Does Involvement of Component Auditors Deter Multinational Enterprises’ Extreme Tax Aggressiveness?

SUMMARY This study investigates whether the involvement of component auditors deters multinational enterprises (MNEs) from engaging in extreme tax aggressiveness. We argue that MNEs are less likely to engage in aggressive tax planning when they anticipate that the involvement of component auditors enhances audit oversight. Consistent with this expectation, we find that MNEs are less inclined to pursue highly aggressive tax planning when network auditors are involved in audit engagements, compared with when the audit is conducted by the principal auditor alone or in conjunction with unaffiliated auditors. This deterrent effect is more pronounced among MNEs with lower financial reporting quality, particularly with respect to tax accrual quality. Also, this deterrent effect is evident when MNEs are audited by Big 4 auditors or do not have subsidiaries in tax havens. These findings underscore the important role that auditors and their global audit networks play in curbing MNEs’ tax aggressiveness. Data Availability: Data used in this study are available from public sources identified in the paper. JEL Classifications: M41; M42; H20.