According to recent research that appears in the September/October issue of the American Accounting Association's Accounting Review, the potential of being audited by the Internal Revenue Service encourages companies to meet and maintain accounting compliance standards, Accounting Today reports.

The comprehensive study incorporated data from approximately 5,000 companies over a period of 17 years. The results reveal that when the probability of being audited doubles, companies' effective tax rates rise by an average of roughly two percentage points. This suggests that the increased threat of being targeted by a team of IRS auditors increased businesses' prioritization of the need to observe accounting legislation.

"The idea that shareholders benefit from having their companies audited by the IRS may seem strange to some investors," said study co-author Jeffrey Hoopes of the University of Michigan, as quoted by the news source. "Our research, however, suggests that strict tax enforcement promotes good financial reporting and tends to check managers' proclivities to divert corporate resources for their personal use under the guise of saving taxes."

Ensuring accounting compliance
Accounting consultants are well aware of the importance of complying with legislation, but sometimes struggle to keep up with the frequently changing requirements and guidelines.

"The stakes are high for accounting professionals," noted Darren McKewen, group publisher for Tax & Accounting at Bloomberg BNA, in a statement.

Bloomberg BNA recently launched a new Financial Accounting Resource Center that features the full text of material from a number of regulators. These include the American Institute of CPAs, the Financial Accounting Standards Board, the Governmental Accounting Standards Board, the International Accounting Standards Board, the Public Company Accounting Oversight Board and the Securities and Exchange Commission. The goal of the research platform is to simplify the process of observing ever-changing legislation for professionals.

"Users can have full confidence in a single, reliable solution to access breaking news, practical approaches to problem solving, and real world examples of how other companies have dealt with similar situations," McKewen explained.

Another way to mitigate instances of noncompliance is to integrate accounting software such as Sage DacEasy. By automating business management tasks, companies are less likely to fall victim to human error and improve their chances of passing IRS audits with flying colors.