Does Corporate Tax Aggressiveness Influence Audit Pricing?

42 Pages Posted: 22 Dec 2012 Last revised: 12 Jan 2013

See all articles by Michael P. Donohoe

Michael P. Donohoe

University of Illinois at Urbana-Champaign - Department of Accountancy

Warren Robert Knechel

University of Auckland Business School

Date Written: December 10, 2012

Abstract

We evaluate whether, and under what circumstances, corporate tax aggressiveness influences audit pricing. Using a compound measure of two long-run effective tax rates, we find that tax aggressive firms pay higher fees for external audit services after controlling for factors related to earnings management. The fee premium increases with management’s uncertainty about the sustainability of tax positions if audited by tax authorities (i.e., disclosed tax reserves). Further, the provision of auditor-provided tax services may create knowledge spillovers that alleviate the fee premium for tax aggressiveness, unless tax uncertainty is high. Finally, an accounting firm’s industry expertise in auditing is associated with higher audit fees independent of tax aggressiveness, whereas industry expertise in taxation leads to a fee premium only for tax aggressive clients. Overall, the evidence implies firms’ aggressive tax behavior, tax services provider, and auditor-expertise interact to influence the pricing of audit engagements.

Keywords: audit fees, tax aggressiveness, auditor-provided tax services, industry specialization

JEL Classification: H25, H26, M41, M42, M49

Suggested Citation

Donohoe, Michael P. and Knechel, Warren Robert, Does Corporate Tax Aggressiveness Influence Audit Pricing? (December 10, 2012). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2192495

Michael P. Donohoe (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Warren Robert Knechel

University of Auckland Business School ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

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