Audit committee characteristics and tax planning: evidence from the ago-industry in listed companies in Thailand

Abstract

This study aims to examine the investigate the audit committee characteristics on tax planning in the agro-industry listed companies in Thailand. This research used 229 firm-year data extracted from the annual financial reports (form 56-1) and data from the SET Security Market Analysis and Reporting Tool (SETSMART) database during the years 2018–2022. The descriptive analysis, correlation matrix, and multiple regression were used for the analysis. Theoretically, this research applies agency theory to explain the relationship between audit committee characteristics and tax planning. The main findings reveal that among audit committee characteristics, being female and the frequency of meetings both have significant effects on tax planning of Thailand ago-industry listed firms. In comparison, size, expertise (financial and accounting) and compensation do not have significant effects on tax planning. The findings offer valuable insights for companies to consider when selecting candidates for audit committees.

Keywords:

• Audit committee
• expertise
• gender diversity
• compensation
• tax planning
• agency theory

REVIEWING EDITOR:

• Collins Ntim, University of Southampton, United Kingdom of Great Britain and Northern Ireland

SUBJECTS:

• Risk Management
• Strategic Management
• Corporate Governance

1. Introduction

Tax planning refers to the strategic management of a firm’s tax affairs to legally minimise its tax liabilities while ensuring compliance with relevant tax laws and regulations. Ado et al. (2021) explain tax planning allows taxpayers to manage their tax affairs to pay the lowest level of tax without overstepping the law. Moreover, tax planning is a tax-saving tool used to reduce costs and increase shareholders’ wealth (Graham & Tucker, 2006; Hanlon & Heitzman, 2010; Robinson et al., 2010). Hanlon and Heitzman (2010) explain tax avoidance as part of a continuum within tax planning strategies, encompassing entirely legal tactics, which is in stark contrast to tax evasion, an illegal form of tax reduction. Tax avoidance aims to reduce explicit taxes, and some studies have addressed a wide spectrum of tax avoidance measures, including tax management, tax planning, tax aggressiveness, tax evasion and tax sheltering (Hanlon & Heitzman, 2010). For that reason, corporate tax planning has become a matter of public concern and has gained continuous attention from researchers (Duhoon & Singh, 2023; Huang et al., 2018). According to agency theory, managers represent shareholders and are expected to act in their best interests (Kayode & Folajinmi, 2020). Effective corporate tax management is often shaped by the prevailing mechanisms of corporate governance (Arismajayanti & Jati, 2017). Hence, Tax planning is closely linked to the principles of corporate governance, as managers are consistently motivated to reduce tax liabilities, a strategy that contributes to the escalation of the firm’s value (Dang & Nguyen, 2022). This correlation stems from the fact that managers, within the scope of corporate governance, are continually seeking ways to enhance the financial well-being of the company. A critical component of this endeavour is the strategic management of tax obligations, where the goal is to legally minimize the tax burden. Such actions not only fulfil the managerial objective of maximizing shareholder value but also reflect a commitment to effective financial management. Consequently, adept tax planning, guided by the tenets of corporate governance, is a key driver in boosting the company’s value. Therefore, tax planning is an important strategy to reduce a company’s income tax costs and increase shareholder benefits. Many studies refer to audit committees (AC) have assumed an increasingly important function in firms’ tax planning and tax risk management procedures (Hsu et al., 2018; Richardson et al., 2013). Accountable to the board of commissioners, AC are established to carry out some of the board’s responsibilities and play a significant role in defining tax planning strategies within companies (Hsu et al., 2018; Tandean & Winnie, 2016). Through members’ financial expertise and independent oversight, AC can identify tax-related risks and opportunities, evaluate tax strategies and ensure that a company’s tax planning aligns with the organisation’s ethical standards and long-term objectives (Deslandes et al., 2020; Hsu et al., 2018). Therefore, the characteristics of AC are critical to the successful completion of their responsibilities.

