Auditor’s Income Taxation and Audit Quality

Marcel Steller and Erich Pummerer

SAGE Open, 2021, vol. 11, issue 3, 21582440211040833

Abstract: We use an analytical research model to analyze the effect of the auditor’s personal income tax on audit effort. We show that the auditor’s level of care crucially depends on the tax rate and amount of loss recognition. Taxes may cause paradoxical effects on the auditor’s effort, audit quality, and marginal audit fee if profits and losses are taxed differently or in case of risk-averse decision-makers. Therefore, compared with the pretax setting, taxes have distortional effects. Thus, common auditing standards (e.g., International Standards on Auditing framework) will imply diverse audit quality and marginal audit fees depending on the respective national tax law. Our results are relevant for standard setters, auditors, and financial statements’ addressees.

Keywords: audit effort; audit quality; financial auditing; taxation; tax distortions (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:sae:sagope:v:11:y:2021:i:3:p:21582440211040833

DOI: 10.1177/21582440211040833

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