Book-Tax Difference Consistency and Audit Pricing

• In Event: Doctoral Student-Faculty Interchange: Audit, Tax, and Diversity

Abstract

Considerable literature has examined the phenomenon of book-tax differences (hereafter, BTD), the difference between book and taxable incomes. Recent papers inform us that firm-level consistency in BTD, defined as the inverse of the time-series variation in BTD around predicted values, is a noteworthy feature which reflects variation in a firm’s policies towards earnings management and tax planning. We hypothesize that BTD consistency affects audit pricing because of its influence on audit risks. Empirically, we find a negative association between consistency in BTD and audit fees after controlling for the magnitude of BTD and other firm characteristics. As further support and as validation of our main results, the relation between consistency in BTD and audit fees is stronger for firms with greater information asymmetry and higher tax planning incentives. These findings suggest that greater BTD consistency signals lower risk to auditors and consequently, results in lower audit fees.

Authors

• Heeick Choi, University of Massachusetts Lowell

• Rui Hu, University of Massachusetts-Lowell

• Khondkar E Karim, University of Massachusetts-Lowell

• Ashok Robin, Rochester Institute of Technology