To fulfil their monitoring role and protect shareholders’ interests, AC must be independent from the management. Similar to the Sarbanes-Oxley (SOX) in the USA, the Canadian National Instrument 52-110 Audit Committees (Ontario Securities Commission, 2011) requires that all AC members be independent. The characteristics of AC are enhanced when they are well resourced, independent and have members with financial expertise (Mangena & Pike, 2005). Prior research suggests that independent AC can more objectively appraise internal controls and financial information disclosures (Abbott et al., 2004). Therefore, in the present study, we developed hypotheses regarding the effects on tax planning of five AC characteristics: AC size, AC gender diversity, AC expertise, AC meetings and AC compensation.

Prior studies have extensively examined the influence of various AC characteristics such as its size, frequency of meetings, gender diversity, expertise, and independence on tax planning (Dang & Nguyen, 2022; Deslandes et al., 2020; Robinson et al., 2012). However, there exists a significant research gap in understanding the impact of AC compensation on tax planning. This gap is particularly notable given the lack of in-depth analysis on how AC compensation may affect tax planning. Therefore, the aim of this study is to bridge this gap in existing research by incorporating this variable, enabling a more comprehensive analysis of the relationship between AC compensation and tax planning.

We selected the agricultural industry as the focus of this study because of Thailand’s reputation as ‘the global culinary hub’, owing to its abundant natural resources, skilled workforce and scientific proficiency. In addition, the agro-industry sector significantly contributes to the country’s economy, accounting for 23% of the country’s GDP (Thailand-Board-of-Investment, 2018). With approximately 9000 agro-industry processing firms and around 55 firms listed on the stock exchange, Thailand’s influence in this sector is pronounced (International Trade Administration, 2022; The Securities Exchange of Thailand, 2021). In recent years, evident growth has been observed in agriculture and food exports, increasing from around USD37,883 million in 2020 to USD42,393 million in 2021 (International Trade Administration, 2022). This expansion undeniably augments the thriving agro-industry landscape in Thailand. As they comprise one of the most significant sectors generating considerable amounts of export earnings. Moreover, during the fiscal year 2022, the listed companies in Thailand, including agro-industry, paid an unprecedented amount of approximately 375,000 million baht in corporate income tax. This amount accounted for 50.2% of the total tax revenue collected by the Revenue Department during that period. Since the listed companies, have a net profit increased from 27,500 US dollars in 2018 to 29,000 US dollars in 2022 (The Stock Exchange Thailand, 2023). Consequently, the implementation of tax planning strategies emerges as a potentially importance approach for reducing corporate income tax liabilities. Therefore, the agro-industry in listed companies in Thailand serves as a suitable case for this experimental study.

This study contributes to the literature in two ways. First, this work explains the direct effects of AC characteristics on tax planning. Second, this study provides board directors with useful information that can help them make informed decisions regarding the individuals they choose for committee and board positions based on the qualities they possess.

2. Literature review and hypothesis development

To examine the influence of AC characteristics on tax planning of agro-industry in listed companies in Thailand, this study proposed five hypotheses consisting of five variables from AC characteristics, including AC size, AC gender diversity, AC expertise, AC meeting, and AC compensation. However, there were a few literatures testing the influence of AC characteristics on tax planning that were used to review and consider.

The board of directors and the AC are two significant instruments or internal mechanisms that play a crucial part in ensuring that organisations maintain high standards of financial reporting (Beasley & Salterio, 2001; Fariha et al., 2022). Thus, it is obligatory for businesses to maintain an AC that enforces the principles of responsibility and accountability (Dang & Nguyen, 2022). According to Kipkoech and Rono (2016), AC size and AC members’ expertise are two factors that have a substantial impact on how well a company performs in terms of financial reporting. In another study, AC size and meetings were found to have a positive relationship with firm performance in Jordanian listed firms (Zraiq & Fadzil, 2018). Moreover, firms that have large boards often have higher values (Saibaba & Ansari, 2012). Previous studies have shown that the number of AC members is also linked with effective tax planning. Therefore, we propose the following hypothesis:

H1: Audit committee size is positive relationship with tax planning.

