Audit committee characteristics and tax aggressiveness

Abstract

PurposeThis study aims to analyze the relationship between a company’s use of aggressive tax planning and several audit committee members’ characteristics, namely, independence, expertise, diligence and gender diversity.Design/methodology/approachThis paper is an empirical research using archival data from 289 Canadian listed companies for the 2011-2015 period.FindingsThe authors find that measures of expertise and diligence are significantly related to tax aggressiveness. Financial expertise and tenure on the audit committee play an important role in constraining tax aggressiveness, as does having a larger audit committee.Research limitations/implicationsOne limitation – and an area for future research – is that the effects of the audit committee members’ relationships with managers of the firms were not investigated.Practical implicationsKnowledge of audit committee characteristics may send a signal to shareholders, investors and tax agencies regarding the company’s potential risk with respect to aggressive tax planning. The analysis provides useful insights for board governance committees when determining the profile of persons to nominate for board positions and committees. In discussing tax-risk management, the study may heighten audit committee members’ awareness of their role in this respect.Originality/valueThis study’s results indicate that even in a setting where incentives for firms to be tax-aggressive is low compared to high-tax rate countries, there is variability in firms’ tax aggressiveness. This situation allows us to find audit committee characteristics that are effective in decreasing tax aggressiveness.