Strategic Interactions Between Tax and Statutory Auditors and Different Information Regimes: Implications for Tax Audit Efficiency

Abstract

We examine whether tax audits become more efficient if tax auditors have access to audited financial statements and information about statutory audit adjustments. We extend the standard tax compliance game by a statutory auditor to analyze the strategic interactions among a firm issuing financial and tax reports, a statutory auditor, and a tax auditor. For medium-powered tax auditor incentives and firms that place a high weight on book income, we show that granting the tax auditor access to information on statutory audit adjustments increases firms' tax compliance, raises tax revenues, and decreases tax audit frequency. Thus more information sharing between statutory and tax auditors could be an important but so far overlooked policy instrument to combat tax evasion and increase tax audit efficiency. However, we also highlight the limitations of this approach. The efficiency effect of information sharing turns out to be ambiguous in many constellations and depends on the strength of tax auditor incentives and the weight that firms place on book income.

How Does Trust Affect Concessionary Behavior in Tax Bargaining?

“…Second, we contribute to the audit literature (Bame-Aldred and Kida, 2007;Kachelmeier, 2020;Nelson and Tan, 2005), especially the literature on tax auditor behavior (Roberts, 1995;Toma and Toma, 1992;Blaufus et al, 2020;Khan et al, 2016;Alissa et al, 2014). We show that not only auditors of financial statements (from private auditing firms) but also auditors as representatives of a government agency are likely to compromise under specific forms of trust.…”

“…Second, we enrich the audit literature, as the behavior of tax auditors is under-researched (Roberts, 1995;Toma and Toma, 1992;Blaufus et al, 2020;Khan et al, 2016;Alissa et al, 2014). We contribute to the literature by examining how trust (both interpersonal trust and trust in government) affects tax auditors' concessionary behaviors in bargaining.…”

Sweetheart Deals in Tax Bargaining? How Trust Affects Concessionary Behavior

“…Second, we contribute to the audit literature, especially the literature on tax auditor behavior (Alissa et al 2014, Blaufus et al 2020, Olken 2016, Roberts 1995, Toma and Toma 1992. We show that not only auditors of financial statements (from private auditing firms), but also auditors as representatives of a government agency are likely to compromise under specific forms of trust.…”

“…First, we add the perspective of interpersonal trust and trust in government to the tax bargaining literature (Bond and Samuelson 1989, Doyle and Van Wijnbergen 1994, Egger et al 2020, Franzoni 2004, Mills et al 2013, and thus complement the economic factors in previous studies. Second, we enrich the audit literature, as the behavior of tax auditors is under-researched (Alissa et al 2014, Blaufus et al 2020, Olken 2016, Roberts 1995, Toma and Toma 1992. We contribute to the literature by examining how trust (both interpersonal trust and trust in government) affects tax auditors' concessionary behaviors in bargaining.…”

The Impact of Performance Improvement of the Tax System on the Economic Growth of Developing Countries Based on the Experience of the European Union

“…The dominant factor in the effective functioning of a modern state is the presence of a state management, which is the basis for the implementation of control work to assess and analyze the origin, distribution and use of financial resources of the budget system (Blaufus et al, 2020). It is the state tax management that is currently assigned a rather significant role, since it is aimed at identifying shortcomings in the formation and use of public finances and issuing instructions for their elimination (Karagiorgos et al, 2020).…”