Component Auditor and Corporate Tax Aggressiveness

Posted: 9 Mar 2021

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Bing Luo

San Francisco State University

Desmond Tsang

McGill University - Desautels Faculty of Management

Jing Zhang

university of Colorado Denver

Date Written: January 20, 2021

Abstract

The PCAOB has expressed continuous concerns on the use of component auditors by U.S. multinational corporations. Prior studies mainly focus on the potential negative impact of component auditors on audit quality, but the literature has thus far overlooked the benefits brought about by their superior local knowledge. This study utilizes the new Form AP filings on disclosure of component auditor involvement in group audits to investigate whether and how component auditors contribute their local tax expertise to the lead auditors. Specifically, our analysis focuses on the relations between component auditor use and corporate tax aggressiveness. Using a sample of companies with auditor-provided tax service, we find that component auditor use is negatively related to corporate tax aggressiveness. We further find that this negative relation is more pronounced when the component and lead auditors share the same network, when the corporate income tax systems in the component auditors’ jurisdictions are more complex, and when the component auditors exhibit higher competence. Lastly, we also find the association between component auditor use and corporate tax aggressiveness varies significantly with the institutional environment facing component auditors. Overall, our study demonstrates the positive effect of tax knowledge spillover from the component to the lead auditors when auditors jointly provide both audit and tax services. We provide novel evidence in support of the bright side of component auditor use; component auditors aid the lead auditors in deterring their clients’ aggressive tax planning.

Suggested Citation

Kim, Jeong-Bon and Luo, Bing and Tsang, Desmond and Zhang, Jing, Component Auditor and Corporate Tax Aggressiveness (January 20, 2021). Available at SSRN: https://ssrn.com/abstract=3770299

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Bing Luo

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, 94132
United States

Desmond Tsang

McGill University - Desautels Faculty of Management ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

Jing Zhang (Contact Author)

university of Colorado Denver ( email )

1475 Lawrence St
Denver, CO
Denver, CO 80202
United States

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