Are Unaudited Firms More Likely to Disregard Tax Payments Prior to Bankruptcy? Small‐Firm Evidence From Sweden

Abstract

ABSTRACT Proponents of mandatory auditing claim that auditing reduces the risk of tax evasion and that firms disregarding tax payments distort competition because they operate with lower costs than firms that meet their tax obligations. To investigate this, we analyse data from a credit reference agency to examine whether unaudited firms are more likely than audited firms to fail to pay income taxes and value‐added taxes up to 4 years prior to bankruptcy. We also examine the association between auditing and tax avoidance prior to bankruptcy and find mixed results, with some evidence suggesting that audited firms engage in greater tax avoidance than unaudited firms. In conclusion, our results indicate that auditing is associated with a higher likelihood of tax‐payment compliance among failing firms. At the same time, we find only limited evidence that auditing systematically affects tax avoidance behaviour or increases tax revenues through higher tax payments.