Audit Quality and Tax Governance: A Qualitative Analysis of Tax-Related Disclosures in Audit Reports

Abstract

This thesis explores how auditors disclose tax-related matters in audit reports and how these disclosures inform corporate tax governance. Against a landscape of growing expectations for tax transparency, the study focuses on Luxembourg and investigates how professional judgment, regulatory frameworks, and reporting standards interact in practice. Using a qualitative methodology, the research draws on eight semi-structured interviews with audit partners and managers from Big Four and mid-sized firms. Thematic analysis reveals that tax issues are systematically integrated into audit planning and execution. Auditors frequently assess areas such as deferred tax assets, litigation risks, uncertain tax treatments, and transfer pricing. However, disclosures of these matters in audit reports remain the exception. Disclosure decisions are primarily governed by ISA 706 (Emphasis of Matter) and ISA 705 (Modified Opinions), while ISA 701 (Key Audit Matters) is rarely applicable outside listed entities. Auditors rely on thresholds of materiality, stakeholder impact, and legal considerations to decide whether tax issues warrant disclosure. The tone and audience of the report also shape final communication decisions. Regulatory developments, such as the EU directive 2021/2101 (as transposed by Luxembourgish law of 15 August 2023) and Pillar 2 implementation, are reinforcing the auditor’s role in signaling tax risks. At the same time, legal confidentiality obligations and the risk of reputational harm constrain full transparency. Findings highlight a gap between the regulatory push for greater tax transparency and the cautious, judgment-driven disclosure practices observed in the field. Audit reports rarely serve as comprehensive indicators of tax governance but can do so in exceptional cases. The study calls for expanded use of existing reporting tools to enhance audit transparency in tax sensitive areas.