Tax-Motivated Income Shifting in Audit-Firm Networks: Comparing Big 4 and Non-Big 4 Firms

• Published in: Journal of accounting, auditing & finance auditing & finance, 2024-02
• Main Authors: Blaylock, Bradley, Doyle, Elaine, Elemes, Anastasios
• Format: Article
• Language: English
• ISSN: 0148-558X; 2160-4061
• DOI: 10.1177/0148558X231220969

Recent research provides evidence consistent with tax-motivated income shifting taking place in Big 4 networks. Non-Big 4 networks have global footprints and audit a significant proportion of private-firm clients. Thus, we cannot make sense of audit-firm networks’ tax avoidance proclivities and the impacts their tax advice may have on aggregate client-firm income-shifting figures without examining non-Big 4 affiliates’ tax planning strategies. This study uses a private-firm dataset of Big 4 and non-Big 4 associated firms from 26 European countries finding evidence consistent with non-Big 4 affiliates being more aggressive income shifters than their Big 4 counterparts. Using a battery of supplemental analyses we demonstrate that the negative association between Big 4 membership and tax-motivated income shifting is weaker when network exposure to the political costs of aggressive tax planning is lower. We also show that political cost considerations are more likely to moderate debt allocation policies in Big 4 than non-Big 4 networks. Our findings suggest that political cost considerations are an important driver of the relation between Big 4 affiliation and tax-motivated income shifting even in our setting where firm size is strongly positively associated with tax expertise, political power, and global footprint and have important implications for anti-avoidance legislation.