Book‐Tax Differences, Corporate Governance Effectiveness and Audit Quality: An Interactive Effects

• Date: 01 October 2018
• Author: Anis Jarboui,Rakia Riguen,Maali Kachouri
• Published date: 01 October 2018
• DOI: http://doi.org/10.1002/jcaf.22359

Book-Tax Differences,

Corporate Governance

Effectiveness and Audit

Quality: An Interactive Effects

Rakia Riguen, Maali Kachouri and Anis Jarboui

INTRODUCTION

Book-tax differ-

ences (BTDs) play an

important role in the

determining of earn-

ings quality.

BTD is the dif-

ference between pre-

tax book income

and taxable income

(Hanlon, 2005;

Hanlon, Krishnan, &

Mills, 2012; Moore,

2012; Tang, 2015).

BTDs have been

studied by many

researchers using the

information con-

tained in BTDs

for investors (e.g.,

Hanlon, 2005; Lev &

Nissim, 2004), ana-

lysts (Weber, 2009),

and credit rating

agencies (Ayers,

Laplante, &

McGuire, 2010).

Whilesomeresearch

focuses on the infor-

mation in BTDs

for tax aggressive-

ness (e.g., Desai &

Dharmapala, 2006;

Manzon & Plesko,

2002; Mills, 1998),

others examine the

information in BTDs

about earnings man-

agement. Besides,

Ayers et al. (2010),

Blaylock, Gaertner,

and Shevlin (2015)

and Tang and Firth

(2012) indicated that

increasing BTDs

reduces earnings per-

sistence and value

relevance. However,

the question of

whetherBTDsinflu-

ence the audit qual-

ity. In fact, previous

researches have

In this article, we aim to answer the important

questions of whether the corporate governance

effectivenessaffects the relationship between book-

tax differences(BTDs) and audit quality. We alsoaim

to determine whether the variability between BTDs

and audit quality is moderated by corporate

governance index (CGI). The primary aim of the

present study is to contribute to improving the

existence of an interaction between BTDs, audit

quality, and CGI. This study uses a sample of

28 nonfinancial listed Tunisian companies and

covers an eight-year period from 2005 to 2015. To

test the hypotheses of this res earch, a generalized

least squares (GLS) and ordinary leastsquares (OLS)

regression was applied. The results obtained show

that, for the Tunisian companies, a positive

association between BTDs and audit quality. The

current study also provides evidence that corporate

governance moderates the relationship between

BTDs and audit quality. The findings may be of

interest to the academic researchers, practitioners

and regulators who are interested in discovering the

quality of corporate governance practices and tax

Refereed (Double-Blind

Peer Reviewed)

© 2019 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22359

20

measured audit qual-

ity based on criteria

that determine the

quality perceived by

the market as audit

firm size, audit fees,

reputation, speciali-

zation, and audit

adjustment (Becker,

DeFond, Jiam-

balvo, & Subrama-

nyam, 1998;

Chadegani, 2011; DeAngelo,

1981; Deis & Giroux, 1992;

Francis, 2004; Ghosh &

Moon, 2005). In this context,

one contemporary paper by

Hanlon et al. (2012) focused

on the relationship between

BTDs and audit fees. They

found that large BTDs in

absolute value being associ-

ated with higher audit fees.

Also, they showed that audit

feesarehigherasBTDsare

large and negative. Their

additional tests reveal that the

positive association between

audit fees and BTDs is smal-

ler for firms that display the

most long-run tax avoidance.

Recent evidence suggests that

BTDs affect positively audit

risk (Heltzer & Shel-

ton, 2015).

Most studies in the field of

the relationship between BTDs

and audit quality have only

focused on static relationship.

Our study will focus on the

interaction between BTDs, cor-

porate governance, and audit

quality.

The corporate governance

implementation aims to moni-

toring and restricting corporate

managers’discretion. A large

body of research has examined

the influence of corporate gov-

ernance on information trans-

parency. Information quality is

altered by earnings and tax

management.

The major objective of

this study is to investigate the

dynamic relation between

BTDs and audit quality by

examining their relation

around corporate governance.

This study therefore set out to

assess the effect of BTDs on

the audit quality and the effect

of corporate governance on the

relationship between BTDs and

audit quality. The central ques-

tion in this study asks how cor-

porate governance affects the

relationship between BTDs and

audit quality.

In fact, our contribution is

twofold. First, this study would

help in showing the existence of

a relationship between

BTDs and audit quality. Auditor

can use today information con-

tained in BTDs to verify the reli-

ability of financial statements.

Second, we are interested in

showing the relevance of corpo-

rate governance to examine the

relationship between BTDs and

audit quality. Data for this study

were collected using financial

statements available on the

Tunis Stock Exchange (TSE)

and Financial Market Council

(FMC) websites. Our main rea-

son for choosing Tunisian firms

is that Tunisian market is more

and more expanding, especially

from the socio-political events

and revolutionary movements,

such as those occurring in

Tunisia over the year 2011.

This article has

been divided into

seven sections.

Section “Accounting-

Tax System Regula-

tion in Tunisia”is

designed to describe

the accounting-tax

system regulation in

Tunisia. Section

“Theoretical Frame-

work”includes a

description of theoretical frame-

work. Section “Literature

Review and Hypothesis Devel-

opment”is the designed to

develop a literature and review

hypotheses. Section “Research

Methodology”presents the

study selected sample, variable

measurement as well as the

applied empirical tests.

Section “Empirical Results”

bears the results’discussions,

and section “Conclusion”

concludes.

ACCOUNTING-TAX SYSTEM

REGULATION IN TUNISIA

The accounting system was

changed by law 96-112 of

December 30, 1996 on the new

accounting system of Tunisian

companies to set up a new

accounting framework that

meets the new needs of the

Tunisian economy.

The specificities of the Tuni-

sian context are characterized

by an accounting system that

provides some flexibility in the

choice of accounting policies,

and by a flexible tax legislation

characterized by a tax benefits

system offering a wide latitude

in terms of tax management

that creates a favorable ground

for discretionary earnings and

tax management practices,

which creates discrepancies

in earnings (Boumediene,

Zarrouk, & Tanazefti, 2016).

In fact, a close link between

practicesinTunisiancontext.Thefindings of this

study can help Tunisian regulators in creating

corporate governance disclosure requirements. The

findings also provide the African business

community insights concerning audit quality, tax

practices, and corporate governance. This article

extends the existing literature, by examining the

inter-relationship between corporate governance,

BTDs, and auditquality. © 2019 WileyPeriodicals, Inc.

The Journal of Corporate Accounting & Finance / October 2018 21

© 2019 Wiley Periodicals, Inc. DOI 10.1002/jcaf