Articlegreen2012

Audit Fees and Book-Tax Differences

Michelle Hanlon · Gopal V. Krishnan · Lillian F. Mills

163 citations0/0 files storedJournal of the American Taxation Association

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Auditing, Earnings Management, Governance Corporate Taxation and Avoidance Corporate Governance and Financial Management

Abstract

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 study 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.

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References

2010A review of tax research 2008What Matters in Corporate Governance?1980The Pricing of Audit Services: Theory and Evidence 2005Corporate tax avoidance and high-powered incentives 2008Long-Run Corporate Tax Avoidance 2002The Relation between Auditors' Fees for Nonaudit Services and Earnings Management 2002Earnings Surprises, Growth Expectations, and Stock Returns or Don't Let an Earnings Torpedo Sink Your Portfolio 2003Do Nonaudit Services Compromise Auditor Independence? Further Evidence

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