The Determinants and Consequences of Tax Audits: Some Evidence from China

48 Pages Posted: 27 Mar 2015

See all articles by Clive S. Lennox

Clive S. Lennox

University of Southern California

Wanfu Li

Nanjing University of Finance & Economics

Jeffrey Pittman

Memorial University ; Virginia Tech

Zi-Tian Wang

Southwestern University of Finance and Economics

Date Written: March 26, 2015

Abstract

Using proprietary data obtained from a local tax office in China, we examine the determinants of corporate tax audits and the consequences of those audits. We find that the tax authority is more likely to select a firm for an audit when the firm has a lower effective tax rate, a higher book-tax difference, and more income-decreasing discretionary accruals. In addition, the tax office imposes larger tax payments on the audited firms that have lower effective tax rates, higher book-tax differences, and more income-decreasing discretionary accruals. Applying a difference-in-difference and matching research design, we find that after firms have been audited they significantly increase their effective tax rates, reduce their book-tax differences, and reduce their income-decreasing discretionary accruals. Our study provides important insights on the determinants of the tax authority’s decision on whether to initiate an audit and the impact of tax audits on both tax reporting and financial reporting.

Keywords: tax audit, deterrent effect, tax aggressiveness, financial reporting quality

JEL Classification: H26, L51, M41

Suggested Citation

Lennox, Clive and Li, Wanfu and Pittman, Jeffrey A. and Wang, Zi-Tian, The Determinants and Consequences of Tax Audits: Some Evidence from China (March 26, 2015). Available at SSRN: https://ssrn.com/abstract=2585466 or http://dx.doi.org/10.2139/ssrn.2585466

Clive Lennox

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

Wanfu Li

Nanjing University of Finance & Economics ( email )

Nanjing, 350000
China

Jeffrey A. Pittman (Contact Author)

Memorial University ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Virginia Tech ( email )

United States

Zi-Tian Wang

Southwestern University of Finance and Economics ( email )

Chengdu, Sichuan
China

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