The role of auditors and banks in the tax aggressiveness of private firms

Abstract

This study examines the role of auditors and monitoring banks in the tax aggressiveness of private firms. We use a unique data set of private small and medium‐sized entities (SMEs) in Finland where book–tax alignment is high and the auditing of private firms (exceeding a low threshold) is mandatory. We add to the existing literature by investigating the auditing of small private firms and using more detailed measures for bank monitoring. Our results suggest a positive association between tax aggressiveness and audit quality, implying that auditors play a greater role in providing tax‐related planning services than restraining tax aggressiveness. Furthermore, bank monitoring is positively associated with tax aggressiveness. This is consistent with lending banks being more interested in cash savings than reducing tax aggressiveness. Finally, we find no evidence of a joint effect of auditing and bank relationships. These results will interest the owners and managers of private companies, tax authorities and banks and the accounting and auditing profession.