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    Relation between Auditor Quality and Tax Aggressiveness:...
    research summary posted January 17, 2017 by Jennifer M Mueller-Phillips, tagged 11.0 Audit Quality and Quality Control 
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    Title:
    Relation between Auditor Quality and Tax Aggressiveness: Implications of Cross-Country Institutional Differences
    Practical Implications:

    This study adds to the audit literature on the effects of Big N auditors. The authors document that Big N auditors are associated with a lower likelihood of tax aggressiveness across countries, and this result holds after controlling for the various components of accruals that proxy for earnings management. Furthermore, the authors contribute to the literature that investigates cross-country determinants of tax aggressiveness by showing that auditor quality is also associated with the likelihood of tax aggressiveness.  

    Citation:

    Kanagaretnam, K., J. Lee, C. Y. Lim, and G. J. Lobo. 2016. Relation between Auditor Quality and Tax Aggressiveness: Implications of Cross-Country Institutional Differences. Auditing: A Journal of Practice and Theory 35 (4): 105 – 135.

    Keywords:
    auditor quality, corporate tax aggressiveness, investor protection, litigation risk, audit environment, and capital market pressure.
    Purpose of the Study:

     Previous research has established that home-country tax system characteristics reduce corporate tax avoidance. This study extends that research by examining whether auditor quality is also related to tax aggressiveness across countries. Additionally, the authors consider whether differences in country-level institutional characteristics systematically affect the relation between auditor quality and corporate tax aggressiveness. Specifically, the authors empirically investigate the ambiguous relation between Big N auditors and tax aggressiveness. 

    Design/Method/ Approach:

    The authors examine the relation between auditor quality and tax aggressiveness using a large non-U.S. sample of firm-year observations across a number of different countries, spanning the years 1995 to 2007. 

    Findings:
    • The authors find that Big N auditors are associates with a lower likelihood of corporate tax aggressiveness.
    • The authors find that the negative association between Big N auditors and the likelihood of tax aggressiveness is more pronounced when investor protection is stronger, when the audit environment is better, when auditors are exposed to higher litigation risk, and when capital market pressure in firms is stronger.
    • The authors find that firms audited by industry-specialist auditors exhibit a lower likelihood of tax aggressiveness and that Big N auditors are associated with a lower likelihood of tax aggressiveness in the post-2002 period after the demise of Arthur Andersen. 
    Category:
    Audit Quality & Quality Control