Does an Increase in the Discrepancy between Actual and Standard Audit Hours Constrain Tax Avoidance?*
Asian Tax Journal Vol. 25 No. 3 (2024), pp. 9-59
Abstract
This paper aims to revisit the question of whether an increase in the discrepancy between actual and standard audit hours constrains tax avoidance, as asserted by Lee et al. (2023). Unlike Lee et al. (2023) which relies on estimated standard audit hours (“SAH”), we use standard audit hours disclosed in business reports for our analyses. Based on data from KOSPI and KOSDAQ listed firms during the period between 2018 and 2022, we first find no significant evidence on the association between tax avoidance and the actual－standard audit hours discrepancy (ASD), compliance or exceedanceo of the SAH. Second, we observe a significantly negative interaction effect between ASD and Big 4 audit firms (BIG4) on tax avoidance, while we find a positive interaction effect between ASD and KOSDAQ firms (MKT) on tax avoidance. The former is consistent with Lee et al. (2023), the latter, on the other hand, is inconsistent with prior research. Third, when we divide the sample period into periods before and after the implementation of the Standard Audit Hours Policy (SAHP), we find no significant association between ASD and tax avoidance in either the pre－SAHP or post－SAHP periods. Lastly, when we exclude firms that fall under the periodic auditor designation system and those requiring audits mandated by the internal accounting control system, we discover a positive significant association between standard audit hours compliance and tax avoidance, which is the conflicting findings of prior research. In summary, our findings do not provide significant evidence supporting the argument by Lee et al. (2023) that the increasing discrepancy between actual and standard audit hours constrains tax avoidance when we use standard audit hour data disclosed in business reports. This study contributes to audit quality as well as tax avoidance related literature by providing fresh insights into the relationship between audit effort and tax avoidance.
Keywords
- actual－standard audit hours discrepancy
- audit effort
- tax avoidance
- Big 4 auditors
- market type
- standard audit hours policy
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