The Determinants and Consequences of Tax Audits: Some Evidence from China

Using data obtained from a local tax office in China, we examine the determinants of corporate tax audits and the consequences of those audits. We find that the tax authority is more likely to select a firm for an audit when the firm has a lower effective tax rate, a higher book-tax difference, and more income-decreasing discretionary accruals. Applying a difference-in-differences research design, we find that after firms have been audited, they significantly increase their effective tax rates, reduce their book-tax differences, and reduce their income-decreasing discretionary accruals. Our study provides important insights on the determinants of the tax authority's decision on whether to initiate an audit and the impact of tax audits on both tax reporting and financial reporting.