Many previous studies have highlighted gender diversity on boards of directors and AC as one of the variables that boosts their performance (Aldamen et al., 2018; Lai et al., 2017). Females are often seen to be more risk averse than males and are capable of making more deliberate judgments (Watson & McNaughton, 2007). Furthermore, Dang and Nguyen (2022) argued that AC positively correlates with tax avoidance, wherein the number of female members and financial and accounting professionals may restrain tax avoidance. Previous studies have also shown that the presence of women in AC increases negative discretionary accruals and decreases the ability to control revenues (Thiruvadi & Huang, 2011). Thus, the following hypothesis is proposed:

H2: AC gender diversity is associated with Tax planning.

In the present study, we define ‘AC members’ as individuals with financial and accounting competence, which includes qualifications and experiences in the financial and accounting fields, based on their biographical information. According to Wilbanks et al. (2017) AC members who have professional backgrounds as corporate controllers are likely to engage more actively in the appraisal of risks related to fraudulent financial reporting and management oversight. Tandean and Winnie (2016) stated that members of AC in public companies should include financial and accounting professionals. This means that AC assume a vital role in overseeing firms’ financial reporting, internal controls and risk management, including the evaluation of tax-related risks. Previous studies have shown that both financial and accounting expertise have positive effects on tax planning (Hsu et al., 2018). According to Deslandes et al. (2020), tax planning is related to measures of expertise and diligence, and a larger AC, financial knowledge and length of service on the AC all play an essential role in restricting tax planning (cash ETR). Thus, the following hypothesis is proposed:

H3: AC expertise (financial and accounting) has a positive relationship with tax planning.

AC play a crucial role in overseeing a company’s financial reporting process, internal controls and external audit activities. Thus, the regular meetings held by AC are an essential part of their responsibilities (Ontario Securities Commission, 2011). Previous studies have reported some potential effects of AC meetings on firm performance. For example, according to Al-Matari et al. (2014), AC board size, AC meetings, AC independence and executive AC independence all have significantly positive relationships with firm performance. Zraiq and Fadzil (2018) found that AC meetings are positively and significantly associated with firm performance. Therefore, AC bear the responsibility of thoroughly analysing and diligently overseeing their companies’ financial statements, as well as addressing any tax-related matters and concerns. Thus, the following hypothesis is proposed:

H4: AC meetings have a positive relationship with tax planning.

AC also play a governing role in overseeing firms’ financial reporting quality (Lin, 2018; Liu & Yu, 2018). In this regard, AC characteristics, including size, independence, expertise, compensation, meeting and tenure, have all been widely investigated in prior studies. According to the previous literature, AC compensation refers to fixed pay in firms that impose high monitoring demands (Engel et al., 2010; Lin, 2018). In addition, both cash and equity compensation paid to AC members have been found to influence AC decision making regarding auditors post-censure (Behrend & Pitman, 2022; Hayek, 2018). Especially in relation to equity compensation, firms use this scheme to align AC interests with those of shareholders (Hayek, 2018; Vafeas & Waegelein, 2007). This scheme is also used to mitigate agency problems between managers and shareholders (Benmelech et al., 2010). Whenever firms pay higher equity compensation to AC members, this motivates the latter to be more effective, thus enhancing the quality of firms’ financial reporting and decreasing the possibility of restatement (Lin, 2018; Liu & Yu, 2018). Furthermore, short-term AC stock compensation is likelier to support a preference for aggressive corporate reporting, whereas long-term stock compensation supports a preference for conservating corporate reporting (Bierstaker et al., 2012). Although AC members with financial expertise tend to play more vital roles in advising and monitoring corporate tax planning (Hsu et al., 2018), existing studies on the association between AC compensation and tax planning remain limited. This motivates the current study to further investigate how AC compensation can affect corporate tax planning. Thus, the following hypothesis is proposed:

H5: AC compensation has a positive relationship with tax planning.

3. Research method

This study develops a five-year longitudinal study by employing a panel of Thai-listed companies in the alternative capital market to test whether AC characteristics can influence tax planning. There are three sub-sections which are (1) population and sample, (2) data collection and variable measurement, and (3) data analysis.

