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Spillover Effects Of Clients’ Tax Enforcement On Financial Statement Auditors: Evidence From A Discontinuity Design, Travis K. Chow, Jeffrey Pittman, Muzhi Wang, Le Zhao

Research Collection School Of Accountancy

We examine the impact of clients’ tax enforcement on financial statement auditors. In a regression discontinuity design, we exploit the firm-registration-date-based application of a new rule that assigns firms to two different tax enforcement regimes. Our analysis implies that auditors exert less effort–evident in lower audit fees and shorter audit report lags–when their clients are monitored by the more stringent tax authority. In results supporting that audit quality improves in this situation despite the fall in auditor effort, we report that clients subject to tougher tax enforcement exhibit a lower incidence of accounting restatements and tax-related restatements. Additionally, we find …