This study examines how the appointment of tax certified individual auditors is associated with reported effective tax rates of corporate clients. The study uses a unique German institutional setting which makes it possible to track individual auditors that are also certified tax consultants and sign the audit opinion. Empirical results indicate that tax certified individual engagement partners are associated with higher effective tax rates. Further tests reveal that this association also exists for individual parent company financial statements and that it is stronger when tax confirmation services are provided to the audit client. My findings enhance the understanding of the role of individual auditors.

Introduction

This paper examines the association between individual auditors who are also certified tax consultants and corporate effective tax rates. A rising number of international companies, among them Google, Apple, Starbucks, or Amazon, to mention the most high-profile cases, have pursued aggressive tax avoidance strategies and in turn, minimized their tax burdens. Lately, also European companies like BASF (Germany), Fiat (Italy), and Engie (France) have been accused to aggressively avoid taxes. This corporate behavior has drawn public attention to the taxation of multinational corporations and in turn has triggered both an academic and political debate on the subject of corporate tax avoidance (see OECD 2013). An emerging stream of research suggests that specialized audit firms influence their clients’ extent of corporate tax avoidance. For example, studies like Richardson et al. (2013) and McGuire et al. (2012) focus primarily on the impact of audit firms or local audit offices and find an association with tax avoidance. Another avenue of research, however, has found that individuals’ characteristics matter to financial statement outcomes too, in terms of both audit quality (e.g., Cahan and Sun 2015; Gul et al. 2013; Knechel et al. 2015) and tax avoidance (e.g., Dyreng et al. 2008). Nevertheless, still ‘we know very little about the people who conduct audits’ (Francis 2011, p. 134) and ‘tax papers tend to ignore the role of the financial statement auditor’ (Maydew and Shackelford 2007, p. 312). And despite quality control mechanisms within audit firms and their local branches it is ever more important to understand the association that individuals have with the audit outcome (Gul et al. 2013), even if associations might be hard to be elucidated. This study aims to fill this gap by assessing the connection of individual auditors who are also tax consultants with reported corporate effective tax rates. Knowledge is a substantial factor for auditors to provide expert performance (Bonner and Lewis 1990) and with the help of broader knowledge experts can perform more efficiently (Be´dard and Chi 1993). However, auditors’ performance differs depending on the source of their knowledge and their expertise (Libby and Luft 1993). Tax-specific knowledge is a subspecialty within the general domain of auditing knowledge (Bonner and Lewis 1990), but it differs from auditing expertise by the skills and processes learned (Bonner et al. 1992). Moreover, there are, admittedly, two different auditor types—those who are tax certified and those who are not—but it is unclear how these two types differ concerning tax-specific knowledge. It can only implicitly be assumed due to a lack of evidence that the additional qualification of auditors to be a chartered tax consultant is accompanied by more ‘tax specific knowledge’ that is in any way relevant for corporate effective tax rates.