Compliance Costs and Book-Tax Conformity: Evidence from Audit Fees and Audit Quality

50 Pages Posted: 11 Apr 2016

See all articles by Kathleen Bakarich

Kathleen Bakarich

Hofstra University - Department of Accounting, Taxation and Legal Studies in Business

Jon N. Kerr

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: April 8, 2016

Abstract

The decade-long debate on required book-tax conformity has centered on three areas: the information content of earnings, the incentive to engage in earnings management, and the costs of compliance. While the first two have been studied extensively, studies on the effect that conformity may have on compliance costs are limited to estimates of the effect that perfect conformity will have on tax-related compliance costs, a near tautology. This lack of research is perhaps attributable to the relative invariance in conformity within the United States and the relative unavailability of compliance-related data outside the United States. This study overcomes those limitations and fills the gap in the extant research by using an international sample of firms with manually collected audit fee data. We focus on audit fees as it is a more economically significant compliance cost with available data and where the effect of book-tax conformity has tension. Test results show that increased conformity is associated with greater audit fees. This provides evidence that the hypothesized decreases in tax-related compliance costs may be offset by increases in audit fees, implying that the actual reduction in compliance costs may be lower than previously thought. The results of a difference-in-differences test using the adoption of IFRS for consolidated purposes only as an exogenous shock to book-tax divergence shows consistent results and supports a causal prediction. We also find evidence that higher conformity is associated with higher fees paid for auditor-provided tax service, an increased likelihood the firm chooses its auditor to provide tax services, and higher audit quality.

Keywords: book-tax conformity, audit fees, audit quality, APTS, IFRS adoption, international

JEL Classification: M4, M40, M41

Suggested Citation

Bakarich, Kathleen and Kerr, Jon N., Compliance Costs and Book-Tax Conformity: Evidence from Audit Fees and Audit Quality (April 8, 2016). Available at SSRN: https://ssrn.com/abstract=2761107 or http://dx.doi.org/10.2139/ssrn.2761107

Kathleen Bakarich

Hofstra University - Department of Accounting, Taxation and Legal Studies in Business ( email )

United States

Jon N. Kerr (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-2698 (Phone)

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