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臺大管理論叢
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For example, before the IRS (Internal Revenue Service) defined malicious tax evasion as
illegal, Ernst & Young provided this tax service to 132 clients, its competitive tax shelter
being contingent deferred swap. The main idea behind this tax-avoidance strategy is shifting
operating income to capital gains which has a lower tax ratio. In August 2005, KPMG
publicly acknowledged that they had peddled tax shelters to their clients and agreed to pay a
fine of $456 million.
It seems that external audit firms forget their auditing roles when providing tax services
to their clients. However, from the perspective of risk control, external auditors should
constrain clients’ tax avoidance when taking on auditor duties (Maydew and Shackelford,
2007). Overall, the question about auditor’s role in clients’ tax avoidance activity is still
open. This paper investigates the association between auditor industry expertise and clients’
tax avoidance and whether this association is affected by auditor independence. Although a
number of studies have investigated the influence of auditor industry expertise on audit
quality or audit pricing (e.g., Gul, Fung, and Jaggi, 2009; Reichelt and Wang, 2010; Francis,
Reichelt, and Wang, 2005), evidence on the association between auditor industry expertise
and tax avoidance is scarce. It is not clear whether auditor industry expertise is associated
with greater tax avoidance, because auditor industry expertise influences tax avoidance from
both tax and audit perspectives. From a tax perspective, industry experts are associated with
greater tax avoidance because experts have a better understanding of industry-specific
opportunities for avoiding tax, and may use their expertise to develop tax strategies that
benefit clients. From an audit perspective, due to the complexities of tax laws and risk
control principles, industry experts are more likely to find and deter tax avoidance activity by
requiring adjustments that limit the associated financial statement benefits.
2
The purpose of this paper is to examine the influence of auditor industry expertise on
tax avoidance. Considering the intense competition in the Chinese audit market, this study
further investigates whether the association between auditor expertise and tax avoidance is
affected by auditor independence. Using 2008-2012 A-share listed companies in Shanghai
and Shenzhen Stock Exchange as research sample, this paper demonstrates that an auditor
who is an industry expert is more likely to help its client engage in tax avoidance activity,
2 For example, some tax avoidance activities (such as creating a permanent difference to reduce tax
expense) will attract auditor’s attention, especially when the auditor is an industry expert. If the auditor
does not believe the tax strategy will withstand the scrutiny of the relevant tax authorities, he/she may
require the client to adjust the accounting process and therefore reduce tax avoidance.