Week 1: Eulaiwi et. al., 2021. "Tax Haven Use, Audit Pricing, Suspicious Matters Reporting Obligations and Whistle Blower Hotline Facility: Evidence

Week 1: Eulaiwi et. al., 2021. "Tax Haven Use, Audit Pricing, Suspicious Matters Reporting Obligations and Whistle Blower Hotline Facility: Evidence from Australian Financial Corporations".

Area of Research: compliance, legal issues and corporate governance.

Objective: First, we examine whether tax haven use by Australian financial corporations is associated with the pricing of audit and non-audit services. Second, we investigate whether the existence of financial corporations suspicious matters report (SMRs) (required for the reporting of corporate activities about money laundering risk or fraud) and whistle blower hotline facilities (a major tool designed to detect fraud) moderate the association between tax haven use and the pricing of audit and non-audit services.

Background: Tax haven use by multinational corporations (MNCs) typically involves the concealment of the nature and origin of funds, which makes it difficult for tax authorities to determine the source and applicable tax liability relating to those funds. Australian audit firms face increasing obligations in terms of financial corporations exposure to reporting and compliance risk, particularly in light of the reporting requirements required by the Australian Securities and Investment Commission (ASIC). Australian Financial Services Industry-The findings of the Royal Commission into misconduct in the banking, superannuation and financial services industry were provided through reports released to the public in January 2019. These reports found that the Australian financial services sector suffered from a lack of controls in term of money laundering, accuracy in the provision of financial advice and terrorism financing.

Motivation: Oxfam Australia estimates that Australian corporations have used tax havens to avoid around AUD $4.8 billion in corporate taxes in 2014, accounting for about 90 percent of corporate profits (Oxfam, 2014). We argue that tax haven use facilitates large agency problems in MNCs (e.g., rent extraction and/or resource diversion by managers), as the benefits of doing so are likely to be greater than the costs (Dyreng and Lindsey, 2009). The use of tax havens provides managers with opportunities to engage in rent extraction or resource diversion (Dharmapala and Hines, 2009). Associated financial reporting obfuscation then makes it more difficult for audit firms to fully assess MNCs risks, leading to increased audit risk and increases in the pricing of audit and non-audit services. Thus, it is important to determine whether Australian financial corporations use of tax havens is associated with the pricing of audit and non-audit services.

Contributions: This study makes the following contributions: First study to examine the potential association between the use of tax havens by financial corporations and the pricing of audit and non-audit services. There is a lack of research that specifically examines the important role that tax havens play in influencing audit and no-audit pricing. Second, this study contributes to the literature on the determinants of audit risk by examining the audit and non-audit fee implications of tax haven use. The multiple roles that tax havens play in assisting financing, investing, taxation and operational activities of financial corporations has important implications in terms of audit risk and hence on the pricing of audit and non-audit services. An audit firm will likely charge a premium for this increased complexity given the increased audit risk that will likely translate into increased audit effort and the higher pricing of audit and non-audit services. Second, this study is the first to investigate how corporate governance mechanisms relating to the existence of a SMR policy and a whistle blower hotline facility play in moderating the association between tax haven use and the pricing of audit and non-audit services in financial corporations.

Theory: We argue that tax haven use facilitates large agency problems in MNCs (e.g., rent extraction and/or resource diversion by managers), as the benefits of doing so are likely to be greater than the costs. The use of tax havens provides managers with opportunities to engage in rent extraction or resource diversion. Associated financial reporting obfuscation then makes it more difficult for audit firms to fully assess MNCs risks, leading to increased audit risk and increases in the pricing of audit and non-audit services.

Hypotheses:

H1: There is a positive association between tax haven use and the pricing of audit and non-audit services.

H2: The positive association between tax haven use and pricing of audit and non-audit services is moderated for financial corporations with a suspicious matter reporting requirements SMRs disclosure policy

H3: The positive association between tax haven use and pricing of audit and non-audit services is moderated for financial corporations with a whistle blower hotline facility.

ACCT6001: Accounting Research Project

INVESTIGATION MARKING RUBRIC

Criteria (Total marks: 40) Marks awarded

Introduction and Conclusion (13 marks)

An abstract that summarizes the major aspects of the entire report

The Introduction should include background information, why you would like to focus on this particular topic (motivation of the study), what you expect to find in this study and hence your contributions to research in this area. You should answer the question 'Why:' why you choose that topic for research; why it is important; why you adopted a particular method or approach. Theoretical Background (8 marks)

Theory that could help to explain the relationship between your variables Literature Review and Hypothesis Development of your research project (12 marks)

Literature review should cover important recent research in that area or relevant to that area

Hypothesis(es) should provide the rationale for a particular relationship between variables, and a hypothesis needs to be stated.

Writing quality and referencing (7 marks)

Writing is clear and concise. Grammar, spelling, and punctuation are correct.

Chicago format is followed for writing, citations and bibliography.