Country-by-Country Reporting and Audit Fees

Using a sample of cross-country observations, we examine the impact of the implementation of country-by-country reporting (CbCr) by the European Union in 2016 on audit fees. We posit that on one hand increased tax transparency increases firms’ demand for audit effort and auditors’ engagement risk, hence increasing audit fees. On the other hand, increased tax transparency reduces firms’ aggressive tax avoidance activities and incentivises firms to better document and support their tax position, hence reducing audit fees. Using a difference-in-differences approach we find an increase in audit fees following the implementation of CbCr reporting. This increase in audit fees is larger for firms subject to greater oversight. Further analysis suggests that firms improved their reporting quality following the implementation of CbCr and financially stronger firms experience a larger increase in audit fees.

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