the risk of the auditee, and the CPA will increase the
audit fees as a compensation, which means that tax
evasion has a negative impact on enterprises. By
analyzing the impact path of tax evasion on audit fees,
this paper theoretically explores whether the tax
evasion of the auditee will have different mechanisms
on audit risk and audit fees.
The structure of the following parts of this paper
is as follows: The second part is literature review and
theoretical analysis. Through literature review in
related fields, research hypotheses are proposed; The
third part is the research design; The fourth part is
empirical regression, descriptive statistics and
regression results; The fifth part is the conclusion and
related discussion.
2 LITERATURE REVIEW AND
THEORETICAL ANALYSIS
2.1 The Mechanism of Corporate Tax
Evasion
Summarizing the research of relevant scholars at
home and abroad, corporate tax evasion can form two
different mechanisms: the value effect and the agency
effect of tax evasion.
2.1.1 The Value Effect of Tax Evasion
Cai and Liu (2009) thought that tax evasion could
decrease the tax payable of companies, retain more
cash flow, ease the financing burden and enhance the
sustainable operation ability of enterprises. Chen
Shenglan and Jia Siyuan (2016) believed that tax
evasion had a significant positive net effect on the
cash holding value of enterprises. The cash saved by
tax evasion for enterprises was conducive to reducing
leverage, reducing enterprise capital costs, capturing
investment opportunities, and even distributing it to
shareholders. Song Hang and other scholars (2019)
believed that tax evasion reduced the possibility of
enterprises falling into financial difficulties and was
conducive to dealing with the uncertainty of the
business environment.
2.1.2 The Agency Effect of Tax Evasion
However, the complexity and concealment of tax
avoidance also provide an opportunity for the
management to seek rent, which leads to tax avoidance
becoming a "black box" that causes agency problems.
The agency effect mechanism believes that tax evasion
has certain risks, which will weaken the effectiveness
of the contract. Normal remuneration cannot
compensate for the risks brought by tax avoidance,
which will worsen the principal-agent problem. In
addition, for tax evasion, enterprises need to design
complex and vague economic exchanges to support
their tax avoidance arrangements, which reduces the
transparency of enterprise information and makes it
more difficult for shareholders to supervise the
management. Considering their own interests or
reputation and other factors, the management does not
arrange tax evasion activities with the goal of
maximizing enterprise value, resulting in enterprises
failing to make full use of preferential tax policies to
pay more taxes, Or make too radical tax avoidance
strategies (Desai, 2006).Graham and other scholars
(2012) believe that tax evasion is often related to
abnormal accounting estimates, accounting
judgments and related transactions, which reduces the
credibility of financial statements, blurs the true
performance of enterprises, increases the risk of
financial restatement, increases the workload of
auditors and raises the potential litigation risk. This
tax avoidance behavior that damages the quality of
enterprise accounting information obviously increases
audit costs. Liao Xinxin (2016) believed that in order
to avoid being reviewed by the tax authorities, the
management would usually construct complex and
opaque transactions to cover up their tax avoidance
behavior. This aggravates the information asymmetry
between the internal and external of the enterprise,
making the management have the opportunity to use
the complex and hidden tax avoidance activities to
engage in profit manipulation, tunneling and other
self-interest behaviors to erode shareholder wealth.
2.2 The Effect of Tax Evasion on Audit
Fees
2.2.1 The Value Effect of Tax Evasion on
Audit Fees
Beck et al. (2014) believed that tax evasion enhances
the sustainable operation ability of enterprises,
mainly because tax evasion saves the expenditure that
should be handed over to the tax collection and
management authority, and converts these
expenditures into the operating cash flow of the
company, thus reducing the possibility of enterprises
suffering from financing difficulties, high financing
costs and other difficulties, and also reducing the
probability of enterprises facing financial constraints
or going bankrupt, thus making it possible for
auditors to reduce the risk assessment value.