Independent auditors’ tax consultancy and its impact on tax litigation

Purpose: This study aims to determine the impact of tax consulting services provided by independent auditors on the increase in tax litigation in Brazilian companies listed on B3 . The research investigates the impact of greater investment in audit and tax consulting services on the likelihood of legal disputes occurring. Methodology: An empirical analysis was realized, through a balanced panel dataset – with 416 observations from 2017 to 2020. We used multiple linear regression models, as well as descriptive statistics and Pearson correlation analysis. In addition, the study held constant several important variables, including the return on equity (ROE), indebtedness, and the size of the company, to isolate the impact of tax consultancy outlays on outcomes of tax litigation. Results: It shows a highly positive relationship between higher spending on auditing and on tax consultancy with incidence of tax litigation. More specifically, firms that invest more in these services face more tax-related legal disputes. These findings underscore that while tax consultancy may provide strategic and compliance related benefits, it also increases exposure to litigation risks. Contributions of the Study: The paper fills an important theoretical void by articulating a direct connection between independent auditors' provision of tax consultancy services and enhanced legal exposure. At a methodological level, the use of panel data econometric models increases both the precision of analysis and the insights which this can provide into the driving factors behind tax litigation. The research contributes to academic literature in accounting, auditing, and corporate governance, while also providing practical implications for regulators and corporate managers aiming to strike a balance between the strategic benefits related to tax advisory through firms that can also mitigate risks.