The Role of Auditors in Corporate Tax Avoidance
Asian Tax Journal Vol. 17 No. 4 (2016), pp. 63-91
Abstract
This study investigates the role of external auditors in corporate tax avoidance (hereafter ‘CTA’). Specifically, this paper tries to examine the impacts of external auditors’ efforts on the CTA. Intuitively, the share－holders might enjoy their additional wealth through CTA by saving tax payments to the authorities. But the CTA would exacerbate agency conflicts and involve information asymmetries which are designed by managers. (Chen and Chu 2005；Hanlon and Heitzman 2010；Kim et al. 2011). With respect to the audit risk, these negative attributes of CTA might increase inherent risk and control risk. So it is expected that the external auditors would increase their efforts to decrease clients’ CTA. But the tough audit market situation forced the external auditors to make a profit and as a result the independent auditors might play an important role in clients’ CTA. In other words, the auditors would make an efforts to increase clients’ CTA for maintaining a friendly relationship. So it is expected that the results of audit efforts would be different depending on whether negative points of CTA or economic perspectives of auditors. Therefore this paper tries to solve the ambiguous question with Korean data. For the empirical test, 4 kinds of CTA measurements (i.e., GAAP ETR, CASH ETR, DD_BTD, BTD) are adopted to measure clients’ level of CTA and the actual audit hours and estimated abnormal audit hours are used to proxy the audit efforts. With 2,898 KOSPI firm－year observations from 2001 to 2010, we found that the level of clients’ CTA increased when the external auditors’ efforts increasing. And additional analysis supported our main results. The results suggest that in the CTA regime, the economic incentives of external auditor are as important as that of monitoring role.
Keywords
- Corporate tax avoidance
- audit hours
- abnormal audit hours
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