Tax Knowledge Diffusion Through Shared Audit Partners: Evidence From China

Abstract

This study investigates how tax knowledge is diffused through auditors at the individual partner level. We find that firms sharing the same audit partner with low-tax firms exhibit lower effective tax rates (ETRs) but not for firms that share the same audit office but with different partners. Using a difference-in-difference (DID) research design, we show that firms’ETRs decline significantly after their existing audit partners start auditing a low-tax firm. Our findings suggest that the transfer of tax planning knowledge from low-tax firms to focal firms occurs mainly through common individual partners. Moreover, benefits to focal firms are stronger when their top executives have a social connection to the shared partners. Further analysis shows that audit partners are more likely to retain existing clients and charge higher audit fees for tax planning diffusion, indicating how audit partners benefit from sharing tax planning knowledge with their clients.