Abstract

This study investigates the relationship between firm risk represented by the emphasis of matter paragraph (EOM) of the audit report and corporate tax avoidance. And the study analyzes the impact of financial analysts on the relationship. Through this, the study investigates whether the auditor’s additional explanation in the audit report acts as information representing the tax risk of the company, and whether such results are discriminatory depending on the information environment. As a result of a survey of 13,251 company－year samples from 2011 to 2019, the main empirical analysis results are as follows. First, EOM showed a significant positive (＋) correlation with corporate tax avoidance. This suggests that firm risk proxied by EOM represents the degree of tax avoidance of the firm in relation to the firm’s financial constraints, high information opacity and complexity. Second, EOM related to the company’s financial constraint and information opacity, such as the uncertainty related to going concern, litigation, and events after the reporting period, was highly related to the degree of tax avoidance. Third, the positive relationship between the firm risk and tax avoidance was limited only in samples without financial analysts. This suggests that if a financial analyst exists and plays the role of an information watchdog for a company, it has the effect of mitigating the positive relationship between firm risk and tax avoidance. This study suggests that firm risk in the audit report has informational value, and reveals that the content of the audit report could be a determinant of corporate tax avoidance. And the study suggests that financial analysts could act as tax monitors.

Keywords

• audit report
• emphasis of matter paragraph
• tax avoidance
• analyst
• going concern uncertainty
• firm risk

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