An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Gopal V Krishnan
George Mason University

Michelle Hanlon
University of Michigan

Abstract: We investigate whether auditors use this information when auditing firms’ financial statements. The data are consistent with larger (absolute value) book-tax differences being associated with higher audit fees. We interpret this evidence as indicating that book-tax differences reflect information that represents a higher risk of earnings management which increases auditors’ efforts and time spent on the audit. We conduct supplemental tests on auditor opinions and auditor turnover. The data are consistent with larger book-tax differences being associated with more modified audit opinions and a greater incidence of auditor turnover. Similar to the audit fee results, we interpret this evidence as being consistent with the book-tax differences reflecting information about earnings management and with auditors examining and using this information in opining on the firms’ financial statements.

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