Abstract
We examine the effect of auditors’ litigation risk on corporate tax avoidance following pivotal U.S. court rulings. Our findings indicate a significant association between increased litigation risk and reduced tax avoidance that persists even after controlling for other influencing factors. A focused analysis of New Jersey and California with lower auditor litigation risks reveals higher levels of tax avoidance. This effect is more pronounced among financially constrained companies, firms with higher litigation risk, and firms that previously engaged in significant tax avoidance, particularly when audited by Big N auditors. This research addresses the call for more insight into the benefits of increased auditor litigation risk, shedding light on the complex interplay between auditor behavior and tax avoidance. It also informs the ongoing discussions on whether expanding auditor liability to third-party claims can enhance audit quality.
| Original language | English |
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| Number of pages | 29 |
| Journal | Journal of International Accounting Research |
| DOIs | |
| Publication status | E-pub ahead of print - 2 Apr 2025 |
Bibliographical note
We thank Ling Lei Lisic (editor) and two anonymous reviewers for their constructive and helpful suggestions. We also thank Russ Hamilton (discussant) and workshop participants at the 2022 American Accounting Association Annual Meeting and the 2022 European Accounting Association Annual Meeting for their helpful comments. The authors declare no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.Keywords
- auditor litigation risk
- tax avoidance
- state liability laws
- effective tax rates