Public and private sector auditors and accruals quality in English NHS hospital Trusts

To promote auditor independence and audit quality in English NHS Trusts the Audit Commission regulates auditor rotation, fees and the appointment of its own and private sector auditors. NHS sanctioned departures from GAAP, some of which allow the financial breakeven target to be achieved, have been criticised by the Audit Commission as detrimental to financial discipline. In this paper, we investigate the association between abnormal accruals and the achievement of financial breakeven in NHS hospital Trusts over the period 1998–2005. We also investigate the association between abnormal accruals, audit fees and the Trusts audited by public and private sector auditors. We find evidence that abnormal accruals are used to achieve financial breakeven and they differ across different types of auditor. We also identify a negative relationship between abnormal accruals and NHS Trust star ratings. These findings raise questions about the ‘quality’ of NHS audit where compliance with NHS-specific regulations overrides the wider GAAP-based requirement for financial statements to show a true and fair view and they warrant reconsideration of the nature of audit in NHS Trusts.     

影响纳税人税收遵从决策的因素

税收遵从决策是纳税人行为选择的一个复杂过程,其中起作用的因素很多,除了经济因素,还包括非经济因素。按照经典的逃税模型——A-S模型①所揭示的主要因素是稽查概率和罚款率,除此之外影响纳税人遵从决策的因素还包括:税收遵从成本、税制、纳税人个体特征、对政府的满意程度以及税收文化等。     

Do auditors constrain intertemporal income shifting in private companies?*

This study investigates the association between private company auditing and intertemporal income shifting. Using a large reduction in the Finnish corporate tax rate as a strong incentive for income shifting and financial statement data coupled with proprietary information from the tax authorities, we analyse accruals and cost stickiness of small private companies. Our results reveal significant differences in accrual income shifting between audited and unaudited companies, but only among companies that on average could anticipate the tax reduction the most. Further, we find auditors to restrict sticky selling, general, and administrative cost behaviour that we hypothesise is associated with illegal actions. Additional tests expose a nontrivial number of incorrectly unaudited companies which are the ones mostly associated with income shifting. Taken together, our study highlights the effects of audit exemption and the importance of enforcement while also suggesting that the audit process is value adding for the tax authorities.     

Shady car dealings and taxing work practices: An ethnography of a tax audit process

The empirical focus of this article is a ten-month ethnography of a tax audit process led by the Danish Tax and Customs Administration. The tax audit concerns a number of shady car dealings from which taxable income is not reported. This article focuses on the process whereby the tax administration succeeds in making some of these car dealings visible. This article draws inspiration from interpretative tax studies that consider taxation as an organisational, institutional, social and cultural phenomenon. Complementing those studies’ approaches, the present study draws both on Latour’s concept of the oligopticon and on Foucault’s notion of the panopticon. The analysis shows that tax inspectors produce oligoptic and panoptic visions when they account for taxpayers’ economic activities and that tax inspectors’ visions are received differently by the represented taxpayers. Some taxpayers fall out of sight, whereas others are highly visible and are interrogated in detail. Using the concepts of the oligopticon and the panopticon to analyse the tax audit process is significant for interpretative tax and accounting studies, because this theoretical approach represents an original method of conceptualising taxation in practice and the work implied in tax administration. Furthermore, due to its detailed ethnography of the tax audit process, this study makes a significant methodological contribution.     

International evidence on economic policy uncertainty and asymmetric adjustment of audit pricing: Big 4 versus non‐big 4 auditors

By investigating the association between economic policy uncertainty and audit fees using data from eight countries, this study examines whether and how Big 4 auditors reinforce their advantages over non‐Big 4 auditors through audit pricing. We find that both Big 4 and non‐Big 4 auditors reduce their audit fees when economic policy uncertainty increases. However, while non‐Big 4 auditors adjust audit pricing asymmetrically as economic policy uncertainty changes, i.e., the magnitude of decline in audit fees when economic policy uncertainty increases exceeds the magnitude of rise when economic policy uncertainty decreases, Big 4 auditors regulate their audit pricing in a symmetric manner. Further analyses reveal that: (1) the asymmetric pricing of non‐Big 4 auditors mainly exists in countries where Big 4 auditors have dominant market share, (2) Big 4 auditors provide higher‐quality audits when economic policy uncertainty increases and (3) many firms in better financial condition turn to Big 4 auditors during uncertain years. Our findings suggest that the symmetric audit pricing helps Big 4 auditors maintain a favorable position in the audit market.     

