Audit fees and book-tax differences

This paper examines whether book-tax differences help explain audit fees. By attesting to the fair representation of financial information, auditors are an important intermediary in financial statement users’ trust and understanding of financial information. Our evidence that large booktax differences are associated with higher audit fees implies that such book-tax differences represent an observable proxy for earnings quality that affects auditor decisions. Our paper contributes to existing capital market research that examines audit fees and the research that examines market participants’ use of the information in book-tax differences.