What Turns the Taxman On? Audit Opinion and Tax Return Adjustments in a Voluntary Audit Environment

• In Event: Continental Breakfast & Research and Education Forum
  In Paper Session: Table 5: Tax and/or financial-reporting-related

Abstract

This paper addresses the following research question: What are the factors that influence adjustments by the tax authority to the taxable income reported in a voluntary audit environment? Using a large proprietary data set obtained from the Finnish Tax Administration, we examine the factors that trigger adjustments by the tax authority to the taxable income reported by around 25,000 small private companies in their tax returns for the fiscal year 2011. After controlling for tax aggressiveness and other relevant factors, we find that having a voluntary audit with an unqualified audit opinion decreases the likelihood of the tax authority not accepting taxable income as reported. At the same time, it moderates the otherwise significant positive effect of tax aggressiveness on the likelihood of tax authority making adjustments. However, we do not find statistically significant support for our hypothesis that having a voluntary audit with a qualified audit opinion increases the likelihood of tax authority not accepting taxable income as reported. The main results are insensitive to whether the full sample is used or a balanced sample based on propensity score pairing of tax-adjusted companies with their non-adjusted counterparts. This study contributes to the emerging literature on the tax authority’s role in monitoring financial reporting quality. It is the first to document the effect of voluntary audit on tax return adjustments and whether the tax authority’s response is associated with a qualified or unqualified audit opinion.

Authors

• Hannu Ojala, Aalto University

• Jill Collis, Brunel University London

• Kinnunen Juha, Aalto University

• Lasse Niemi, Aalto University

• Pontus Troberg, Hanken School of Economics