IDEAS home Printed from https://ideas.repec.org/a/sae/sagope/v11y2021i3p21582440211040833.html
   My bibliography  Save this article

Auditor’s Income Taxation and Audit Quality

Author

Listed:
  • Marcel Steller
  • Erich Pummerer

Abstract

We use an analytical research model to analyze the effect of the auditor’s personal income tax on audit effort. We show that the auditor’s level of care crucially depends on the tax rate and amount of loss recognition. Taxes may cause paradoxical effects on the auditor’s effort, audit quality, and marginal audit fee if profits and losses are taxed differently or in case of risk-averse decision-makers. Therefore, compared with the pretax setting, taxes have distortional effects. Thus, common auditing standards (e.g., International Standards on Auditing framework) will imply diverse audit quality and marginal audit fees depending on the respective national tax law. Our results are relevant for standard setters, auditors, and financial statements’ addressees.

Suggested Citation

  • Marcel Steller & Erich Pummerer, 2021. "Auditor’s Income Taxation and Audit Quality," SAGE Open, , vol. 11(3), pages 21582440211, August.
    • Handle: RePEc:sae:sagope:v:11:y:2021:i:3:p:21582440211040833
    DOI: 10.1177/21582440211040833
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/21582440211040833
    Download Restriction: no
    File URL: https://libkey.io/10.1177/21582440211040833?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Haapamäki, Elina & Sihvonen, Jukka, 2019. "Research on International Standards on Auditing: Literature synthesis and opportunities for future research," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 35(C), pages 37-56.
    2. Bruno Jullien & Bernard Salanié & François Salanié, 2007. "Screening risk-averse agents under moral hazard: single-crossing and the CARA case," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 30(1), pages 151-169, January.
    3. Dye, Ronald A, 1993. "Auditing Standards, Legal Liability, and Auditor Wealth," Journal of Political Economy, University of Chicago Press, vol. 101(5), pages 887-914, October.
    4. Bonroy, Olivier & Lemarié, Stéphane & Tropéano, Jean-Philippe, 2013. "Credence goods, experts and risk aversion," Economics Letters, Elsevier, vol. 120(3), pages 464-467.
    5. Niels J Philipsen, 2014. "Limiting Auditors’ Liability: The Case for (and Against) EU Intervention," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 39(3), pages 585-597, July.
    6. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 127-178, December.
    7. Evsey D. Domar & Richard A. Musgrave, 1944. "Proportional Income Taxation and Risk-Taking," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 58(3), pages 388-422.
    8. Narayanan, Vg, 1994. "An Analysis Of Auditor Liability Rules," Journal of Accounting Research, Wiley Blackwell, vol. 32, pages 39-59.
    9. Marleen Willekens & Dan Simunic, 2007. "Precision in auditing standards: effects on auditor and director liability and the supply and demand for audit services," Accounting and Business Research, Taylor & Francis Journals, vol. 37(3), pages 217-232.
    10. DeFond, Mark & Zhang, Jieying, 2014. "A review of archival auditing research," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 275-326.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ku He & Xiaofei Pan & Gary Tian, 2017. "Legal Liability, Government Intervention, and Auditor Behavior: Evidence from Structural Reform of Audit Firms in China," European Accounting Review, Taylor & Francis Journals, vol. 26(1), pages 61-95, January.
    2. Minlei Ye & Dan A. Simunic, 2013. "The Economics of Setting Auditing Standards," Contemporary Accounting Research, John Wiley & Sons, vol. 30(3), pages 1191-1215, September.
    3. Sebastian Kronenberger & Volker Laux, 2022. "Conservative Accounting, Audit Quality, and Litigation," Management Science, INFORMS, vol. 68(3), pages 2349-2362, March.
    4. Pan, Yue & Shroff, Nemit & Zhang, Pengdong, 2023. "The dark side of audit market competition," Journal of Accounting and Economics, Elsevier, vol. 75(1).
    5. John M. Barrios, 2022. "Occupational Licensing and Accountant Quality: Evidence from the 150‐Hour Rule," Journal of Accounting Research, Wiley Blackwell, vol. 60(1), pages 3-43, March.
    6. Georges Dionne & Florence Giuliano & Pierre Picard, 2009. "Optimal Auditing with Scoring: Theory and Application to Insurance Fraud," Management Science, INFORMS, vol. 55(1), pages 58-70, January.
    7. Chy, Mahfuz & De Franco, Gus & Su, Barbara, 2021. "The effect of auditor litigation risk on clients' access to bank debt: Evidence from a quasi-experiment," Journal of Accounting and Economics, Elsevier, vol. 71(1).
    8. Limei Che & Ole-Kristian Hope & John Christian Langli, 2020. "How Big-4 Firms Improve Audit Quality," Management Science, INFORMS, vol. 66(10), pages 4552-4572, October.
    9. Anna Bergman Brown & Nicole M. Heron & Hagit Levy & Emanuel Zur, 2023. "StoneRidge Investment Partners v. Scientific Atlanta: A Test of Auditor Litigation Risk," Journal of Business Ethics, Springer, vol. 187(3), pages 517-538, October.
    10. Guangming Gong & Liang Xiao & Si Xu & Xun Gong, 2019. "Do Bond Investors Care About Engagement Auditors’ Negative Experiences? Evidence from China," Journal of Business Ethics, Springer, vol. 158(3), pages 779-806, September.
    11. Wu, Bin & Wu, Yaqian & Zhang, Min & Li, Jiyuan, 2024. "Opening the black box of human resource allocations in audit firms: The assignment of audit partners to audit engagements," The British Accounting Review, Elsevier, vol. 56(2).
    12. Breuer, Matthias & Le, Anthony & Vetter, Felix, 2023. "Audit mandates, audit firms, and auditors," Working Papers 333, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    13. Aobdia, Daniel & Shroff, Nemit, 2017. "Regulatory oversight and auditor market share," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 262-287.
    14. Xiaomei Han & Wei Luo & Liansheng Wu & Wei Zhou, 2023. "Audit Effort and Stock Price Crash Risk," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 230-257, March.
    15. Patrick Velte, 2023. "The impact of external auditors on firms’ financial restatements: a review of archival studies and implications for future research," Management Review Quarterly, Springer, vol. 73(3), pages 959-985, September.
    16. Alexander Ljungqvist & Liandong Zhang & Luo Zuo, 2017. "Sharing Risk with the Government: How Taxes Affect Corporate Risk Taking," Journal of Accounting Research, Wiley Blackwell, vol. 55(3), pages 669-707, June.
    17. Kyungha Kari Lee & Carolyn B. Levine, 2020. "Audit partner identification and audit quality," Review of Accounting Studies, Springer, vol. 25(2), pages 778-809, June.
    18. Cook, Jonathan & Kowaleski, Zachary T. & Minnis, Michael & Sutherland, Andrew & Zehms, Karla M., 2020. "Auditors are known by the companies they keep," Journal of Accounting and Economics, Elsevier, vol. 70(1).
    19. Mande, Vivek & Son, Myungsoo & Song, Hakjoon, 2017. "Auditor search periods as signals of engagement risk: Effects on auditor choice and audit pricing," Advances in accounting, Elsevier, vol. 37(C), pages 15-29.
    20. Chen, Bingyi, 2022. "Do investors value audit quality of complex estimates?," Advances in accounting, Elsevier, vol. 57(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sae:sagope:v:11:y:2021:i:3:p:21582440211040833. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.