A Potential Benefit of Increasing Book–Tax Conformity: Evidence from the Reduction in Audit Fees

Nan-Ting Kuo and Cheng Few Lee

Chapter 3 in Handbook of Financial Econometrics, Mathematics, Statistics, and Machine Learning:(In 4 Volumes), 2020, pp 151-197 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Our study explores a possible benefit of conforming book income to taxable income. We expect that increased book–tax conformity can reduce audit fees by simplifying tax accruals and increasing tax authorities’ monitoring, which reduce audit workload and audit risk, respectively. Consistent with our expectations, we find that a higher country level of required book–tax conformity leads to lower audit fees. Moreover, firm-level book–tax differences are positively associated with audit fees. We also find that the negative association between country level of required book–tax conformity and audit fees is mitigated among firms with larger book–tax differences. Our findings are robust to including country-level legal investor protection or other extra-legal institutions. Overall, our results suggest that one benefit of increasing book–tax conformity is the reduction in audit fees. In the appendix we extend our main empirical test by including firm fixed effects and clustering standard errors of regression coefficients, and we find that these do not change our conclusions.

Keywords: Financial Econometrics; Financial Mathematics; Financial Statistics; Financial Technology; Machine Learning; Covariance Regression; Cluster Effect; Option Bound; Dynamic Capital Budgeting; Big Data (search for similar items in EconPapers)
JEL-codes: C01 C1 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Journal Article: A potential benefit of increasing book–tax conformity: evidence from the reduction in audit fees (2016)
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