Audit Effort and Tax Avoidance: Evidence from Audit Firms’ Tax Adjustments in China

We investigate the effect of audit effort on tax avoidance using a unique dataset of audit hours and tax adjustments in China. When audit effort is greater, audit firms' constraining effect on tax avoidance, as measured by upward tax adjustments to pre-audited tax numbers, is greater. This result suggests that financial statement audits can constrain tax avoidance. The positive effect of audit effort on upward tax adjustments is less pronounced in clients with analyst following and when clients are more economically important to audit firms. Further analyses indicate that audit effort's positive effect on upward tax adjustments is weaker for Big 10 audit firm clients or clients are state-owned enterprises.

Keywords: Audit effort; Tax avoidance; Financial statement audit; Tax adjustments

JEL Classification: H26; M42

Suggested Citation: Suggested Citation

Han, Xiaomei and Omer, Thomas C. and Wu, Liansheng and Xing, Qiuhang and Zhou, Jian, Audit Effort and Tax Avoidance: Evidence from Audit Firms’ Tax Adjustments in China (November 9, 2022). Available at SSRN: https://ssrn.com/abstract=4271860 or http://dx.doi.org/10.2139/ssrn.4271860