The effect of audit quality on transfer pricing aggressiveness and firm risk: Evidence from Southeast Asian countries

This research examines the relationship between audit quality and transfer pricing aggressiveness (TPAG), the impact of TPAG on firm risk, and the indirect effect of audit quality on firm risk through TPAG. The research is important in reaffirming the auditor-client relationship, increasing companies’ understanding of the advantages and disadvantages of transfer pricing in their strategies, and advancing research on audit quality and firm risk considering the tax aspects of multinational companies. Data were collected from non-financial publicly listed companies in three Southeast Asian countries, Indonesia, Malaysia, and Singapore, from 2014 to 2018, totaling 1,470 firm-year, using the panel data regression. The result indicates that multinational companies audited by high-quality (Big-N) audit firms exhibit higher levels of TPAG. Moreover, companies that employ more TPAG practices are likely to have lower firm risk because their transfer pricing transactions are efficient. This research also highlights that better audit quality indirectly reduces firm risk by influencing TPAG.