3.1. Population and sample

To investigate the influence of AC committee characteristic on tax planning of Thai listed companies, the population of this study was 71 listed firms in agro-industry listed companies in the SET during the period from 2018 to 2022 (The Stock Exchange of Thailand, 2022). However, the study excludes listed companies did not end their accounting year on 31st December, and were withdrawn from listing by the SET including listed companies under rehabilitation. After applying the condition above, 54 listed companies were adopted as sample in this study. After removed the outlier data available in a particular year, the total complete sample for this study consisted of 229 firm-years from 54 listed firms in the agro-industry sector, according to the SET industry group.

3.2 Data collection and variable measurement

Data acquisition for this study is conducted through the utilization of secondary data sources, specifically corporate annual reports spanning the reporting periods from 2018 to 2022, in conjunction with Form 56-1, as retrieved from the SET Security Market Analysis and Reporting Tool (SETSMART) database. In this research, three primary groups of variables are examined. These groups are composed of an AC characteristics, tax planning, and corporate characteristics, which function as the control variable. All the variable measurements and notations that are used are shown in Table 1.

Table 1. Variable measurements.

Variable	Acronym/Abbreviation	Definition
Audit committee (AC) characteristics
AC size	AC size	Number of members serving on the AC
AC Gender diversity	AC women	Number of AC women members
AC expertise	AC expertise	Number of AC members with a finance or accounting education
AC meeting	AC meet	The frequency of AC meetings held in one year
AC compensation	AC compens	Natural logarithm of AC compensation
Tax planning
Effective tax rate	ETR	Current tax expense/Pre-tax income
Control variables
Firm size	Firm size	Natural logarithm of total assets
Leverage	LEV	Total liabilities to total assets

3.3. Data analysis

In analyzing the data, this study’s objectives are to test for the relationship between AC characteristics and tax planning of agro-industry in listed companies in Thailand, descriptive analysis, correlation matrix, and multiple regression which are used. Firstly, descriptive analysis presents the summary statistics of all variables. The correlation matrix is used to test for any multicollinearity problem between variables. Finally, multiple regression is used to examine the relationship between AC characteristics and tax planning. Moreover, to examine the influence of AC characteristics on tax planning, the equation in this study are as follows: $$\begin{array}{c}{\text{ETR}}_{\mathit{\text{it}}}={\beta }_0+{\beta }_1\text{AC}\_{\text{size}}_{i,t}+{\beta }_2\text{AC}\_{\text{women}}_{i,t}+{\beta }_3\text{AC}\_{\text{expertise}}_{i,t}\\ +{\beta }_5\text{lnAC}\_{\text{compens}}_{i,t}+{\beta }_2\text{lnFirm}\_{\text{size}}_{i,t}+{\beta }_3{\text{LEV}}_{i,t}+{\epsilon }_i{}_{,t}\end{array}$$

4. Findings and results

4.1. Descriptive statistics and correlation matrix

Table 2 indicates a descriptive analysis of all variables used in this study by using mean, standard deviation, min, and max. For example, the average of AC size is 3.214 (SD = 0.497). It is lower than non-financial firms listed on the Ho Chi Minh City and Ha Noi Stock Exchange (Dang & Nguyen, 2022). While AC women is 0.777 (SD = 0.775), and AC expertise is 0.856 (SD = 0.719). Moreover, AC meet, and AC compensation is 4.983 (SD = 1.364) and 5.851 (SD = 0.427), respectively. In terms of ETR is 0.151 (SD = 0.131), while the control variable Firm size and leverage is 6.956 (SD = 3.121) and 0.407 (SD = 0.208), respectively.

Table 2. Descriptive analysis of variables used in this study.

