Tax Avoidance and Audit Quality with Emphasis on the Role of Management Conservatism: Evidence from Data Mining of Influencing Variables

Document Type : Original Article

Authors

1 Assistant Professor of Accounting, Department of Accounting, Faculty of Industrial Engineering and Management Shahrood, Shahrood University of Technology, Shahrood, Iran.

2 Assistant Professor of Financial Management, Department of Management, Economics and Accounting, Faculty of Humanities and Social Sciences, Golestan University, Gorgan, Iran.

10.48308/jfmp.2026.243053.1567

Abstract

Introduction: Agency theory attributes managers' opportunistic behaviors, including tax avoidance, to conflicts of interest with shareholders. In contrast, signaling theory introduces the selection of high-quality auditors as a mechanism to signal transparency to the capital market. Meanwhile, managerial conservatism, as a corporate governance mechanism, can reduce agency costs and moderate opportunistic behaviors. Given the importance of tax revenues in Iran's economy and the role of audit quality in financial information transparency, this study investigates the mediating role of conservatism in the relationship between tax avoidance and audit quality. Previous research has primarily examined the effect of tax avoidance on firms' returns and profitability, but the relationship between tax avoidance and audit quality with the mediating role of managerial conservatism in the Iranian Stock Exchange has not been investigated. This study contributes to the literature by examining whether conservatism can moderate the link between tax avoidance and audit quality. To this end, two hypotheses based on theoretical foundations were developed and tested: the first hypothesis examines the significant relationship between tax avoidance and audit quality, and the second hypothesis tests the moderating role of managerial conservatism. Method: This study is applied in terms of purpose and quantitative in nature, examining the relationship between tax avoidance and audit quality with an emphasis on the moderating role of managerial conservatism. The statistical population includes all non-financial companies listed on the Tehran Stock Exchange during the period from 2013 to 2024. Instead of conventional sampling methods, a criterion-based screening method was used to include all eligible companies in the study. Companies that did not meet the entry criteria were systematically excluded. Finally, the final sample consisted of 136 companies that met all research conditions during the study period. Data analysis was performed using a combination of statistical and data mining methods. Descriptive statistics were calculated using SPSS software version 24. To test the research hypotheses, multivariate regression models were estimated using Eviews software version 12. Furthermore, to enhance the robustness of the results and investigate possible nonlinear relationships between variables, the decision tree data mining model was used as a complementary method using SPSS Modeler software version 18. Findings: The findings of this study indicate a statistically significant negative relationship between tax avoidance and audit quality, meaning that an increase in the level of corporate tax avoidance is associated with a decrease in audit quality. The results of supplementary analyses indicate that managerial conservatism plays a significant moderating role in the relationship between tax avoidance and audit quality, such that managerial conservatism reduces and moderates this negative relationship. Furthermore, the results of the decision tree data mining model confirm the effect of tax avoidance on audit quality and indicate that firm size and managerial conservatism have the greatest impact on the audit quality of the examined companies. Conclusion: The overall results of the study indicate a significant negative relationship between tax avoidance and various dimensions of audit quality. Specifically, higher levels of tax avoidance are associated with reduced audit quality, indicating that companies employing aggressive tax avoidance strategies typically experience lower audit quality. Additionally, managerial conservatism plays a significant moderating role in the relationship between tax avoidance and audit quality, with conservative management reducing the negative effects of tax avoidance on audit quality. It should be noted that this moderating effect on the relationship between tax avoidance and auditor tenure was not significant, which may be due to the predominance of institutional and regulatory factors such as auditor rotation requirements over managerial tendencies. The results of the decision tree data mining model also confirm the above findings. Based on these findings, firm size and managerial conservatism were identified as determining and statistically significant factors in all audit quality measurement criteria. Furthermore, the variables of tax avoidance, accruals, and return on assets showed statistically significant effects on audit quality in most cases. Based on the findings of this study, strengthening financial and tax transparency and supervision, utilizing advanced technologies such as artificial intelligence in auditing, improving reporting standards and corporate governance requirements, and enhancing the knowledge of market participants are recommended. Investors should also pay special attention to companies' tax behavior, audit quality, and managerial conservatism, and avoid investing in companies that pursue aggressive tax avoidance strategies.

Keywords

References

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