high on any one issue was small which means that single high risk issues are a

High on any one issue was small which means that

This preview shows page 233 - 235 out of 311 pages.

high on any one issue was small, which means that single high risk issues are a narrow basis for selecting cases for audit. Could the results be made more useful for auditors by aggregating some of the issues that rarely occur as high risks? Consider ‘capital loss creation via asset sales’. When the risk under this issue is rated high, the number of other high risk issues (that is, the number rated over 7) averages 16 (compared to a mean of 0.86 when ‘capital loss creation via asset sales’ is not high). But there were only four HWIs with a rating over 7 on ‘capital loss creation via asset sales’, so the level of risk on this particular issue is sufficiently rare that it will be of limited value in audit practice. Consequently, we created an aggregated issue of wider scope. This issue was ‘capital loss creation’ instead of the narrower (but more powerfully predictive) issue ‘capital loss creation via asset sales’. The broader issue was a composite of nine different kinds of capital loss creation. Hence, if there was a rating of more than 7 for any single capital loss creation issue, the red flag was put up – whether the loss was created by asset sales, property development, debt forgiveness, bad debts, takeover/acquisition/merger, cost base manipulation, artificial loss duplication, related party transactions or some other explanation, or even if the capital loss creation was unexplained. Note, however, that it is not so broad as to include revenue loss creation; it is a capital loss creation variable only. The second recurrently predictive red flag that we broadened was trust distributions. While ‘trust distributions – capital distributions in cash (to the HWI)’ was the most predictive red flag here, twenty different kinds of distributions from
Image of page 233
224 Taxing Democracy trusts were combined in the composite red flag. This included distributions in cash and non-cash to the HWIs themselves, to HWI family members, to group entities, to charitable trusts, to a loss entity, and from probate/deceased estates, related entities, and so on. There were from as well as to distributions. Finally we broadened ‘other’ to include all sixteen ‘other’ issues including ‘other significant deduction issues’. Table 10.8 shows the summary results from a logistic regression predicting high overall risk and an ordinary least squares regression predicting the total number of high risk issues (i.e., with a rating over 7) with our set of red flags which now include the broadened issues. What we are doing in Table 10.8 is a re- run of the analyses in Tables 10.3 and 10.5, but with ‘other’, ‘capital loss creation’ and ‘group trust distributions’ as broader red flags with many more high risk cases. Table 10.8 Summary results of the final models predicting risk using original and aggregated red flags Final red flags Other categories (aggregated flag) Capital loss creation (aggregated flag) Group trust distributions (aggregated flag) Use of an offshore entity in an unlisted country (original flag) Utilization of revenue losses via intra group transfers (original flag)
Image of page 234
Image of page 235

You've reached the end of your free preview.

Want to read all 311 pages?

  • Fall '16
  • tax authority, Australian Taxation Office, Tax Office, Compliance Model

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes