The effects of International Financial Reporting Standards, auditing and legal enforcement on tax evasion: Evidence from 37 African countries

Abstract

This study examines the significance of International Financial Reporting Standards (IFRS), audting and legal enforcement on tax evasion for a group of 37 African countries for the period 2008–2017. These countries were subsequently regrouped into subsamples of four clusters. Three-stage least square regression was used for the analysis. The results indicate that there is a negative and significant relationship between IFRS and tax evasion in some clusters (i.e., early IFRS adopters and strong legal enforcers). The other clusters (late IFRS adopters and weak legal enforcers) have a similar sign of coefficient though statistically insignificant. Moreover, evidence suggests that adoption and application of IFRS lead to improved financial reporting quality and lessen tax evasion in some African jurisdictions. Additionally, legal enforcement is found to be statistically significant in relation to tax evasion in two clusters (i.e., early IFRS adopters and strong legal enforcers). Some African countries are slow or ineffective in adopting and implementing IFRS, which by itself cannot improve tax compliance. IFRS can only achieve its objective when there is strong legal enforcement (e.g., control of corruption, rule of law, effective regulatory framework, voice and accountability, strong monitoring, and auditing to promote transparency). More evidently, in contrast to weak legal enforcers, countries with strong legal enforcement have high IFRS compliance, which can strengthen auditing and reporting standards and hence, improve tax compliance.