Audit firm tenure and corporate tax avoidance: evidence spanning COVID-19 pandemic

Abstract

Purpose

This study aims to examine the effect of audit firm tenure (AFT) on corporate tax avoidance (CTA) and the moderating effect of the COVID-19 pandemic.

Design/methodology/approach

The sample comprises 41,074 firm-year observations from 32 countries from 2015 to 2020, for which data are collected from various sources: financial data from the Refinitiv database, country corporate tax rates from the Tax Foundation, and other country-level data from the World Bank database. The authors use the book tax difference to measure CTA and multiple proxies for AFT.

Findings

This study finds that a longer AFT is associated with higher CTA, confirming the notion that long AFT impairs auditor independence. The findings remain robust when considering various AFT proxies, incorporating Hofstede’s cultural factors, using weighted least-squares estimation and addressing endogeneity through propensity score matching. This study also finds a non-linear relationship between extended client and auditor relationships and CTA, supporting the mandatory audit firm rotation regulation and increasing investors’ caution regarding the consequences of extended client–auditor relationships on firm behaviour.

Research limitations/implications

This study offers new evidence on the effect of the COVID-19 pandemic on the link between AFT and CTA and documents a non-linear relationship between AFT, which has not been addressed in prior studies.

Practical implications

The findings of this study have several significant practical implications. First, governments and policymakers gain insights into the consequences of extended auditor–client relationships, hence calling for a review of auditing and taxation regulations. Second, the findings provide important insights into the issue of auditor independence, especially during long engagements and crises such as COVID-19. Finally, investors and tax authorities should be more cautious about the risks of aggressive tax avoidance during crisis periods.

Originality/value

To the best of the authors’ knowledge, this is the first study to use a global data set to investigate the effect of AFT on CTA during the COVID-19 pandemic.

Citation

Kamarudin, K.A., Wan Ismail, W.A., Harymawan, I. and Mohamad Ariff, A. (2025), "Audit firm tenure and corporate tax avoidance: evidence spanning COVID-19 pandemic", Journal of Financial Crime, Vol. 32 No. 1, pp. 98-116. https://doi.org/10.1108/JFC-12-2023-0329