Tax avoidance and financial statements readability: a case of JSE listed firms.

Abstract

This study examines the relationship between financial statement readability, as measured by the BOG Index, and key firm-specific factors, including tax avoidance, leverage, audit quality, firm size, firm age, and profitability. Using a regression model, the study identifies significant predictors of financial reporting complexity and explores the strategic considerations underlying these relationships. The findings reveal that firms engaging in higher levels of tax avoidance and those with greater leverage produce more complex financial statements, potentially as a means of obfuscating information and managing external scrutiny. Conversely, firms audited by high-quality auditors, such as the Big Four, tend to present simpler, more transparent financial statements, underscoring the critical role of audit quality in promoting financial statement readability. Firm size is positively associated with financial reporting complexity, reflecting the increased regulatory and operational demands of larger firms, while older firms tend to produce less complex financial statements due to established reporting practices. Profitability, however, is found to have no significant impact on financial statement readability in this context. The model explains approximately 40% of the variation in financial reporting complexity, indicating a moderate explanatory power, with the F-statistic confirming the overall significance of the regression. These findings contribute to the literature on financial reporting by highlighting the strategic use of reporting complexity in managing perceptions and the importance of audit quality in enhancing transparency. The study underscores the need for robust regulatory oversight and suggests further research into the roles of corporate governance, industry-specific dynamics, and external market conditions in shaping financial statement readability. This research provides valuable insights for policymakers, auditors, and stakeholders seeking to understand the determinants of financial reporting practices and their implications for corporate transparency.