Political connections, joint audit and tax avoidance: evidence from Islamic banking industry

Abstract

Purpose The purpose of this paper is to examine the association between political connections and tax avoidance in Islamic banking industry and to test whether joint audit affects this relationship. Design/methodology/approach Tax avoidance is measured using effective tax rate while political connections represent an indicator variable that equals 1 if a bank has at least one politically connected director on the board of directors and zero otherwise. Findings This study documents that political connections are negatively associated with effective tax rate, while joint audit is positively related to the same variable. We also find that the negative association between political connections and effective tax rate becomes insignificant for joint-audited banks, while it remains negative and significant for banks audited by one auditors. Originality/value The findings of this study have policy implications for banking industry because joint audit reduces the adverse effect of political connections on tax avoidance.