Abstract

As worldwide pushback against corporate tax avoidance increases, management who engage in tax avoidance are incentivized to obfuscate firms’ financial information to reduce the likelihood of being challenged by tax authorities and investors. Previous research has indicated that when management has an incentive to conceal their opportunistic activities, the firm’s financial statements become less readable. Building on this indication, this study aims at investigating whether firms with tax avoidance activities issue less readable financial statements. It also determines whether high-quality audit can moderate the effects of tax avoidance on financial statement readability. Using the data of Taiwanese listed companies from 2013 to 2018 as the sample, empirical results show that firms with high levels of tax avoidance issue more complex and less readable financial statements. Furthermore, we confirm that the negative association between financial statement readability and the level of tax avoidance can be mitigated if firms are audited by industry specialists. These findings suggest that firms that engage in tax avoidance are more prone to utilizing complex financial reporting strategies that are challenging to comprehend. This complexity may serve as a barrier for outsiders attempting to identify their tax avoidance practices. However, high-quality audit is essential for effective corporate governance, while protecting the users of financial reports against the opportunistic actions of management.  

Keywords

tax avoidancefinancial statement readabilityindustry specialization auditor