Variables	Obs	Mean	Standard deviation	Min	Max
AC size	229	3.214	0.497	3.000	5.000
AC women	229	0.777	0.775	0.000	3.000
AC expertise	229	0.856	0.719	0.000	3.000
AC meet	229	4.983	1.364	3.000	9.000
AC compens	229	5.851	0.427	4.875	7.081
ETR	229	0.151	0.131	0.000	1.118
Firm size	229	6.956	3.121	2.842	11.802
LEV	229	0.407	0.208	0.003	0.961

Note: This table reports some summary statistics for 229 firm-years from 54 listed firms in the agro-industry sector over the period 2018–2022. See Table 1 for variable definitions.

Before conducting a multiple regression analysis, it was essential to first verify that the data did not exhibit multicollinearity among the variables included in the analysis. This step ensures that the variables are independent of each other, which is a key assumption for the validity of multiple regression results. Table 3 illustrates the correlation matrix used to test for multicollinearity between eight variables used in this study: five dependent variables, one independent variable, and two control variables. The absolute maximum Pearson correlation value between AC meet and firm size is 0.243 not exceed 0.700 (see, Table 3). Furthermore, the score of Variance Inflation Factor (VIF) of each variable not over 10, as AC compensation had the highest VIF score of 1.179 (see, Table 4).

Table 3. Correlation matrix.

	1	2	3	4	5	6	7	8
AC size	1.000
AC women	0.022*	1.000
AC expertise	−0.025	0.041	1.000
AC meet	−0.111	0.009	0.232*	1.000
AC compens	0.021	−0.175**	−0.008	0.192**	1.000
ETR	−0.058	0.172**	0.136	0.191**	0.048	1.000
Firm size	0.042	0.85	−0.103	−0.243**	0.029	−0.004	1.000
LEV	−0.082	0.137*	−0.021	−0.006	0.241**	−0.004	0.070	1.000

Note: *, ** are indicate statistical significance at the 1%, 5% and 10% level respectively. See Table 1 for variable definitions.

Table 4. Multiple regression.

Variable	Coeff	t-stat
(Constant)	−0.025	−0.190
AC size	−0.013	−0.736
AC women	0.029	2.546**
AC expertise	0.015	1.078
AC meet	0.016	2.450**
AC compens	0.017	0.803
Firm size	0.001	0.470
LEV	−0.032	−0.730
R Square	0.076
Adj R Square	0.047
F-value (sig.)	2.610**
Max VIF	1.179
N	229

Note: *, is **,*** indicate statistical significance at the 1%, 5% and 10% level respectively. See Table 1 for variable definitions.

4.2 Main results

Table 4 shows the results of multiple regression analysis from the model. The R squared from the models is 0.076, and the adjusted R squared is 0.047, indicating that models illustrate approximately 2.610% of the variance in the data. The predicted relationships between AC characteristics and tax planning in agro-industry listed company, the finding shows AC size ($\beta$= −0.013, p > 0.05) and AC expertise ($\beta$=0.015, p > 0.05) are both rejected. In addition, AC women ($\beta$=0.029, p < 0.05) and AC meet ($\beta$=0.016, p < 0.05) has significant positive relationship on tax planning. Although AC compens ($\beta$=0.017, p > 0.05) has a positive relationship with tax planning, the predicted relationship is rejected. As a reason for the control variable, the findings indicate no significant links between tax planning and a firm size and LEV.

4.3. Sensitivity analysis and robustness

As a robustness test, we added and excluded the control variables. For the first, we added the firm age measure by the number of years of incorporation of the company and the Big 4 audit measure by the dummy variable (that equals 1 if the auditor is a Big 4 audit firm and 0 otherwise). Both results from the multiple regression output in Table 5 shows, reveal that among the various AC and firm characteristics examined for their impact on tax planning, the frequency of AC meetings and AC women demonstrated a robust and statistically significant relationship, suggesting a reliable positive influence on tax planning. In contrast, other variables, including AC size, AC expertise, and AC compensation as well as their quadratic effects, did not show statistically significant results. The direction of these coefficients is consistent with our initial findings, indicating a robust positive correlation between AC meetings and the presence of women on AC in relation to tax planning. Consistent with Lu and White (2014) robustness is imperative for credible causal inference, as it ensures that the coefficients of the pivotal variables remain unaffected by the inclusion or exclusion of additional variables under suitable conditions.

