The Financial Burden of Regulation – Exploring Macroeconomic and Institutional Ties with the Demand for Accounting Services

Abstract

We empirically analyze the determinants of regulatory costs associated with accounting, audit and tax rules in the European Union. Regulatory costs include transfer payments from losers to beneficiaries of such legislation. Hence, building upon a novel dataset, we estimate regulatory costs as the actual revenues earned from accounting, audit and tax advisory services. Potential determinants include governance mechanisms, financing sources as well as country-specific tax and audit requirements. Our results indicate that regulatory cost strongly depend on the economy’s size. However, their share of GDP decreases in larger economies. We find further evidence that large companies bear the majority of regulatory costs. Strong governance and enforcement institutions cannot fully compensate this effect. Competitive income tax systems do not lower regulatory costs, indicating tax advisory as the “price tag” of maximizing tax benefits.

Keywords: Corporate Governance; Regulatory Costs, Compliance Costs, Audit, Taxation, Legal Enforcement, European Union

JEL Classification: G18, G30, K22, K34, L51, M41, M42