The effect of simplified cash accounting on tax and financial accounting compliance costs

In many countries simplified methods for tax accounting are considered as important step to reduce tax complexity and thereby the compliance cost burden of particularly small businesses. Using two surveys among (1) small businesses and (2) tax advisors, this study examines the effect of cash-based versus accrual accounting on tax and financial accounting compliance cost. While the results of the first study are ambiguous, the second study shows that cash-based accounting is associated with a decrease of external compliance costs of small firms by about 30%. This relative benefit decreases slightly with the size of the business. However, we do not find that the usage of cash-based accounting reduces the demand for professional tax advice. © 2019, Springer-Verlag GmbH Germany, part of Springer Nature.