The effect of big data-driven tax enforcement on audit pricing: evidence from China

Over the past few decades, the Chinese government has implemented a series of tax system reforms, namely, the Golden Tax Project (GTP), to use information technology to enhance tax administration. Taking advantage of the staggered implementation of phase III of the GTP from 2013 to 2016, we use a difference-in-differences design to examine whether strengthened tax enforcement impacts audit pricing. Using a sample of 2751 companies listed on Chinese stock exchanges from 2007 to 2016, we test and find support for our hypothesis that the implementation of GTP III leads to a reduction in audit fees. We predict that GTP III decreases audit risks by improving corporate tax compliance and information transparency, which in turn reduces audit fees. Consistent with our prediction, the results show that the implementation of GTP III is associated with improved tax compliance (proxied by reduced tax avoidance and negative tax-related media coverage) and with improved information transparency (measured by reduced earnings management and analyst forecast errors). Our further analyses show that the effect of GTP III on audit pricing is more pronounced for companies in regions with higher fiscal pressure, worse tax compliance environment, and more severe corruption. Furthermore, the effect is strengthened when auditors are from a Big 4 firm, have more experience, and have experience in the high-tech industries. Moreover, business complexity, industry competition, and business uncertainty attenuate the effect of GTP III on audit pricing. Overall, this study suggests that tax enforcement has an important impact on auditor behavior, with benefits extending beyond enhanced tax compliance.