Especificación y Validación de la Bitácora.

The first group of characteristics are the auditee-specific parameters, also called client- specific in financial audit research (Quick/Wolz 1999). Overall, this group involves all objectively measurable indicators and also the subjective behavior and all attitude features of a taxpayer. For this investigation the most relevant objective parameters have been chosen: legal form of the auditee, determination of income, sector groups, and affiliation to a group. Those parameters are representatives of firm complexity and, due to statutory requirements, in part require one another. However, as already stated, firm size variables

60 _{The criteria are constituted in Appendix H Table 72. Hanlon et al. (2005) use seven categories in their}

study.

61 _{Further features for a distinction of audit criteria may be degree of diversification, complexity of corporate}

structure (Anderson/Zéghal 1994), position in an affiliates group, and market position or sector.

105 cannot be included here. Within the bounds of each size category it is expected that the chosen characteristics—subsequently described in detail—affect the time consumption. It can be expected that, with an increase in the auditee’s complexity, the revenue agent’s time consumption also increases (Anderson/Zéghal 1994).

So the first hypothesis, stated in alternative form, is:

H1: The characteristics of the auditee influence the revenue agent’s time consumption.

3.1.1 Legal Form

Taxpayers can choose different legal forms for their businesses. Those legal forms can be classified in three main groups: individual entrepreneurs, partnerships, and corporations (Sinha 2010). The particular choice is usually determined by several influencing factors as where suitable individually or jointly with others, by differences in taxation and liability (e.g., Blaufus/Mantei 2014), by separation of management and control, risk attitude, financing, available assets and so on.63 _{In general}—and abstracted from research made into

noncompliance which is split up according to legal forms (e.g., Tedds 2006)—the legal form defines the regulatory framework of the audited business. Thus, constant influence on the revenue agent’s time consumption is not to be expected, rather, that auditors adapt their working methods to specific conditions.

Following the findings of Cole and Sokolyk (2015), it is furthermore conceivable that auditees chose their legal form depending on the complexity of their business. The researchers found that firms choose a more complex legal form of organization if the firm is more complex. The consequence would be an increase in revenue agents’ time consumption the more complex the legal form.

I assume that an impact of time results only for the auditing of more complex legal forms, where the degree of complexity is so high that a normal adaption of working methods is not sufficient to counteract the expected negative time effects. This is particularly important in the medium firm size category as this category is the highest class of SMEs and thus below the threshold of large business. So I conjecture a concentration of more complex businesses in the specific legal form of the corporation and a variety of less complex businesses in all

63 _{Herzig (2008) gives a short overview of ownership and control in Germany compared to the United}

Kingdom as well as the United States. Harhoff et al. (1998) describe the reasons for growth of the non- public corporate legal form in Germany.

106 other legal forms in the medium size category. In addition, with regard to the specific German tax law that requires, in the case of partnerships, a split of tax bases over a lot of (usually heterogeneous) members, it can be expected that report writing is more time- consuming than in the case of other legal forms. During audit preparation the auditor will take precautions, contributing toward adapting the pure audit time consumption so that the total time consumption does not exceed the recommended timeline. This is more likely under time pressure.

So the first hypothesis is extended by:

H1-1: The legal form does not influence revenue agents’ time consumption in total; however, a complex legal form provokes a task complexity which the agents cannot compensate by adapting their working methods.

Moreover, since the choice of a specific legal form also defines other characteristics of an auditee, I will control this, not least because legal forms are also a means to take advantage of loopholes and other gaps in the law (Slemrod 2004: 9) so that they may indirectly influence auditors’ time consumption.

3.1.2 Determination of Income

First and foremost, the law dictates that the type of determination of income is stipulated in the investigation area. With no exception, corporations must prepare balance sheets,64

partnerships and individual entrepreneurs only if the auditee engages in commercial business, or is legally required by the tax law, or prepares balance sheets on a voluntary basis. In all other cases auditees determine their taxable profit by means of accounting of income and expenditure. In addition, in accounting there are three types of profit determination: the tax balance sheet in accordance with or separately from the trade balance sheet; or a trade balance sheet with an annual offsetting and reconciliation to the taxable income. Given this complexity, it is obvious that occurrence and treatment of possible book- tax differences (Atwood et al. 2010; Cho et al. 2006) influence revenue agents’ time consumption. If book-tax conformity increasingly diminishes, I assume that the level of complexity increases. This is supported by the fact that according to Mills (1996, 1998) audit adjustments increase as the extent of book-tax differences increase. Thus it can expected that the time required to identify these also will increase. Furthermore, if the disclosure of

