The challenge facing tax authorities worldwide has intensified in recent years. Multinational enterprises have developed strategies to minimise their corporate tax obligations, using techniques such as transfer pricing, royalty payments and intercorporate loans. Australian media outlets reported numerous instances of companies exploiting loopholes in tax legislation through mispriced loans, intragroup transactions, and channelling income into low-tax jurisdictions.

These tax planning activities often depart from normal operational practices, involve related-party transactions and lower corporate transparency. The stakes are high: such strategies may lead to litigation and reputation risk for the companies involved. In 2017, for example, Chevron faced a $340 million tax assessment after Australian courts ruled that the company borrowed money in the United States at around 1.2% and loaned it to its Australian subsidiary at 9% interest. The case highlighted concerns about intercorporate loans that shift profits across jurisdictions.

Technology companies have also faced similar scrutiny over intellectual property arrangements. Google, for example, booked revenue through Singapore or Ireland, attracting tax rates as low as 12.5% before profits moved to jurisdictions with zero tax rates. The profits were then transferred via a Netherlands-based subsidiary to avoid Irish withholding tax to another Irish subsidiary registered as a tax resident in Bermuda. The net effect was that Google reduced its effective tax rate on overseas profits to around 2.4%.

New research examines whether a feature of the audit process could influence this behaviour. The study focused on group audits of multinational enterprises, in which principal auditors rely on component auditors to conduct portions of the audit in foreign countries. Under Australian financial reporting requirements, listed companies must disclose information about audit fees paid to lead auditors and two types of component auditors: firms within the principal auditor's global network and firms unaffiliated with the principal auditor.

The research paper, Does Involvement of Component Auditors Deter Multinational Enterprises' Extreme Tax Aggressiveness? was published in Auditing: A Journal of Practice & Theory and co-authored by Dr Yi (Dale) Fu from Deakin University's Department of Accounting, along with Emeritus Professor Elizabeth Carson and Associate Professor Youngdeok Lim from the School of Accounting, Auditing and Taxation at UNSW Business School.

“A key motivation for the study was the growing concern that increasingly complex cross-border tax strategies had outpaced traditional monitoring mechanisms, raising the question of whether features of the audit process itself could meaningfully deter extreme tax aggressiveness,” A/Prof. Lim explained.

The researchers analysed 6136 observations from 1104 Australian multinational enterprises between 2011 and 2018. They used fee disclosures to identify group audit structures and measured tax aggressiveness using a metric called DELTA, which compares cash taxes paid against what would be expected based on pre-tax book income and the statutory tax rate. The study focused on extreme tax aggressiveness, examining firms in the most aggressive quintile of tax planning activities.

How component auditors create oversight

The involvement of component auditors creates scrutiny of certain tax positions. When principal auditors engage component auditors, they typically perceive risk and require more audit procedures. Component auditors perform work on tax-related accounts under the instructions of principal auditors and may, for example, review intercompany transactions for compliance with transfer pricing rules or evaluate the reasonableness of tax estimates.

"The presence of component auditors may streamline the digital audit trail, make underlying transactions traceable, and assist principal auditors in obtaining detailed information about those suspicious transactions or tax provisions,” the researchers said in their paper.

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Importantly, the research revealed that this oversight had a deterrent effect. Multinational enterprises were "less inclined to pursue highly aggressive tax planning when network auditors are involved in audit engagements" compared with when the audit is conducted by the principal auditor alone or in conjunction with unaffiliated auditors. The researchers explained that the confirmation hypothesis supports this finding: levels of post-facto audit verification can incentivise managers to act truthfully beforehand.

“The findings provide empirical evidence that enhanced oversight embedded in group audit structures can influence managerial behaviour, indicating that audit design plays a previously under-recognised role in shaping multinational tax compliance,” said A/Prof. Lim.

Network auditors versus unaffiliated auditors

The study distinguished between two types of component auditors with different effects. Network auditors are part of the principal auditor's global firm network. For example, KPMG Australia might involve KPMG China to audit a Chinese subsidiary, while unaffiliated auditors operate independently from the principal auditor's network.

The findings showed that the deterrent effect on extreme tax aggressiveness occurred when network auditors were involved, compared with audits conducted solely by the principal auditor or together with unaffiliated auditors. The researchers noted that "local component auditors can easily acquire both client-specific and tax-specific knowledge about components because there are no language or culture barriers."

Importantly, global audit networks have invested in professional training, the development of audit methodologies, and knowledge management systems, enabling cooperation and communication among geographically distributed audit teams.

A/Prof. Lim explained that this distinction underscores the point that not all audit involvement is equal: “The coordinated methodologies and information-sharing capabilities of global audit networks materially strengthen scrutiny in ways unaffiliated auditors typically cannot,” he said.

Financial reporting quality and auditor type matter

This deterrent effect proved more pronounced among multinational enterprises with lower financial reporting quality, particularly around tax accrual quality. Tax accrual quality measures how well a company’s recorded tax expenses align with actual cash tax payments over time. The research found that companies with poor-quality income tax accounts faced constraints on aggressive tax planning when network auditors were involved. This suggests that auditors pay attention to tax aggressiveness when it coincides with financial reporting concerns.

Furthermore, cross-sectional tests revealed that the relationship between component auditor involvement and reduced tax aggressiveness concentrated among multinational enterprises audited by Big 4 firms or companies without subsidiaries in tax havens. Big 4 auditors possess global networks with in-house audit and tax expertise, and face litigation exposure and reputational concerns. The absence of tax haven subsidiaries indicated that companies were not actively structuring their operations to minimise tax.

“Together, these results show that both the quality of a firm’s reporting environment and the sophistication of its auditors condition how effectively audit oversight constrains aggressive tax strategies,” A/Prof. Lim said.

Implications for business leaders and audit committees

The research offers important insights for business professionals and boards. First, the structure of audit arrangements matters beyond financial reporting quality. Group audit structures involving network auditors create scrutiny that extends to tax planning strategies. Second, companies with weaker financial reporting quality in tax-related accounts face constraints on tax positions when network auditors participate in audits.

Third, policymakers and regulators could consider financial statement auditors as a factor in risk-based screening when seeking to detect companies engaging in tax planning. Multinational enterprise audits result from group audit arrangements, which can provide assurance of financial report quality while also constraining tax aggressiveness.

For audit committees, these findings suggest several considerations. Committees should understand whether and how component auditors are involved in group audits, particularly in jurisdictions where subsidiaries operate. They should also monitor the quality of tax-related financial reporting, as this quality interacts with audit structures to influence tax planning decisions. Companies with operations in multiple jurisdictions may also benefit from network auditor involvement to ensure consistency in audit approach across locations.

Overall, A/Prof. Lim said the study demonstrates that audit structures are not merely compliance mechanisms but active governance tools. “By shaping oversight quality across jurisdictions, they can meaningfully influence corporate tax behaviour and reduce exposure to regulatory, financial, and reputational risk,” A/Prof. Lim concluded.