信息不对称、激励与税收征管

税务机关与纳税人之间的信息不对称造成的影响:其一,造成了纳税人的逆向选择;其二,造成了税制的扭曲;其三,加大了税收的征收成本。应采取有力的政策措施减少纳税人与税务机关之间的信息不对称。在信息不对称条件下关联博弈和重复博弈可以有效地激励纳税人诚实纳税。     

Thinking and Learning in the Tax Evasion Game

Equilibrium behaviour is one of the fundamental concepts of economics: that each player's strategy is a best response to their beliefs about other players' strategies (and that these beliefs are realised). It is therefore striking that one of the most utilised economic models of tax compliance (Allingham and Sandmo, 1972) lacks this property as random audit selection is not a best response for the tax administration. The game theory literature of tax compliance has solved the equilibrium under assumptions of perfect information, full rationality and representative agents (Reinganum and Wilde, 1986; Erard and Feinstein, 1994). The recent application of behavioural economics to tax compliance (Hashimzade et al., 2014) allows richer assumptions such as heterogeneity and asymmetric information to be included in agent‐based models. This paper investigates the tax administration's best‐response audit strategy with heterogeneous taxpayers, imperfect information and evolutionary survival of taxpayers. It finds that, under these conditions, the tax administration's best‐response audit strategy is an adaptive learning approach and not a well‐defined audit function. This fits with actual practice of ‘predictive analytics’ by OECD tax administrations. Behavioural game theory also predicts that when actors are information rich, adaptive learning will dominate abstract thinking.     

The impact of corporate governance on auditor choice: Evidence from China

As the largest and fastest growing emerging market, China is becoming more and more important to investors throughout the world. The purpose of this paper is to investigate the determinants of firms’ auditor choice in China in respect of their corporate governance mechanism. Normally firms have to take a trade-off in their auditor choice decisions, i.e., to hire high-quality auditors to signal effective audit monitoring and good corporate governance to lower their capital raising costs, or to select low-quality auditors with less effective audit monitoring in order to reap private benefits derived from weak corporate governance and less-transparent disclosure (the opaqueness gains). We develop a logit regression model to test the impact of firms’ internal corporate governance mechanism on auditor choice decisions made by IPO firms getting listed during a bear market period of 2001–2004 in China. Three variables are used to proxy for firms’ internal corporate governance mechanism, i.e., the ownership concentration, the size of the supervisory board (SB), and the duality of CEO and chairman of board of directors (BoDs). We classify all auditors in China into large auditors (Top 10) and others (non-Top 10), assuming the large auditors can provide higher quality audit services. The empirical results show that firms with larger controlling shareholders, with smaller size of SB, or in which CEO and BoDs chairman are the same person, are less likely to hire a Top 10 (high-quality) auditor. This suggests that when benefits from lowering capital raising costs are trivial, firms with weaker internal corporate governance mechanism are inclined to choose a low-quality auditor so as to capture and sustain their opaqueness gains. On the other hand, with improvement of corporate governance, firms should be more likely to appoint high-quality auditors.     

纳税人税收遵从行为博弈分析

创建基于行为博弈的税收遵从均衡模型,将处于相同税收境况的纳税人视为一个群体,则个体纳税人选择税收遵从策略从纳税人群体角度来看就是以一定的概率选择该种策略。面对正常税务检查与严格税务检查并存的环境,纳税人税收遵从博弈稳定均衡策略形成不但取决于税制的特性,而且依赖于其他纳税人的税收遵从决策。依据税收遵从博弈均衡的形成机理,提出建立我国税收遵从激励监督机制的对策。     

An egocentric model of the relations among the opportunity to underreport,social norms,ethical beliefs,and underreporting behavior

A model of the relations among taxpayers’ opportunity, social norms, ethical beliefs, and tax compliance is proposed and tested using structural equation modeling. High opportunity taxpayers, who may personally benefit from evasion, judged evasion as less unethical than low opportunity taxpayers. High and low opportunity taxpayers judged social norms similarly. Further, ethical beliefs partially (fully) mediate the relation between opportunity (social norms) and underreporting. Implications from our study to tax compliance researchers and policy makers are discussed.     