107 differences within the auditee’s documents becomes more complicated, an audit of them will be even more time-consuming. In accordance with previous research on book-tax conformity and managers’ behavior (see e.g., Tang 2014) these effects arise even stronger in those members of the group classified as corporations, because it is this legal form favors this effect with its structural.65 In the case of small businesses, the relation between simplified methods of tax accounting and the choice of legal forms has been studied (Bergner/Heckemeyer 2017). Hence this analysis will control for possible interaction effects between the various legal forms and the types of determination of income. So the first hypothesis is further extended by:

H1-2: The type of determination of income influences revenue agents’ time consumption. If book-tax conformity decreases, the time consumption increases. 3.1.3 Group of Sectors

As already stated, Zimmermann (1983) states that larger firms reduce their income with the help of accounting procedures more frequently than smaller firms, but such conduct depends on the current sector of auditee. Hanlon et al. (2005) have shown that medium-sized businesses have the lowest rate of noncompliance following a U-shaped trajectory, whereby noncompliance, in turn, is related to auditees’ sector, among other factors, because some “industries have a higher proposed deficiency rate and a lower proportion of deficiency agreed to upon exam relative to the other groups.” Since it can be assumed that each sector affects revenue agents’ time consumption in various ways and that, moreover, no sector exclusively polls noncompliant behavior, it follows that different sectors need to be included.

In the present study it is helpful to cluster the observed sectors with regard to the findings of researchers cited above and to the specific similarities under the aspect of the audit process itself. Accordingly, the groups are to be split up in: manufacturing/production, trading (wholesale and retail), utilities, and service. The latter includes all service companies and will be the basis for the comparison. Furthermore, the group of utilities is separated as it is subject to state control to a greater or lesser extent.66

Chan and Mo (2000), e.g., have distinguished in their study between manufacturing-oriented and service-oriented firms. They assume that detecting inconsistencies in production cost only on the basis of a firm’s documents and ledgers will create obstacles. Analytical

65 _{For an overview about ownership and control in Germany, see, e.g., Herzig (2008).}

108 procedures are required to test reasonablety. Hence it can be expected that auditing will take more time in the manufacturing-oriented than in the service-oriented firms. A corresponding difference between the trading-oriented and the service-oriented sector cannot be expected. The provision of services and goods resemble each other strongly. So the first hypothesis is further extended by:

H1-3: The group of sectors influences revenue agents’ time consumption. If the auditee conducts a manufacturing-oriented business, time consumption increases compared to the other groups of sectors.

It has to be emphasized here that due to the above-named interdependent relationship between sector and noncompliance, it is conceivable that, if the auditor suspects tax evasion, his or her assumption is influenced by the specific sector of the auditee. Consequently, possible interaction effects should be taken into consideration.

3.1.4 Corporate Company

If the auditee belongs to an affiliated group, it can be expected that the degree of complexity (Carney et al. 2011) and hence the audit time required increases (Anderson/Zéghal 1994). There are many reasons for this: the build of grown or consolidated structures within a group, a wider range of tax planning opportunities (see e.g., Beuselinck/Deloof 2014),67 _revenue

agents’ difficulties in dissolving the information asymmetry relating to define the relevant facts—the probability of detection of noncompliance depends on the interdependent agents’ competence (Feinstein 1991) and task complexity—and the potentially highly time- consuming coordination process between what might be a number of agents from different state and/or tax audit departments. However, it can be assumed that only a few executive agents have to bear the majority of the additional work within a coordinated tax audit. The other benefit from the audit guidelines of these executive agents.68 These guidelines can state, e.g., limitation of topics to be audited, unification of exchange of information and legal assessments, or even offer support in person. Furthermore, agents often perform repetitive tasks when they audit a number of comparable affiliates from the same corporate company. Consequently, routine audits of smaller dependent firms typically take less time than individual audits, with one exception: the amount of report work increases if dependent

67 _{This includes above all income shifting between countries (e.g., Klassen et al. 2017) or states (e.g.,}

Gupta/Mills 2002).

68 _{According to German law guidelines in principal have to be provided, see sections 14, 16, 17 of the BpO}

109 auditors need to communicate additional data to the executive agent. So the first hypothesis is further extended by:

H1-4: The time consumption increases if the auditee is an affiliated company. But, if the agent can conduct a routine audit of a smaller dependent firm, in contrast, audit (report) time consumption decreases (increases).