The effect of voluntary private tax audits on tax aggressiveness and tax audit fees

This study examines the effects of a regulatory shift in Greece that initially mandated tax audits by private (external) auditors for large firms from 2011 to 2015. In 2016, the mandate was lifted, allowing firms to either continue private audits or revert to audits conducted by public tax authorities. This shift created a natural experiment, allowing analysis of audit choice as a signal of managerial risk preference and tax aggressiveness. Using firm-level data from 2011 to 2019, we compare outcomes across two regimes: the mandatory private audit regime (2011–2015) and the voluntary audit regime (2016–2019). We find that tax aggressiveness decreased following the switch to voluntary audits, with a more pronounced reduction among firms that chose to continue with private audits. Additionally, tax audit fees declined under the voluntary regime, especially for firms that engaged Big 4 auditors. Our findings support agency theory, suggesting that voluntary audit choice acts as a bonding mechanism, reducing information asymmetry and perceived audit risk. Robustness checks, including Heckman selection models, instrumental variable analysis, and matching methods, confirm the reliability of the results.