Abolition of Statutory Audit Obligation of Small Limited Liability Companies in Norway. Should Tax Evasion Inclined Industries be Excepted?

Abstract

All over Europe, mandatory audit requirements have been repealed forsmall- and medium-sized enterprises (SMEs). Audit exemption was introduced for small enterprises in Norway in 2011. This option was justified by benefits of reduced costs and bureaucracy for small companies. On the other side, weakened reliability of financial statements and tax returns may increase the extent of tax evasion. This study of 163 769 Norwegian companies reveals that small companies in tax evasion inclined industries opt-out auditors to a significantly greater extent than companies in other industries. The results highlight the concern that the abolition of auditing obligations impair the reliability of tax accounts and lead to increased tax evasion. Several explanations for the result are discussed, including asymmetric information and opportunism and demand side issues within the Allingham and Sandmo (1972) framework for explaining tax evasion. The results may also be due to supply side factors such as the fact that companies in evasion inclined industries are likely to pay higher audit fees than companies in other industries. The increased information asymmetry actualises the questionofwhether the tax authority's control capacity should be strengthened or whether audit exemptionsshould be limited in evasion inclined industries.