The Study on the Relationship Between Auditor Expertise and Book-Tax Differences Before and After the Passage of the Mandatory Auditor Rotation
Author | : Laney Tsai |
Publisher | : |
Total Pages | : |
Release | : 2016 |
Genre | : |
ISBN | : |
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The study examines the impact of mandatory auditor rotation on auditor expertise and book-tax differences using data from Taiwan, where the names of signing audit partners and audit firm are required to disclose audited financial statements. The rotation of auditor every five years became mandatory in Taiwan after 2004. The regime changes in Taiwan provide a unique setting to examine how the mandatory auditor rotation regime affects the auditor industry expertise's attitude toward their clients' tax avoidance.We divided our sample into two groups to compare the relationship between auditor expertise and book-tax differences in a regime without rotation (pre-mandatory rotation period: 1998-2003) and one with rotation (mandatory rotation period: 2004-2008). We find that auditor industry expertise has professional tax knowledge, and thus plays a critical role in their clients' tax avoidance strategies during pre-mandatory rotation period. However, we also find that the companies audited by auditor industry expertise are less likely to engage tax avoidance activities after implementing auditor mandatory rotation regime. Our results suggest that a limit on the length of the auditor-client relationship result in greater incentives for auditors to maintain independence or avoid excessive familiarity to each other, which effectively restrains firms' opportunistic tax avoidance activities. Overall, our results provide empirical support for the arguments put forward by advocates of mandatory rotation from tax avoidance perspective.