The Love Triangle of Accounting, Taxation and Auditing in Portugal: An Econometric Analysis of the Book–Tax Gap in Listed Companies on Euronext Lisbon
Abstract
This study investigates the interdependence between accounting, taxation, and auditing in companies listed on Euronext Lisbon, conceptualizing this relationship as the "love triangle" of financial reporting. The paper empirically analyzes the book-tax-gap (BTG)—the difference between accounting and taxable income—as an indicator of misalignment between accounting and tax standards, as well as potential tax planning and earnings management practices. Based on a panel of 42 non-financial companies from 2014 to 2023, fixed- and random-effects models were estimated, controlling for audit variables, size, sector, profitability, and leverage. The results suggest that companies audited by Big Four firms have a significantly smaller book-tax gap, highlighting the disciplinary role of audit quality in accounting-tax convergence. Conversely, periods of higher tax burden and earnings volatility tend to widen the gap, reflecting the influence of tax incentives and earnings management. Robustness tests confirmed the stability of the estimated coefficients, reinforcing the model's econometric validity. This study contributes to the literature by integrating, within a single framework, the dimensions of accounting, taxation, and auditing in the Brazilian context, offering theoretical and practical implications for regulators, auditors, and public policymakers.
Keywords
Book–Tax Gap; Accounting; Taxation; Auditing; Portugal; Euronext Lisbon; Audit
References
Atwood, T. J., Drake, M. S., & Myers, L. A. (2010). Book–tax conformity, earnings persistence and the association between earnings and future cash flows. Journal of Accounting and Economics, 50(1), 111–125. https://doi.org/10.1016/j.jacceco.2009.12.003 Baltagi, B. H. (2021). Econometric analysis of panel data (6th ed.). Cham: Springer. https://doi.org/10.1007/978-3-030-53953-5 Becker, C. L., DeFond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1–24. https://doi.org/10.1111/j.1911-3846.1998.tb00547.x Blaylock, B., Gaertner, F., & Shevlin, T. (2012). The book-tax income trade-off and income shifting at the firm level. Journal of the American Taxation Association, 34(1), 91–120. https://doi.org/10.2308/atax-10153 Carvalho, C., Rodrigues, L. L., & Craig, R. (2020). Audit quality and earnings management: Evidence from Portugal. Journal of International Accounting, Auditing and Taxation, 41, https://doi.org/10.1016/j.intaccaudtax.2020.100355 Chen, S., Chen, X., Cheng, Q., & Shevlin, T. (2020). Are family firms more tax aggressive than non-family firms? Journal of Financial Economics, 95(1), 41–61. https://doi.org/10.1016/j.jfineco.2009.02.003 Chi, W., Lisic, L. L., & Pevzner, M. (2018). Is enhanced audit quality associated with greater real earnings management? Accounting Horizons, 25(2), 315–335. https://doi.org/10.2308/acch-50094 Chi, W., Lisic, L., Myers, L. A., & Pevzner, M. (2018). Auditor tenure and accounting conservatism: Evidence from the European Union. Auditing: A Journal of Practice & Theory, 37(1), 43–72. Desai, M. A. (2005). The degradation of reported corporate profits. Journal of Economic Perspectives, 19(4), 171–192. https://doi.org/10.1257/089533005775196705 Driscoll, J. C., & Kraay, A. C. (1998). Consistent covariance matrix estimation with spatially dependent panel data. Review of Economics and Statistics, 80(4), 549–560. https://doi.org/10.1162/003465398557825 Ferreira, C., & Nunes, A. (2021). Corporate taxation and earnings management: Evidence from Portuguese firms. Revista de Contabilidade e Finanças, 32(86), 150–168. https://doi.org/10.1590/1808-057x202110070 Ferreira, P., & Nunes, M. (2021). Auditoria e planeamento fiscal em empresas portuguesas cotadas. Revista Contabilidade & Finanças, 32(87), 456–474. Francis, J. (2011). A framework for understanding and researching audit quality. Auditing: A Journal of Practice & Theory, 30(2), 125–152. https://doi.org/10.2308/ajpt-50006 Gaertner, F. B. (2014). CEO after-tax compensation incentives and corporate tax avoidance. Contemporary Accounting Research, 31(4), 1077–1102. https://doi.org/10.1111/1911- 3846.12059 Gul, F. A., Wu, D., & Yang, Z. (2013). Do individual auditors affect audit quality? Evidence from archival data. The Accounting Review, 88(6), 1993–2023. https://doi.org/10.2308/accr-50536 Hanlon, M. (2005). The persistence and pricing of earnings, accruals, and cash flows when