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Audit quality and tax-induced earnings management in UK private firms

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  • VAN TENDELOO, Brenda

Abstract

This paper examines audit quality and tax-induced earnings management in UK private (i.e. non-listed) firms. Tax incentives are considered to play a large role in private firms’ earnings management behavior. While Big 4 auditors are generally considered to provide a higher audit quality compared to non-Big 4 auditors, we expect that Big 4 auditors in a weak tax alignment country have weak incentives to constrain tax-induced earnings management. Moreover, Big 4 auditors arguably possess a higher expertise in providing tax advice, which is allowed under the EC recommendation on auditor independence. We provide evidence that UK firms engage more in income-decreasing earnings management and have lower relative tax burdens when they have a Big 4 auditor. These results imply that Big 4 auditors seem to help their clients in engaging in tax-induced earnings management.

Suggested Citation

  • VAN TENDELOO, Brenda, 2007. "Audit quality and tax-induced earnings management in UK private firms," Working Papers 2007004, University of Antwerp, Faculty of Applied Economics.
  • Handle: RePEc:ant:wpaper:2007004
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    References listed on IDEAS

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    1. Brenda Van Tendeloo & Ann Vanstraelen, 2008. "Earnings Management and Audit Quality in Europe: Evidence from the Private Client Segment Market," European Accounting Review, Taylor & Francis Journals, vol. 17(3), pages 447-469.
    2. Zimmerman, Jerold L., 1983. "Taxes and firm size," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 119-149, April.
    3. DeAngelo, Linda Elizabeth, 1981. "Auditor size and audit quality," Journal of Accounting and Economics, Elsevier, vol. 3(3), pages 183-199, December.
    4. Shackelford, Douglas A. & Shevlin, Terry, 2001. "Empirical tax research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 321-387, September.
    5. Gupta, Sanjay & Newberry, Kaye, 1997. "Determinants of the variability in corporate effective tax rates: Evidence from longitudinal data," Journal of Accounting and Public Policy, Elsevier, vol. 16(1), pages 1-34.
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