The Effect of Audit Quality on Tax Avoidance: Evidence from Listed Companies in Sri Lanka

Abstract

The objective of this study is to investigate the effect of audit quality on tax avoidance in listed manufacturing and diversified holding companies in Sri Lanka. The audit quality is determined based on the size of the auditor. That is, by checking if the financial statements are audited by big four firms. This study uses a quantitative approach, with a population of 33 manufacturing and 14 diversified holding companies listed in Colombo Stock Exchange in the period of 2015-2019 with an exclusion of banking, finance & insurance sector due to inherent limitations. Fixed effect model and random effect model were used to analyse the data. The result of the panel regression shows that there is a negative relationship between audit quality and tax avoidance in Sri Lanka. However, the relationship is not significant statistically. This study contributes to tax avoidance literature that audit quality also a determinant of tax avoidance.