firms have large book-tax differences. The Accounting Review, 80(1), 137–166. https://doi.org/10.2308/accr.2005.80.1.137 Hanlon, M., & Heitzman, S. (2010). A review of tax research. Journal of Accounting and Economics, 50(2–3), 127–178. https://doi.org/10.1016/j.jacceco.2010.09.002 Hanlon, M., Maydew, E. L., & Shevlin, T. (2008). An unintended consequence of book-tax conformity: A loss of earnings informativeness. Journal of Accounting and Economics, 46(2–3), 294–311. https://doi.org/10.1016/j.jacceco.2008.09.003 Instituto Nacional de Estatística (INE). (2024). Estatísticas das empresas: Receita e carga fiscal 2014–2023. Lisboa: INE. Kanagaretnam, K., Krishnan, G. V., & Lobo, G. J. (2016). Audit quality and the pricing of discretionary accruals. Auditing: A Journal of Practice & Theory, 29(2), 49–76. https://doi.org/10.2308/aud.2010.29.2.49 Khurana, I. K., & Raman, K. K. (2004). Litigation risk and the financial reporting credibility of Big 4 versus non-Big 4 audits: Evidence from Anglo-American countries. The Accounting Review, 79(2), 473–495. https://doi.org/10.2308/accr.2004.79.2.473 Lennox, C. S. (2016). What do studies of auditor switching tell us about audit quality? Contemporary Accounting Research, 17(1), 37–76. https://doi.org/10.1506/car.17.1.3 Lisowsky, P., Robinson, L. A., & Schmidt, A. (2013). Do publicly disclosed tax reserves tell us about privately disclosed tax shelter activity? Journal of Accounting Research, 51(3), 583–629. https://doi.org/10.1111/1475-679X.12003 Lopes, C. (2018). Book-tax differences and corporate tax avoidance in Portugal. Portuguese Journal of Accounting and Management, 23(2), 75–98. Martins, A., & Guerreiro, R. (2019). IFRS adoption and the relationship between accounting and taxation in Portugal. Accounting in Europe, 16(1), 75–98. https://doi.org/10.1080/17449480.2019.1569518 Santos, A., & Lopes, P. (2021). Financial reporting and tax alignment: Evidence from European listed firms. European Accounting Review, 30(4), 703–729. https://doi.org/10.1080/09638180.2020.1868221 Santos, C., & Lopes, J. (2021). Setor de atividade e divergências contabilístico-fiscais nas empresas portuguesas. Revista Portuguesa de Contabilidade, 17(2), 89–107. Simunic, D. A. (1984). Auditing, consulting, and auditor independence. Journal of Accounting Research, 22(2), 679–702. https://doi.org/10.2307/2490671 Tang, T. (2015). Does book-tax conformity deter opportunistic book and tax reporting? Journal of Accounting and Economics, 59(1), 111–134. https://doi.org/10.1016/j.jacceco.2014.11.001 Tang, T. Y. H. (2015). Does book–tax conformity deter opportunistic book and tax reporting? An international analysis. European Accounting Review, 24(3), 441–469. Appendix A Table A1 – Descriptive Statistics by Sector (2014–2023) Sector Number of Companies BTG Average TAX Average BIG4 (%) Average PROF Average VOL Industrial 12 0,036 0,218 75% 0,079 0,021 Energy 6 0,028 0,201 100% 0,091 0,018 Services 10 0,047 0,226 70% 0,083 0,031 Construction 5 0,056 0,243 60% 0,067 0,028 Technology 9 0,061 0,231 55% 0,094 0,036 Note: Values represent annual averages by industry sector, calculated from 420 company-year observations. The concentration of Big Four audits is particularly high in regulated sectors (energy and industrial), suggesting a relationship between informational complexity and the demand for highly reputable auditors. Table A2 – Correlations between main variables Variables BTG BIG4 TAX PROF LEV SIZE VOL BTG 1.000 BIG4 –0.312 1.000 TAX 0.278 –0.106 1.000 PROF 0.196 0.122 0.144 1.000 LEV 0.084 –0.058 0.087 –0.172 1.000 SIZE –0.229 0.318 –0.093 0.116 –0.146 1.000 VOL 0.243 –0.078 0.158 0.266 0.022 –0.181 1.000 Note: No correlation exceeds 0.35 in absolute value, indicating no severe multicollinearity. Additional methodological notes The Hausman test rejected the null hypothesis of absence of correlation between individual effects and regressors (?² = 18.42; p < 0.01), confirming the adequacy of the fixed effects model. The Breusch–Pagan heteroscedasticity test was significant (p < 0.05), justifying the use of robust errors. The Wooldridge autocorrelation test failed to reject the null hypothesis (p = 0.21), indicating no relevant serial autocorrelation. The mean VIFs were between 1.12 and 1.45, ruling out the risk of multicollinearity. The standardized residuals were approximately normally distributed (Jarque–Bera test, p = 0.18), validating the linear specification of the model. Table A3 – Alternative results (robustness – RE and FGLS model) Variáv
