AAA Spark Meeting of Regions

Collusion or Supervision? Between Accountants and Companies - Tax Planning’s Perspective

• In Event: Auditor Tasks and Advising the Client

Abstract

This study investigates the effects of auditor industry specialization (AIS) on the degree of tax planning at audit firm level and individual auditor level, respectively. Donohoe and Knechel (2009) provide an interesting insight into the fee premium from a regulatory perspective by considering a firm’s aggressive tax planning strategies, provision of tax services, and audit firm industry specialization. A critical skill in issue identification, a key element of tax planning, is the ability to predict the tax consequences of a given set of facts (i.e., forward reasoning). Hence, Big 4 CPA firm also provides the tax planning of curriculum for their clients and members. Our research addresses this issue using tax planning (TP) calculation equation following Abdul Wahab and Holland (2012) and hand-collected AIS data. We find a significantly positive association between the degree of tax planning and AIS at firm level under both AIS measurement methods (number of clients and scale of clients), indicating that the higher audit firm industry specialization, the higher degree of tax planning. But the degree of tax planning and AIS at individual auditor level under both AIS measurement methods is significantly negative because individual CPAs face more signature risk and reputation risk, thus the higher individual auditor industry specialization, the lower degree of tax planning. We further document that after enactment of Common Reporting Standard (2014), the degree of tax planning in China significantly decreases. Finally, we deal with endogenous problems between AIS and TP and the results of our two-stage regression estimation are consistent with those of our previous analyses. Our results contribute to the company to better choose the external auditors and help regulators to make relative laws more accurate.

Authors

• Wen-Jye Hung, Min Jiang University

• Tsui-Lin Chiang, Fu Jen Catholic University

• yiyin ruan, Minjiang University

• Ya-Min Wang, Minjiang University