The moderating role of digital transformation in the relationship between audit quality and aggressive tax avoidance: empirical evidence from the Jordanian industrial firms

This paper examines the moderating effect of corporate digital transformation in the relationship between audit quality and aggressive tax avoidance in the sample of industrial companies listed on the ASE and operating during the 2020–2025 period. They were based on data of a balanced panel of 30 industrial companies listed on the ASE 180 observations. The primary estimator used was the feasible generalized least squares (FGLS) method that was employed after it was established that first-order autocorrelation, groupwise heteroskedasticity, and partial cross-sectional dependence existed. System-GMM estimator was used to confirm the robustness of the results, and to deal with the endogeneity that may arise due to reverse causality between auditor selection and result. There are three key findings of the study. First, there is a strong and consistent negative relationship between affiliation with one of the Big Four audit firms and aggressive tax avoidance in all the models studied, confirming that reputation-based audit quality is an effective institutional deterrent a finding of particular importance given that 73.3% of the Jordanian industrial firms in the sample rely on local auditors and therefore lack similar governance controls. Second, aggressive tax avoidance is positively related to higher audit fees, which are indicative of a more complex client base and an economic dependence on clients by the auditor, rather than a signal of greater monitoring rigour and, therefore, as a challenge to the fee-as-quality assumption common to the developed-market framework. Third, although digital transformation demonstrates a direct positive correlation with aggressive tax avoidance—indicating that firms can use digital capabilities to enhance tax planning and not compliance in the pre-JoFotara regulatory environment—its moderating effect on Big Four affiliation is not statistically significant. It is important to note that the relationship between the intensity of audit fees and digital transformation is positively significant, which is in line with the economic dependence argument. The implications of the findings are important to the Jordan Securities Commission, the tax authorities as well as regulatory bodies who are looking to enhance corporate tax compliance in a dynamic digital regulatory environment, and raise important questions of the portability of audit quality assumptions across institutional settings.

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