Tax Differences,Institutional Investors Holding Shares,and Audit Fees

According to the audit pricing model E(c)= CQ + E(d)* E(?)proposed by Simunic,CQ represents the input of human resources during the audit process,E(d)represents the possible losses incurred by issuing audit reports,and E(?)represents the probability of loss.Therefore,E(d)* E(?)represents the compensation for audit risk.In other words,the auditor should consider not only the human cost input during auditing process,but also the expected loss.Tax differences are caused by the different calculation calibers between taxable income and accounting profit and loss.Taxable income is based on tax law,while accounting profit and loss is based on accounting standards.Earnings management behavior is to manipulate accounting profit and loss,and tax avoidance is to manipulate taxable income.Due to the separation of accounting standards and tax laws,the manipulation of taxable income does not necessarily lead to an equal change in accounting profit and loss.Similarly,manipulation of accounting profit and loss does not necessarily lead to an equal change in taxable income.Consequently,there are differences between accounting and tax law.Earnings management and tax avoidance will indirectly lead to increased tax differences.In the auditing process,earnings management and tax avoidance reflect audit risks.Earnings management and tax avoidance contained in tax differences also reflect audit risks.Therefore,tax differences are related to audit fees.In order to avoid the loss of auditing business,the auditor needs to fully estimate the manpower cost and the audit risk.Tax differences are not completely caused by behaviors such as earnings management and tax avoidance that will bring audit risks.They may also be due to institutional reasons.Therefore,simply judging the degree of the audit risk based on the degree of tax differences can easily lead to unreasonable audit pricing.In the market economy,enterprises not only rely on internal governance mechanisms to conduct supervision,but also are supervised by government departments and external institutional investors,thus making the company's behavior in business activities more standardized.Institutional investors as professional investment institutions can influence corporate governance.Many existing documents have found that institutional investors have played a positive role in corporate governance and have the ability to effectively supervise companies.Therefore,the supervision of institutional investors can have an impact on corporate earnings management and tax avoidance.However,the existing literature does not study whether the shareholdings of institutional investors will affect the relationship between tax differences and audit fees.In addition,with the continuous development of institutional investors,different institutional investors have developed toward their own goals in their respective fields,resulting in differences in the concept of value investment.Although institutional investors possess the ability of corporate governance and also have the motivation to supervise the company,different value investment ideas lead institutional investors to perform different behaviors when participating in corporate governance.The research results of existing literature show that institutional investors with long-term value investment philosophy are more active in corporate governance and are more willing to actively supervise the invested companies,while institutional investors who choose short-term speculative trading are reluctant to spend too much supervision costs to supervise the invested company.Therefore,different types of institutional investors have different effects on earnings management and tax avoidance levels.It can thus be seen that whether different types of institutional investors have different effects on the relationship between tax differences and audit fees are also worthy of academic research.Consequently,based on information asymmetry theory,insurance theory,and corporate governance theory,this paper establishes a systematic theoretical analysis framework for the correlation of tax differences,shareholdings of institutional investors and audit fees,and collects sufficient sample data for empirical verification.This article takes all A-share listed companies in China from 2011 to 2015 as the research object,systematically examines the correlation between the tax differences and the audit fees,and the influence of institutional investors' shareholdings on the relationship between the tax differences and the audit fees.The results of the study indicate that there is a significant positive correlation between the taxdifferences and the audit fees;after taking into account the governance role of the institutional investors,the positive correlation between the tax differences and the audit fees increases with the proportion of institutional investors holding shares.After taking into account the heterogeneity of institutional investors,it was found that "pressure-resistance" institutional investors and "pressure-sensitive" institutional investors have different effects on the suppression of the positive correlation between tax differences and audit fees.Compared with the latter,the former has a stronger inhibitory effect.Finally,based on the research conclusions of this paper,several suggestions are proposed:(1)Perfect the disclosure system of listed companies' tax information,improve the transparency of the company's taxation information without revealing the unfavorable information such as business secrets,make investors' investment decisions and academic research more smooth,and regulate the role of earnings management;(2)Provide institutional investors with a better investment environment,reduce supervision costs,and actively guide institutional investors to participate in corporate governance;(3)Promote institutional investors to develop long-term value investment concepts and reduce short-term speculative transactions.