Strategic Interactions between Tax and Statutory Auditors and Different Information Regimes: Implications for Tax Audit Efficiency

Abstract

We examine whether tax audits become more efficient if tax auditors have access to audited financial statements and information about statutory audit adjustments. We extend the standard tax compliance game by a statutory auditor to analyze the strategic interactions among a firm issuing financial and tax reports, a statutory auditor, and a tax auditor. For medium-powered tax auditor incentives and firms that place a high weight on book income, we show that granting the tax auditor access to information on statutory audit adjustments increases firms’ tax compliance, raises tax revenues, and decreases tax audit frequency. Thus more information sharing between statutory and tax auditors could be an important but so far overlooked policy instrument to combat tax evasion and increase tax audit efficiency. However, we also highlight the limitations of this approach. The efficiency effect of information sharing turns out to be ambiguous in many constellations and depends on the strength of tax auditor incentives and the weight that firms place on book income.