Is Tax Risk a Critical Audit Matter? Empirical Evidence on the Associations Between Tax Risk, Critical Audit Matters, and Audit Fees

This study contributes to the nascent literature on the economic consequences of critical audit matters (CAMs) by examining how tax-related CAMs (TaxCAM) are associated with a company’s tax risk and audit fees. We predict and find that if a company’s tax accounts involve a high degree of risk, it is more likely that the auditor discloses a TaxCAM. However, there is no association between tax risk and the disclosure of other CAM categories. We document a consistent relationship between TaxCAM and higher audit fees. Notably, the study hypothesizes, and by doing a path analysis, finds that the effect of company’s tax risk on audit fees is partially transmitted (mediated) through disclosure of TaxCAM. To our knowledge, prior and concurrent studies have not explored this nuanced consequence of CAMs. The research contributes to the literature around the consequences of the newly expanded auditor report and the intersection of corporate taxation and external auditing