The Optimality of Punishing Only the Innocent: The Case of Tax Evasion

We study the effectson tax enforcement and tax policy of unintentional complianceerrors by taxpayers and administrative errors by tax auditors.The government can impose both penalties for misreporting andrewards for honest reporting. Maximal sanctions will not be appliedbecause errors are possible, so evasion cannot be eliminatedcostlessly. Under optimal policy intentional evasion can be deterred,but innocent tax evaders must be penalized whether they haveunintentionally evaded or have been mistakenly convicted. Thisdeters intentional evasion, but limits redistribution. Withoutrewards for honest reporting, the revelation principle need notapply, so intentional evasion can occur.     

Tax Administration Reform and Taxpayer Compliance in India

This paper evaluates effects on tax compliance of simple reforms in personnel policy in the Indian income tax administration. Taxpayers voluntarily disclosing higher incomes are currently assigned to special assessment units. To avoid this, high income taxpayers have an added incentive to understate their incomes. Empirical evidence consistent with this hypothesis is found. It explains spillover effects of enforcement efforts across assessment units. We incorporate these spillovers in estimating revenue effects of increased support staff. The results imply significant compliance gains would accrue from expanded staff employment and changes in assignment procedures for staff and taxpayers.     

The value of honesty: empirical estimates from the case of the missing children

How much are people willing to forego to be honest, to follow the rules? When people do break the rules, what can standard data sources tell us about their behavior? Standard economic models of crime typically assume that individuals are indifferent to dishonesty, so that they will cheat or lie as long as the expected pecuniary benefits exceed the expected costs of being caught and punished. We investigate this presumption by studying the response to a change in tax reporting rules that made it much more difficult for taxpayers to evade taxes by inappropriately claiming additional dependents. The policy reform induced a substantial reduction in the number of dependents claimed, which indicates that many filers had been cheating before the reform. Yet, the number of filers who availed themselves of this evasion opportunity is dwarfed by the number of filers who passed up substantial tax savings by not claiming extra dependents. By declining the opportunity to cheat, these taxpayers reveal information about their willingness to pay to be honest. In our analysis, we develop a novel method for inferring the characteristics of taxpayers in the absence of audit data. Our findings indicate both that this willingness to pay to be honest is large on average and that it varies significantly across the population of taxpayers.     

Public Disclosure of Audit Fees and Bargaining Power between the Client and Auditor: Evidence from China

Before the public disclosure of audit fees was mandated, it was unlikely for an audit client to have accurate information about how much other companies were charged by their auditors. Public fee disclosure decreases the cost of auditees' access to audit fee information for the auditor's portfolio of clients and is thus likely to increase the relative bargaining power of auditees over auditors when they negotiate audit fees. Using both proprietary and public audit fee data before and after public fee disclosure was mandated in China, we provide evidence consistent with the preceding conjecture. We find that public fee disclosure reinforces the magnitude of audit fee decreases for overcharged clients and weakens auditors' ability to raise audit fees for undercharged clients. These findings suggest the existence of unintended consequences of public fee disclosure regulation, the original rationale of which was a concern about audit pricing practices that could undermine auditor independence.     

Independent and joint effects of audit partner tenure and non-audit fees on audit quality

We examine the individual and joint effects of auditors’ non-audit services (NAS)/abnormal NAS fees and length of audit partner tenure on audit quality. Our results raise questions about the ‘one size fits all’ approach imposed by the current audit partner rotation requirement in Australia as a result of (1) a learning differentiation that we observe between Big 4 and non-Big 4 auditors and (2) higher discretionary accruals associated with non-Big 4 auditors. We find abnormal NAS fees to have a positive association with both absolute and positive (income-increasing) values of discretionary accruals for firms with short audit partner tenure. NAS/abnormal NAS fees are also negatively associated with the issuance of going concern opinions to financially distressed firms when partner tenure is short. In terms of policy implications, regulators are able to gauge the efficacy of the CLERP 9 reforms which currently impose a five year mandatory audit partner rotation requirement.     

