Audit quality and tax-induced earnings management in UK private firms

Brenda van Tendeloo

Working Papers from University of Antwerp, Faculty of Business and Economics

Abstract: This paper examines audit quality and tax-induced earnings management in UK private (i.e. non-listed) firms. Tax incentives are considered to play a large role in private firms’ earnings management behavior. While Big 4 auditors are generally considered to provide a higher audit quality compared to non-Big 4 auditors, we expect that Big 4 auditors in a weak tax alignment country have weak incentives to constrain tax-induced earnings management. Moreover, Big 4 auditors arguably possess a higher expertise in providing tax advice, which is allowed under the EC recommendation on auditor independence. We provide evidence that UK firms engage more in income-decreasing earnings management and have lower relative tax burdens when they have a Big 4 auditor. These results imply that Big 4 auditors seem to help their clients in engaging in tax-induced earnings management.

Pages: 31 pages
Date: 2007-03
New Economics Papers: this item is included in nep-acc
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Persistent link: https://EconPapers.repec.org/RePEc:ant:wpaper:2007004

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