Statutory Auditors and Tax Compliance: Evidence from a Quasi-Natural Experiment

Charoula Daskalaki () and Nikolaos Karampinis
Additional contact information
Charoula Daskalaki: Department of Economics, University of Crete, Gallos University Campus, Greece
Nikolaos Karampinis: Department of Accounting and Finance, Accounting Information Systems Laboratory, Athens University of Economics and Business, Greece

The International Journal of Accounting (TIJA), 2023, vol. 58, issue 02, 1-38

Abstract: The research problemWe evaluated the effectiveness of statutory auditors as a tax inspection mechanism and examine a regulation change that occurred in Greece. In 2011, the Greek State passed a directive requiring that statutory auditors audit and certify the tax compliance of medium and large firms, and issue a Tax Compliance Report (TCR).MotivationThe evidence on the auditors’ effect on tax avoidance is quite limited. Our research setting constitutes a unique quasi-natural experiment to evaluate auditors’ effectiveness and firms’ tax avoidance behavior under a new tax compliance regime.The test hypothesisWe tested the following hypothesis: Tax avoidance was significantly reduced in the post-TCR period for firms subject to TCR.Target populationOur target population consisted of firms that are subject to audits from statutory auditors for tax compliance purposes.Adopted methodologyWe employed a difference-in-differences design with Greek firms subject to TCR as the treated group and the rest of the Greek firms as the control group. We examined potential differences from the TCR enforcement for the two groups.AnalysisOur main analysis presents results for the treated and the control groups regarding their non-conforming and conforming tax avoidance behavior in the pre- and the post-TCR period. Non-conforming refers to activities that reduce taxable income but leave book income unaffected, whereas conforming tax avoidance refers to activities that reduce both taxable income and book income. Additional analysis evaluates the effect of Big 4 audit firms, increased audit effort, and assignment of the TCR to the financial statements’ auditor.FindingsOur empirical results suggest that non-conforming tax avoidance for treated firms (i.e., firms subject to tax audits) significantly decreased in the post-TCR period compared with that of the control sample (i.e., firms not subject to tax audits). Conversely, conforming tax avoidance increased. This evidence suggests that treated firms switched from non-conforming to conforming tax avoidance activities. Our results hold irrespective of the size of the audit firm that performed the TCR program, but we find that increased audit effort to accomplish the TCR program and the assignment of the TCR to the auditor who also audited the financial statements had an incremental impact on the reduction of non-conforming tax avoidance.

Keywords: Tax avoidance; statutory auditors; tax enforcement (search for similar items in EconPapers)
JEL-codes: G3 H25 H26 K34 M41 (search for similar items in EconPapers)
Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S1094406023500051
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wsi:tijaxx:v:58:y:2023:i:02:n:s1094406023500051

Ordering information: This journal article can be ordered from

DOI: 10.1142/S1094406023500051

Access Statistics for this article

The International Journal of Accounting (TIJA) is currently edited by A. Rashad Abdel-khalik

More articles in The International Journal of Accounting (TIJA) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().