Does Client Importance Matter to Book-Tax Differences?

Yi-Hsing Liao, Pih-Shuw Chen, Teng-Sheng Sang and Chia-Hsuan Tseng

Journal of Applied Finance & Banking, 2020, vol. 10, issue 5, 17

Abstract: This paper examines whether audit client importance affects book-tax differences, a measure that can potentially reflect discretion in audit client’s action in financial and tax reporting choices. We use Taiwan data as client importance can be measured not only at the firm level but the individual partner level as well as the audit team level. The multiple regression analyses show that client importance is positively correlated with the magnitude of book-tax difference under each of our client importance measures, suggesting that auditors compromise reporting quality by allowing economically important clients to choose relatively more opportunistically reporting practices. As a result, book-tax differences are larger for these clients. JEL classification numbers: M41, M42 Keywords: Audit client importance, Audit quality, Financial reporting quality, Book-tax differences.

Date: 2020
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