The Impact of Tax Audits on Audit Fees: An Examination of Belgian Private Firms

Abstract

This research examines the relationship between tax audits and audit fees in Belgian private firms. Using a dataset of 504 firm-year observations for the years 2015–2018, the study implements multiple regression models including Ordinary Least Squares (OLS) and Random-Effects Generalized Least Squares (GLS), to establish whether tax audits affect statutory audit pricing. The results indicate that tax audits have no significant impact on audit fees, which further suggests that in Belgium auditors do not generally price their services differently based on whether tax audits are occurring. The pricing of audit services instead is driven by firm characteristics, such as size, asset structure and whether they are audited by a Big 4 audit firm. Firm size emerged as the most constant significant variable which also supports prior international evidence that larger and more complex firms create significant amounts of work and effort for auditors. The results indicate that intangible assets and the Big 4 premium also have a positive association with higher audit fees which is consistent with the indication of audit firm complexity and reputation effects. For practitioners, the study suggests that audit pricing in Belgium was driven by firm fundamentals and auditor characteristics, not external interference by tax audits. Therefore, this study provides some confidence about the stability of the audit market where fees reflect structural audit risks and not shocks created by regulators. For researchers, the study provides insights into the relationship between taxation and audit markets in a continental European setting although there are restrictions such as using a short time frame for the data and focusing exclusively on private firms which may limit the ability to generalize the findings.