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NTU Management Review Vol. 33 No. 2 Aug. 2023

Tax Avoidance and Financial Statement Readability: The Role of
Industry Specialization Auditor

Chia-Hui Chen, Department of Accounting, National Dong Hwa University
Pei-Yi Liu, Department of Accounting, Tunghai University
Sin-Pei Syu, Deloitte & Touche, Taiwan

1. Purpose

Previous research suggests that when management has incentives to conceal their
opportunistic activities, financial statements become less readable. Building on this insight,

this study aims to investigate the relationship between tax avoidance and financial statement
readability. We propose that as the severity of tax avoidance increases, firms have a greater
incentive to reduce their corporate transparency by using complicated and obscure language
in their financial reports, thereby lowering the readability of the reports and potentially
hiding their actual tax-saving strategies. Moreover, this study explores the impact of

industry-specialist auditors on the relationship between a firm’s degree of tax avoidance and
the readability of its financial statements. We expect that auditor industry specialists have a
strong ability to identify opportunistic behaviors and therefore are highly able to recognize

false financial reporting. In other words, such specialists are able to catch those who intend
to hide their tax-avoiding actions by producing obscure financial statements.

2. Hypothesis Development

In general, when firms engage in tax avoidance, they need to weigh the potential
profit against the potential cost and risk yielded by their tax saving even when their tax
avoidance strategy does not violate tax regulations. However, the changeable nature of
tax system greatly increases the tax risk of firms and therefore creates future challenges

for them. If a firm is not able to prove the legitimacy of its tax-sheltering strategies, in
this situation, to prevent the negative outcome of investors or the relevant tax authority
learning of its tax avoidance behavior, the firm in question is highly motivated to hide its
tax-saving strategy.

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