible limitation of the results was that CPAs may not have been familiar with SRTP since they were only suggested guidelines. In the current study, accounting students are divided into two groups: One group received specific instruction on SSTS and another group did not. The study examines the likelihood of compliance with SSTS and investigates whether demographic factors such as gender, age and class grade have an effect on students' compliance.

The paper is organized as follows: After this introduction is a background on the concepts of tax preparation along with a discussion of ethics and an examination of SSTS. This is followed by an explanation of the research design and sample selection. The results are presented next followed by discussion and implications for accounting education and the accounting profession.

Background

Tax Preparation and Ethics

A significant segment of CPAs is involved in tax preparation of individual tax returns and tax planning. Approximately 55% of all federal income tax returns and even greater percentages of complex tax returns are prepared by tax professionals. The cost exceeds $11 billion annually (Yetmar & Rioux, 2004). Even with increasing complexities of tax laws and increased demand for tax preparation, CPAs face competition from accountants without the CPA designation, enrolled agents, tax-preparation chains and software programs (Fisher, 1994). This increasing competition from less-expensive sources presents CPAs with a dilemma in determining their level of conservatism.

In providing tax preparation and planning services, CPAs attempt to satisfy many constituents such as clients, employers, professional organizations and government agencies. Given these constituents with different goals and risk preferences, it is not surprising for CPAs to face ethical conflicts during their careers (Yetmar, 1997). CPAs are confronted with ethical dilemmas especially when there is client pressure to adopt overly aggressive tax positions (Hume et al., 1999; Cruz, Shafer & Strawser, 2000). Finn, Chonk, and Hunt (1988) noted this problem in an earlier survey of CPA tax preparers where almost half of them indicated their biggest problem was clients' proposals to alter tax liability and/or tax fraud. Almost half of the respondents felt that CPAs outside their firms often engaged in unethical activities.

In facing these ethical challenges, CPAs must sometimes balance competing interests. Taxpayers and the IRS have different expectations of CPAs. The IRS maintains that CPAs should have loyalty to the U.S. tax system and act as government agents (Brody & Masselli, 1996). On the other hand, research shows that many taxpayers are ambivalent about whether tax cheating is morally wrong and are often willing to play the audit lottery (i.e., adopting aggressive or even fraudulent positions based on a low audit probability) (Kaplan & Reckers, 1985; Westat, 1980). Yetmar and Eastman (2000) noted that taxpayers expect CPAs to minimize their clients' tax liability and be the clients' advocate. Schisler (1995) found that taxpayers were generally more aggressive than preparers on every scenario presented and Schisler (1994) concluded that preparers adhered to the aggressive tendencies of their clients.

In order for the IRS to illustrate the importance of its position, it has increased penalties on tax preparers in recent years. Yetmar and Rioux (2004) estimated that a quarter of all tax preparers would be assessed for some type of preparer penalty during their career. Brody and Masselli (1996) criticized the IRS position and noted that it failed to consider the possibility that two or more tax positions, even though they differ in their level of aggressiveness, may still meet the good faith criterion for recommending a position.

Erard (1993) found that CPAs and lawyers were more likely to condone aggressive reporting activities as well as recommend tax shelters to their clients compared to nonlicensed preparers. Research regarding the impact of sanctions on CPAs' behavior has reached mixed conclusions. For example, Reckers, Sanders, and Wyndelts (1991) found that preparer penalties were effective in reducing CPAs aggressiveness in signing returns. On the other hand, Cuccia (1994) found preparer sanctions increased the effort by CPAs in the engagement but did not have an effect on aggressiveness.

Some research has attempted to determine factors influencing tax preparers' ethical decisions. Cruz et al. (2000) found that tax practitioners' behavior was consistent with five ethical philosophies: Moral equity, contractualism, utilitarianism, relativism, and egoism. Another study found that expert tax preparers seemed to be most influenced by personal integrity and professional ethics when confronted with clients' desires in tax matters (Jackson, Milliran & Toy, 1988).

In dealing with potential ethical conflicts in tax preparation, the AICPA requires members to act with integrity and maintain the public trust. The SSTS illustrate the CPAs' commitment to meet their responsibilities to the public.

SSTS and Responsibilities

Between 1964 and 1977, the AICPA issued SRTP. They were guidelines that helped CPAs recognize their ethical obligation to the public. They dealt with issues such as knowledge of an error in a filed tax return, use of estimates, and CPAs taking aggressive tax positions that will circumvent tax audits. The SRTP were voluntary standards. However, they became de facto enforcement standards with courts, the IRS, state accountancy boards and other professional organizations relying on them as accepted professional conduct in tax practice (Swails, 2000).

In 2000, the AICPA replaced SRTP with SSTS. The SSTS differ from the SRTP in one important way. The SSTS are explicitly enforceable professional standards. Members of the AICPA who do not adhere to SSTS are subject to sanctions. Although other tax practice standards exist, most notable Treasury Department Circular 230 and penalty provisions of the Internal Revenue Code (IRC), they are limited in that (1) they do not provide the depth of guidance contained in the SSTS, and (2) they may be considered to take an unrealistic or oversimplified view of the complexities of tax practice (Swails, 2000).

The SSTS were written in as simple and objective a manner as possible. In terms of content, the SSTS mirror the old SRTP: The name, number, and substance of each statement remain essentially the same. The current study uses the SSTS to investigate accounting students' likelihood of compliance.

Accounting Students and Ethics

Prior research has shown that despite widespread efforts by practitioners and educators to encourage greater emphasis on ethics in accounting education, there has been minimal coverage of ethics in the accounting curriculum (e.g. Thompson, McCoy & Wallestad, 1992). However, a more recent national survey by Mastracchio (2005) found that half of the Colleges of Business offered a separate course in business ethics. In addition, 90% of the surveyed schools noted that protecting the public interest was covered in the Auditing course.

Although research has investigated accounting students' ethical reasoning in general accounting settings, little research has specifically examined tax settings. Since many accounting students will be involved with tax preparation and planning, whether as CPAs in public practice or as CMAs in industry, it is important to understand their perception of tax preparation standards and the likelihood of compliance with such standards.

In a literature review, Borkowski and Ugras (1998) identified several factors (e.g. gender, age and class grade) that can affect accounting students' ethical reasoning with mixed conclusions. In a tax context, Grasso and Kaplan (1998) investigated gender and age differences in tax ethics perception among accounting students. The results showed that females tended to believe more strongly than males that evading taxes was immoral. Contrary to most previous ethics research regarding age, Grasso and Kaplan (1998) found that younger students (<25 years old) perceived evading taxes as more immoral compared to older nontraditional students. In several scenarios, students believed actions to be ethical, even though they believed these actions conflicted with the AICPA code of conduct. Fallan (1999) also investigated gender in a tax context. The results showed that females reconsidered their position on tax ethics issues more often than males.

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