ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

An Empirical Analysis whether Book－Tax Difference Affects Audit Fees

  • Hee-chun Roh Soongsil University
  • Kim Kyung Tae University of Seoul

Asian Tax Journal Vol. 11 No. 3 (2010), pp. 37-67

Abstract

This paper provides an empirical result whether book－tax difference information is used in capital market in Korea. We investigate whether auditors use this information when auditing firms'financial statements. Specially earnings quality such as accruals are used in the empirical model with book－tax difference so additional information of book－tax difference which earnings quality information does not cover in prior literature. The first result of this paper is that the relation between book－tax difference and audit fees is effectively positive. This means that audit fees increase in book－tax difference because auditors interpret high book－tax difference as low earings quality so they make more effort and take more risk. Second, empirical result shows the more positive relation in big audit firms between booktax difference and audit fees than in non－big audit firms. This means that big audit firms response the information of book－tax difference more sensitively than non－big audit firms. Third, the relation between book－tax difference and audit fees in group of higher accruals is less than in group of lower accruals. This is interpreted that additional information of book－tax difference decreases because of similar earnings quality information such as accruals. This paper contributes to the literature that investigates the information reflected in the difference between book and taxable income and whether market participants utilize this information. This paper shows that the information intermediary such as auditor in capital market uses the information of book－tax difference when auditor decides audit fees. Second, this paper presents the additional information of book－tax difference over accruals. Third, this paper analyzes that big audit firms response to book－tax difference more sensitively than non－big audit firms.

Keywords

  • book－tax difference
  • audit fees
  • (discretional) accrual
  • earnings quality
  • audit quality

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Asian Tax Journal

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