Audit fees, tax complexity and tax compliance premium

Linda H. Chen, George J. Jiang, Weiwei Wang and Joseph H. Zhang

Managerial Auditing Journal, 2026, vol. 41, issue 7, 1441-1473

Abstract: PurposeThis study aims to investigate how tax haven complexity and tax fraud risk jointly affect audit and auditor-provided tax service (APTS) fees.Design/methodology/approachUsing a sample of US publicly listed firms from 2003 to 2022, the authors construct text-based measures of active tax haven engagement from 10-K disclosures and proxy for tax fraud risk using established tax shelter likelihood scores. The authors estimate audit and APTS fee models that jointly incorporate tax complexity, tax fraud risk and their interaction effects.FindingsThe authors find that tax haven complexity and tax fraud risk each have positive incremental effects on audit and APTS fees. Importantly, auditors do not price these risks additively. Instead, they charge additional fees when tax haven engagement coincides with elevated fraud risk. This interaction effect is robust across alternative tax haven measures. Additional analyses reveal asymmetric fee adjustments, with increases in tax haven activity raising fees but subsequent reductions failing to reverse them. When auditors expand their role to include tax services, tax haven engagement is associated with a further shift in the fee mix toward tax-related services.Originality/valueThe authors provide new evidence on how auditors jointly assess tax complexity and fraud risk when pricing audit and tax services. By distinguishing legitimate tax planning complexity from fraud-related risk, this study offers a more nuanced understanding of audit pricing behavior.

Keywords: Audit fees; Tax service fees; Tax haven; Audit risk (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:majpps:maj-08-2025-4951

DOI: 10.1108/MAJ-08-2025-4951

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