The objective of the present study is to investigate the moderating role of auditor credibility in the relationship of tax avoidance and institutional ownership with auditor switching. This study is applied, and in terms of methodology, it is a correlational study of the causal type (ex-post facto). The statistical population of the study includes all companies listed on the Tehran Stock Exchange. Using a systematic sampling method, 142 companies were selected as the sample, and they were examined over a 10-year period between 2015 and 2024. The results of testing the hypotheses showed that there is a direct and significant relationship between tax avoidance and auditor switching. However, there is no significant relationship between tax avoidance and institutional ownership. The interaction of auditor credibility with tax avoidance has an inverse and significant effect on auditor switching. In fact, auditor credibility plays a moderating role in the relationship between tax avoidance and auditor switching. However, the interaction of auditor credibility with institutional ownership does not affect auditor switching.
1. Introduction
The present study is necessary for several fundamental reasons and is crucial for a better understanding of capital market dynamics. First, it is essential to have a deeper understanding of the factors influencing auditor changes, especially in the face of tax avoidance or financial distress. Auditor change is not simply an administrative move, but can be a strong signal of a company’s financial health and governance. If stakeholders are not aware of why and how companies change their auditors under difficult economic conditions, their interpretation of financial reports and market trends may be seriously affected; therefore, conducting this study is necessary to empower analysts and investors to interpret these signals more accurately and manage risks better. In addition, understanding the moderating role of auditor credibility in this process highlights the need for research that helps assess the quality of financial reporting and ensure its credibility. This study also fills an important gap in knowledge in this area by focusing on tax avoidance and ownership. The link between ownership type, tax avoidance, and auditor change processes is a topic that has received less attention, but its importance in assessing corporate transparency and accountability is undeniable.
2. Literature Review
Auditors play an important role in influencing management decisions regarding auditor changes. Each country has regulations regarding auditor changes, but there is still debate about the factors that influence a company's decision to change its auditor. Auditor changes can occur for reasons such as resignations, dismissals, or serious disagreements between management and auditors. Companies often change auditors to conduct opinion shopping, that is, they seek out auditors who are more lenient in providing opinions on the company's financial statements. Various factors such as corporate tax avoidance and non-disclosure of information in this area, as well as the ownership structure of companies, can have an impact on auditor switching. Auditor switching can be explained using agency theory. Agency theory is a contractual concept that explains the relationship between agents (management) and owners (shareholders). This theory helps reduce information asymmetry between agents and owners, and as a result, increases information transparency and legitimately protects the rights and interests of owners.
3. Methodology
This research is applied in nature and, in terms of the research approach, has adopted the causal correlational method (ex-post facto) due to the study of events after their occurrence. The statistical population under study included companies listed on the Tehran Stock Exchange over a ten-year period (2015-2024). To achieve more accurate comparability, sampling was conducted using systematic exclusion, and only companies with a fiscal year-end in Esfand and no change in their fiscal year-end date during the study period were included. In addition, companies active in the banking, insurance, and investment sectors were excluded from the sample. After applying these filters, 142 companies, including 1,420 firm-year observations, were selected as the final sample. For data analysis, the mixed panel data method was used with Eviews 12 software. Since the main dependent variable (auditor change) is a binary variable with values ​​of 0 and 1, the final analysis was conducted using logistic regression.
4. Results
The results of testing the hypotheses showed that there is a direct and significant relationship between tax avoidance and auditor switching. However, there is no significant relationship between tax avoidance and institutional ownership. The interaction of auditor credibility with tax avoidance has an inverse and significant effect on auditor switching. In fact, auditor credibility plays a moderating role in the relationship between tax avoidance and auditor switching. However, the interaction of auditor credibility with institutional ownership does not affect auditor switching.
5. Discussion
From a theoretical perspective, firms that adopt aggressive approaches to tax avoidance may seek auditors who are more flexible in their approach to tax ambiguities or less resistant to management’s arguments regarding the interpretation of tax laws. This phenomenon could be due to auditor opinion shopping, where firms seek auditors who are aligned with their interests, especially when the current auditor has expressed disagreement or concerns about the firm’s tax positions. Institutional investors, due to the large volume of their investments and the long-term nature of their interests, are expected to play an active role in monitoring the quality of financial reporting and auditor independence. However, the lack of a direct relationship may mean that decisions about changing auditors fall largely within the purview of the company’s audit committee. High auditor reputation or credibility can reduce the strength of the positive relationship between tax avoidance and auditor switching (according to the first hypothesis); in other words, companies that work with a reputable auditor may be less inclined to switch auditors, even if they are involved in tax avoidance. The effect of institutional ownership on the decision to change the auditor is independent of the auditor's credibility or reputation; in other words, whether the company is audited by a highly reputable auditor or a smaller audit firm, the degree of influence of institutional owners on the decision to change the auditor does not change.
6. Conclusion
Auditor switching can be used to conceal the aggressive nature of tax avoidance, reduce the likelihood of detecting tax violations, or even to validate a company's specific tax positions in the eyes of regulatory agencies; therefore, the first hypothesis refers to the mechanisms through which companies may achieve their tax avoidance goals by manipulating their regulatory environment (through auditor switching). Institutional ownership alone is not a direct determinant of auditor switching, but rather its impact on audit quality may be exerted through the overall strengthening of corporate governance structures rather than through direct interference in operational decisions such as auditor switching. This result could indicate the relative effectiveness of audit committees in carrying out their oversight functions. Auditor reputation acts as a deterrent (or at least a moderating factor) in the relationship between tax avoidance and auditor switching. Auditors with a high reputation, due to their investment in their brand and fear of losing it, are more likely to maintain independence and professional standards and are less likely to succumb to management pressure to accept ambiguous tax interpretations. Institutional owners may take a more pragmatic approach to auditor switching decisions, based on specific auditor performance, rather than relying solely on the auditor's overall reputation. This finding could have implications for audit firm strategies as well as for regulatory bodies.