Auditors' constraining effect on tax noncompliance at different book-tax conformity levels in a transition economy

Abstract

This study examines how differential auditor quality can affect clients' tax noncompliance at different book-tax conformity levels. Overall, we find that high-quality auditors are associated with client firms' better tax compliance. Specifically, high-quality auditors are effective in constraining book-tax-conforming noncompliance because of the direct linkage between financial and tax reporting for such noncompliance at both the higher and the lower conformity periods. In contrast, high-quality auditors' constraining effect on book-tax-difference noncompliance is significant only in the lower conformity period when there are more opportunities for reporting irregularities. Furthermore, firms that switch from a low- to a high-quality auditor have better tax compliance after the switch. This study contributes to the literature by providing evidence that high-quality auditors not only can constrain clients' earnings management, but can also constrain tax noncompliance.