Publication Type

Working Paper

Version

publishedVersion

Publication Date

11-2019

Abstract

We examine the impact of clients’ tax enforcement on financial statement auditors. In a regression discontinuity design, we exploit the firm-registration-date-based application of a new rule that assigns firms to two different tax enforcement regimes. Our analysis implies that auditors exert less effort–evident in lower audit fees and shorter audit report lags–when their clients are monitored by the more stringent tax authority. In results supporting that audit quality improves in this situation despite the fall in auditor effort, we report that clients subject to tougher tax enforcement exhibit a lower incidence of accounting restatements and tax-related restatements. Additionally, we find no evidence of impaired auditor independence evident in the informativeness of auditors’ modified opinions. Finally, we document that clients undergoing stricter tax enforcement are assigned less-experienced partners, suggesting that tax enforcement enables audit firms to optimize client-partner matching. Collectively, our research suggests that tax authority oversight engenders a positive externality by improving external audit efficiency.

Keywords

tax enforcement, audit fees, audit effort, auditor-client matching

Discipline

Accounting | Taxation

Research Areas

Corporate Reporting and Disclosure

First Page

1

Last Page

70

Publisher

SSRN

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