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

4. Findings

The empirical results indicate that the higher the degree of tax avoidance, the lower
the readability of firms’ financial statements. However, if a firm retains an industry

specialist auditor, the damage caused by tax avoidance to financial statement readability
is mitigated. This research also adopts multiple tests to verify the robustness of the
results, including various measures for industry-specialist auditors, a single index to
measure financial statement readability, the measure of book-tax difference to determine

the degree of tax avoidance, tests for the effects of specific-year changes to tax laws, and
tests to determine differences in tax avoidance activities between loss firms and profitable
firms. In addition, this study eliminates all observations with zero effective tax rates and
incorporates a corporate governance proxy to observe the incremental effect of auditor

industry specialization, a variable for the endogeneity of auditor industry specialization,
and a test for the individual level of each industry specialist auditor. The results of all these
tests support the research hypotheses.

5. Limitations and Future Research

This study has several limitations. First, during the data collection process, we find
that the form of financial reports is not consistent for each firm; some of these reports are

scanned digital images. Besides, many firms adopt protection measures using read-only
files and garbled text, which also lead to data loss or bias. Second, the characteristics of
readers affect their comprehension of financial reports; thus, the readability model adopted
in this study may not accurately record the perspective of each reader; this problem crops

up also in studies conducted in other countries. Third, because data related to taxation
are difficult to obtain, although we follow previous studies by measuring the degree of
corporate tax avoidance, inevitable and biased estimates still exist.
Furthermore, until now, no study has developed a readability model based on
financial statements written in Mandarin Chinese. Thus, we suggest that future studies

explore this area to establish an appropriate readability model. Next, prior research
suggests that standardized-format reports tend to use boilerplate language, providing
limited entity-specific information. Therefore, we propose that there may be a relationship

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