Table 5. Robustness test.

	Include control variables. (Added 2 control variables)		Exclude control variables
	Coeff	t-stat	Coeff	t-stat
(Constant)	−0.043	−0.323	−0.009	−0.072
AC size	−0.013	−0.721	−0.011	−0.661
AC women	0.027	2.273**	0.028	2.529**
AC expertise	0.019	1.353	0.014	1.010
AC meet	0.016	2.314**	0.016	2.485**
AC compens	0.018	0.847	0.014	0.673
Control variables
Firm size	0.000	−0.061
LEV	−0.032	−0.694
FirmAge	0.001	1.382
Big4	−0.016	−0.711

Note: *, is **,*** indicate statistical significance at the 1%, 5% and 10% level respectively.

5. Discussion

The results confirm that AC size does not have a significant impact on tax planning (H1). This means that AC size does not facilitate the tax planning activities of listed companies in the agro-industry. In comparison, AC women have a significant influence on tax planning. This means that AC gender diversity (women) facilitates tax planning activities, thus strongly supporting H2. This finding is similar to the study result of Dang and Nguyen (2022) regarding the link between the composition of AC (specifically the inclusion of female members) and the results or effectiveness of tax planning strategies. As expected, AC expertise (financial and accounting) does not have a significant relationship with tax planning. This result is inconsistent with previous findings (Deslandes et al., 2020; Hsu et al., 2018) stating that financial and accounting expertise within AC exerts a favourable impact on tax planning outcomes. Thus, our finding does not support H3. Meanwhile, the results reveal that AC meet has a significant effect on tax planning (H5). This result is consistent with the findings of the previous literature on AC meetings (Hsu et al., 2018), which state that such meetings play an important role in restricting tax planning. However, H5 is not substantiated by our findings. Finally, we do not observe compelling evidence demonstrating a significant impact of AC compensation on tax planning within listed companies in the agro-industry listed firms.

6. Conclusion and suggestions for future study

This research investigated the relationship between AC characteristics and tax planning of 71 listed firms in the agro-industry sector in Thailand from 2018 to 2022. The empirical findings of this comprehensive analysis have elucidated a statistically substantial and positive relation between the characteristics of the AC, particularly highlighting the presence of women and the frequency of committee meetings that have the effectiveness and strategic sophistication of tax planning practices within this agro-industry listed firms. The findings of this study highlight the significance of AC characteristics in the agro-industry, as they enable improved tax planning management for company organisations operating within this sector. The findings of this study provide valuable insights by demonstrating that although the adoption of AC characteristics could improve tax planning practices in the agro-industry sector on the Stock Exchange of Thailand (SET), it does not inevitably lead to improved tax planning in other industries.

While this study is restricted to the Thai context and thus not generalizable, the findings reveal 4 alternative variables of AC characteristics and there were only 71 ago-industry listed companies used in this research. Therefore, the suggestions for future study could investigate AC characteristics in other regions and use other sectors listed firms.

Authors’ contributions

Conceptualization, W.T.; methodology W.T.; data collection, U.R.; formal anylysis, U.R.; investigation, U.R., writing-the original draft of the manuscript, W.T. and U.R.; and edited the manuscript W.T, and U.R.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Data availability statement

No datasets were generated or analyzed during the current study.

Additional information

Funding

This research is funded by Research and Graduate Studies, Khon Kaen University (Grant number: RP 66-4-001).

Notes on contributors

Wanlapa Thomya

Wanlapa Thomya is an Assistant Professor at Department of Accounting, Faculty of Interdisciplinary Studies, Nong Khai Campus, Khon Kaen University, Thailand. Her research interests include enterprise risk management, corporate governance, financial accounting, and management accounting.

Uma Ritsri

Uma Ritsri is an Assistant Professor at Department of Accounting, Faculty of Interdisciplinary Studies, Nong Khai Campus, Khon Kaen University, Thailand. Her research interests include taxation, risk management, corporate governance, and carbon accounting.