Book-tax difference consistency and audit pricing

We hypothesize that book-tax differences (BTD) consistency affects audit pricing because of its influence on audit risks. Specifically, we argue that a lack of consistency requires auditors to engage in greater effort during their audits to understand whether volatile BTD is reasonable and to ensure underlying factors contributing to such volatility are understood. Consistent with our hypothesis, we find a negative association between BTD consistency and audit fees after controlling for the magnitude of BTD and other firm characteristics. As further support, we find that the relation between consistency of BTD and audit fees is stronger for firms with better quality of auditors and higher tax planning incentives. These findings suggest that a lack of BTD consistency signals greater risk to auditors, and, consequently, results in higher audit fees.