Wei, C. Y., and Chen, L. 2016. Auditor Industry Expertise and Clients’ Tax Avoidance: Evidence from China. NTU Management Review, 26 (2): 1-36. https://doi.org/10.6226/NTUMR.2016.SEP.0126
Chun-Yan Wei, Ph.D. Student, Department of Accounting, Guanghua School of Management, Peking University
Lei Chen, Associate Professor, Department of Accounting, Guanghua School of Management, Peking University
Abstract
Using 2008-2012 A-share listed companies on the Shanghai and Shenzhen Stock Exchange, this paper examines the influence of auditor industry expertise on clients’ tax avoidance. From an audit perspective, industry expertise may constrain tax avoidance because industry experts are more likely to find and deter tax avoidance activity based on risk control principle. From a tax perspective, industry expertise may encourage tax avoidance because industry experts can use their expertise to develop tax strategies that benefit clients. We find that auditor industry expertise is associated with a higher level of tax avoidance, especially when auditor independence is lower. This result indicates that in the case of poor auditor independence, auditor industry expertise may encourage clients’ tax avoidance instead of constraining it. Our study has implications for policy maker by reminding the importance of improving auditor independence while encouraging auditors to develop industry expertise.
Keywords
auditor industry expertisetax avoidancefee dependenceauditor tenure