Audit Fees and Book-Tax Differences

Abstract

We investigate whether book-tax differences are associated with higher audit fees, a proxy for auditor risk assessments and auditor effort. Our evidence suggests that there is a significantly positive relation. Further, this association is larger for firms that appear to have managed earnings (i.e., have high accruals) relative to those that are tax avoiders (i.e., have low cash effective tax rates). Our evidence is consistent with large book-tax differences representing an observable proxy for earnings management that is associated with auditor decisions. Our paper contributes to capital market research that examines audit fees as well as other research that examines the usefulness of book-tax differences for market participants.

Keywords: audit fees, book-tax differences, earnings quality

JEL Classification: M41