Punishing in the public interest: Exploratory Canadian evidence pertaining to convictions and incarcerations for tax offences

Although naming and shaming is a deterrence strategy used by tax authorities, ostensibly to increase tax compliance, the contents of tax conviction notices in which taxpayers are named and shamed have not been investigated in empirical research. To this end, this study uses a sample of 2,570 taxpayers convicted of tax offences by the Canadian tax authority over a ten-year period (2006 through 2015) to identify key characteristics of convictions and incarcerations for tax crimes, and to understand how key conviction characteristics are associated with incarceration. Over this period, findings show that 55% of tax convictions in Canada relate to failure to file tax returns, and that 14% of convicted individuals are incarcerated for an average of 17 months. The mean unreported income per convicted taxpayer is $89,978, the mean unremitted excise tax per convicted taxpayer is $15,330, and the mean fine amount per convicted taxpayer is $48,201. Males are more likely to be convicted of a tax crime than females. Further, professionals are far more likely to be incarcerated than non-professionals. Results also indicate that underreporting related to excise tax as a form of tax evasion is more likely to result in harsher sentencing than underreporting related to income tax. Lastly, we observe a downward trend in convictions and incarceration over the 10-year span, such that the total convictions and incarcerations at the end of the sample period are roughly one-third of the convictions at the beginning. Implications for public policy are discussed.     

Audit quality effects of the PCAOB's 2006 tax service restrictions

In 2004 and 2005, use of aggressive tax services provided by a company's auditor had become so broadly concerning that it was the focus of a PCAOB roundtable and discussed in a Congressional subcommittee investigation report (PCAOB, 2004 and US Senate, 2005). Although auditor provision of these and other nonaudit services to issuer audit clients was restricted in 2006, research on the effectiveness of these restrictions finds that they did not impact audit quality (Notbohm, Paterson and Valencia, 2015 and Lennox, 2016). We reexamine this issue with a focus on the audit quality effects for the engagements most impacted by the restrictions-Big 4 audit clients with pre-restriction tax service fees of at least $100,000 that fell by at least 75% following the restrictions. Using a difference-in-difference framework and two proxies for audit quality, we find evidence of the effectiveness of the PCAOB's 2006 restrictions among those clients. Additionally, we find these results are sensitive to the level of pre-restriction tax service fees, with the restatement (going concern) effect of the restrictions strengthening (weakening) in the pre-restriction tax service fee level. We also find that the effects of these restrictions are concentrated among clients of Big 4 auditors rather than clients of the 2nd tier or 3rd tier auditors. Results of additional analyses indicate that audit quality, as measured by the probability of restatement, was lower in the pre-restriction period for purchasers than for non-purchasers. Our results are robust to a barrage of sensitivity tests. Our findings contribute to the continued regulator discussion about the proper level and types of allowable tax nonaudit services.     

State audit budgets and market assessments of credit risk

While financial statement auditing dominates the market for corporate auditing, internal controls and operational auditing appear to be emphasized in governmental markets. The size of the governmental audit budget (beyond the minimum level prescribed by generally accepted auditing standards) is ultimately a cost/benefit decision, with lower borrowing costs being one of several potential benefits. In testing for empirical regularities between auditing quantity and investor decisions, we found the size of the audit budget to be indeed associated with borrowing costs, but the direction of the relationship was anomalous. The anomalous positive sign for the audit budget variable could be due to self-selection bias. Self-selection bias is a confounding effect that has come up repeatedly to muddy the interpretation of empirical findings in prior (corporate) market based research on discretionary accounting variables. The supply of (discretionary) internal and operational audits may be driven by operational considerations (e.g., internal control weaknesses), which cannot be directly observed by outsiders. The bond markets may be interpreting the size of the audit budget as a signal about underlying economic characteristics that make the state a more risky investment. Alternatively, larger state audit budgets may signal less use of private sector auditors and be interpreted as less useful to investors (though, possibly more useful to governmental concerns focusing on compliance issues). Despite the inclusion of CPAs' audit fees in state budgets, the signal “inferred” for the state's municipalities may have a carryover effect onto state issues.     

Audit report lag: the role of auditor type and increased competition in the audit market

This study investigates the effect of auditor type (private vs. state) and increased competition in an audit market on audit report lag (ARL). This is the first study to provide evidence regarding the effect of audit market competition on ARL. Utilising structure–conduct–performance theory, we predict that competition pressures private auditors to be more efficient and to have less reporting lag than state auditors. We also predict that competition among auditors after a liberalisation period forces auditors to be more efficient and to record less ARL than before. We use a unique data set in Iran, whereby the audit market liberalisation (an audit market where services were previously provided primarily by a state entity) has resulted in both state and private auditors simultaneously providing audit services. The findings are consistent with the following hypothesis, that is ARL is shorter for private auditors than it is for state auditors, and ARL decreases as competition increases in the Iranian audit market. Consistent with the structure–conduct–performance theory, the findings suggest that increased competition in the audit market results in higher efficiency, as reflected by a shorter ARL.