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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.

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

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