The Study Of The Inhibitory Effect Of Audit On Corporate Tax Avoidance: Influencing Factors And Economic Consequences

The analysis of tax avoidance issues under the framework of agency theory is an important direction of academic research in the field of tax avoidance.Research in this direction suggests that complex tax avoidance activities will increase the degree of information asymmetry in the enterprise,and thus often become a tool for controlling shareholders or management to conduct opportunistic behavior.Agency conflicts caused by corporate tax avoidance increase audit risk,so auditors have incentives to suppress corporate tax avoidance.This article refers to the auditor's restraint of corporate tax avoidance as the inhibitory effect of audit on corporate tax avoidance.However,the existing literature is controversial about the existence of the inhibitory effect of audit on corporate tax avoidance.This is mainly because researchers are restricted by the opaque nature of the audit process and cannot directly observe the impact of auditing on corporate tax burdens and cannot obtain robust empirical results.This article uses the unique audit tax adjustment data provided by the Chinese Institute of Certified Public Accountants to open the black box of the impact of audits on corporate tax burdens,and examine the suppression effect of audits on corporate tax avoidance and its influencing factors and economic consequences by directly analyzing the audit adjustment behavior of tax payable.First,this article discusses the motivation of auditors to suppress tax avoidance,and provides theoretical support for auditors to suppress corporate tax avoidance.Breaking through the previous research paradigm of the relationship between audit and tax avoidance,we carry out a series of inspections on the data of audit adjustment of tax payable of listed companies.This paper finds that,on average,audits will significantly increase the balance of tax payable.This shows that auditors will suppress corporate tax avoidance.This article refers to this effect as the inhibitory effect of audit on corporate tax avoidance.Next,we fully discuss the measurement method of the inhibitory effect of audit on corporate tax avoidance.Get to the bottom,the inhibitory effect of audit on corporate tax avoidance is the behavior of auditors who find that the client firm's tax payable is under-calculated and adjust the tax payable upwards.Therefore,this paper adopts the upward adjustment of tax payable to measure the inhibitory effect of audit on corporate tax avoidance,and lays the foundation for the next study of the influence factors and economic consequences of this effect.Second,we study the influencing factors of the inhibitory effect of audit on corporate tax avoidance,that is,the influencing factors of upward adjustment of tax payable.Based on the classic audit quality definition,we believe that the upward adjustment of tax payable is the joint probability that the auditor finds tax avoidance problems and reports tax avoidance problems.On the one hand,from the perspective of the auditor's discovery of tax avoidance issues,this article examines the impact of audit effort on the upward adjustment of tax payable.This article uses audit hour data to measure audit effort.Empirical testing finds that the more audit effort,the more likely the auditor will find the company's tax avoidance problem,the greater the upward adjustment of tax payable.When the client's corporate governance level is high and the client company is a state-owned enterprise,the main effect is weaker.This shows that there are fewer tax avoidance problems in companies with high governance level or in state-owned enterprises,which leads to weakening the effect of audit effort.Further examination reveals that the audit firm will compromise when facing important clients,and the impact of audit effort on the upward adjustment of tax payable will be weakened.On the other hand,from the perspective of the auditor's report on tax avoidance,this article examines the impact of audit independence on the upward adjustment of tax payable.This article uses the exogenous events of the merger of audit firms to capture the changes in audit independence.Empirical testing finds that the improvement of audit independence brought about by the merger of audit firms will increase the upward adjustment of taxes payable.In further analysis,from the perspective of the scale of the audit firm,the perspective of the reputation mechanism and the perspective of client importance,we confirm that the merger of audit firms first affects the audit independence and then the upward adjustment of taxes payable.Finally,we study the economic consequences of the inhibitory effect of audit on corporate tax avoidance,that is,the economic consequences of upward adjustment of the tax payable.The theory on corporate tax avoidance in an agency framework believes that corporate tax avoidance will trigger agency conflicts between shareholders and management,controlling shareholders and minority shareholders,respectively.This article believes that audit's restraint on tax avoidance can significantly alleviate the above agency conflicts.On the one hand,from the perspective of the agency conflict between the controlling shareholder and the minority shareholders,this study uses related-party transactions to measure the tunneling of controlling shareholders.This article believes that the upward adjustment of tax payable will help uncover the“disguise” of related party transactions that seem to be tax avoidance but are actually tunneling,increase the probability that major shareholders are found to be tunneling,increase their expected cost of tunneling,and lead to large shareholders reduce the degree of tunneling in subsequent business activities.Empirical research finds that upward adjustments in taxes payable significantly inhibits the tunneling of controlling shareholders in the next year.This is more obvious among clients audited by the top ten audit firm.In further analysis,we find that both the internal governance mechanism and the external governance mechanism strengthen the main effect to a certain extent.We also find that upward adjustments in taxes payable only has a significant inhibitory effect on abnormal related-party transactions,has no significant effect on normal related-party transactions.It only affects related-party transactions for purchases,and has no impact on related-party transactions such as sales,asset purchases,and lending.On the other hand,from the perspective of the conflict between shareholders and management,this article uses insider trading to characterize the opportunistic behavior of management.This article believes that the upward adjustment of tax payables improves the accuracy of tax payables,reduces the company's information asymmetry,and weakens the information advantage of insiders over external investors,thereby reducing the motivation of insiders to trade stocks.Empirical research finds that upward adjustment of taxes payable inhibits insider trading and affects both insider buying and selling stocks.The impact on the trading behavior of independent directors and supervisors is significantly smaller than that of other executives.The impact on insider trading varies significantly in different time periods.In further analysis,we also confirm that upward adjustment of taxes payable first reduces the degree of information asymmetry before affecting insider trading.In summary,we prove the existence of the inhibitory effect of audit on corporate tax avoidance,and find that audit effort and audit independence help to strengthen this effect,and this effect has a suppressive effect on the tunneling of controlling shareholders and insider trading.This article can enhance our understanding of the role of independent auditing in the capital market,and thus help to improve and develop auditing theories.It can also enrich and expand the research on corporate tax avoidance,especially the theory on corporate tax avoidance in an agency framework.