The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea

Abstract

The purpose of this paper is to verify external auditors’ behavior toward corporate tax avoidance (hereafter ‘CTA’) via audit efforts. In particular, this study examines the effect of CTA on actual audit hours and abnormal audit hours (i.e., auditor perception of corporate tax avoidance as a risk factor). For the successful CTA, the managers have incentives to render corporate information environments more complex and opaque, and as a result exacerbate information asymmetries. And some real-world cases of CTA suggest that it is closely related to the principal-agent regime. These negative aspects of CTA may increase inherent and control risk of audit risks. Considering the monitoring role of external auditing, the auditors may respond to increased inherent and control risks which are consequent to CTA. And the auditor responses are expected to reflect directly in audit hours. For this empirical question, this paper used 2,588 firm-year observations from Korea stock exchange market in the period 2001-2010. We found that in response to increased audit risk from CTA, auditors increased the number of actual audit hours or devoted more audit hours than normal to achieve a given level of audit risk. This study contributes to the literature and auditing practices by extending the auditing and tax literature on the examination of auditor behavior toward CTA and by implying the firms’ CTA behavior is one of the audit risk factors that affect audit planning, respectively.