Statutory Auditors and Tax Compliance: Evidence from a Quasi-Natural Experiment

Abstract

Using a unique, quasi-natural experiment, we evaluate the recruitment of statutory external auditors for tax inspection purposes. In 2011, statutory external auditors were assigned to certify the tax compliance of firms subject to a regulatory change enacted by a state directive in Greece. Under this new directive, besides the audit report for financial statements, auditors were responsible to prepare the “Tax Compliance Report” (TCR) to assure that the audited firm complies with official tax rules. We investigate whether this proactive measure had any effect on firms’ tax avoidance behavior. Using a difference-in-differences research design, our empirical results suggest that non-conforming tax avoidance for treated firms (i.e. firms subject to tax audits) significantly decreased in the post-TCR period compared to that of the control sample (i.e. firms not subject to tax audits). Conversely, conforming tax avoidance increased. This evidence suggests that treated firms switched from non-conforming to conforming tax avoidance activities.

Keywords: Tax avoidance; Statutory auditors; Tax enforcement

JEL Classification: G3; H25; H26; K34; M41