Auditors' Constraining Effect on Tax Noncompliance at Different Book-Tax Conformity Levels in a Transition Economy

Abstract

This study examines how differential auditor quality can affect clients' tax noncompliance at different book-tax conformity levels. Overall, we find that high-quality auditors are associated with client firms' better tax compliance. Specifically, high-quality auditors are effective in constraining book-tax-conforming noncompliance because of the direct linkage between financial and tax reporting for such noncompliance at both the higher and the lower conformity periods. In contrast, high-quality auditors' constraining effect on book-tax-difference noncompliance is significant only in the lower conformity period when there are more opportunities for reporting irregularities. Furthermore, firms that switch from a low- to a high-quality auditor have better tax compliance after the switch. This study contributes to the literature by providing evidence that high-quality auditors not only can constrain clients' earnings management, but can also constrain tax noncompliance. JEL Classifications: M41; M42.

Book-tax conformity and the demand for auditor-provided tax services: European evidence

“…This argument has been supported in prior studies that use data from Brazil (Nakao and Gray, 2018), China (Chan et al. , 2010, 2013, 2016), Greece (Karampinis and Hevas, 2013) and Israel (Chen and Gavious, 2017), among others. Chan et al.…”

“…Chan et al. , 2010, 2016). In other words, firms are more likely to be tax compliant when BTC is high; therefore, the demand for tax compliance services will decrease.…”

“…Chan et al. , 2010, 2016), thereby reducing their demand for APTS. Finally, from an audit risk perspective, a high level of BTC simplifies tax accruals and narrows book-tax differences (BTD, hereafter), thereby reducing the complexity of auditing financial statements and the demand for APTS.…”

“…From a tax compliance perspective, a higher level of BTC provides managers fewer opportunities to engage in tax noncompliance (e.g. Chan et al, 2010Chan et al, , 2016, thereby reducing their demand for APTS. Finally, from an audit risk perspective, a high level of BTC simplifies tax accruals and narrows book-tax differences (BTD, hereafter), thereby reducing the complexity of auditing financial statements and the demand for APTS.…”

The Quality Effect of Auditing on Tax Compliance: Evidence from Tunisian Context

“…in the same sense Chan et al (2016) examine the measure the quality of differential auditor can affect clients tax non-compliance at different levels of tax compliance. they find that high quality auditors are associated with better tax compliance of corporate clients.…”