EuroMed Journal of Business

Quality of management schools, strength of auditing and reporting standards and

tax evasion: A cross-country analysis
Hichem Khlif, Achraf Guidara,
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(2015),"The determinants of tax evasion: a literature review", International Journal
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IJLMA-03-2014-0027">https://doi.org/10.1108/IJLMA-03-2014-0027</a>
(2014),"Tax evasion and compliance; from the neo classical paradigm to behavioural economics,
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Reporting
Quality of management schools, standards and
strength of auditing and reporting tax evasion

standards and tax evasion

A cross-country analysis 149

Hichem Khlif Received 28 May 2017

Revised 6 August 2017
Faculty of Economics and Management of Mahdia, 15 October 2017
University of Monastir, Sfax, Tunisia, and 9 December 2017
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Accepted 30 December 2017

Achraf Guidara
Faculty of Economics and Management of Sfax, University of Sfax,
Sfax, Tunisia

Abstract
Purpose – The purpose of this paper is to examine the relationship between the quality of management
schools and tax evasion and tests whether the strength of auditing and reporting standards moderates
such a relationship.
Design/methodology/approach – Tax evasion is measured using the macro-indirect approach based on
Schneider, Buehn and Monterngro (2010). The quality of management schools is collected from The Global
Competitiveness Report for 2014-2015.
Findings – On the basis of sample of 137 countries, the authors document that the level of tax evasion is
negatively associated with the quality of management schools and the strength of auditing and reporting
standards. When the authors distinguish between low- and high-strength of auditing and reporting standards
countries, the authors find that the negative and significant association remains stable only for high-strength
of auditing and reporting standards countries.
Practical implications – These results imply that the quality of management schools through its output
(managers, fiscal controllers, auditors and businessmen) may increase the tendency of individuals in a given
country to comply with tax rules and that legal enforcement may affect the ethical behaviours of these actors
with regard to tax evasion.
Originality/value – The empirical findings have policy implications for governments with high levels of tax
evasion since they highlight the importance of the quality of higher educational system in shaping tax
compliance behaviour.
Keywords Tax evasion, Quality of management schools, Strength of auditing and reporting standards
Paper type Research paper

1. Introduction
Tax evasion becomes a widespread phenomenon behind several financial scandals for both
developed and developing countries that may significantly influence public revenues due to
the lack of tax compliance (Picur and Riahi-Belkaoui, 2006). It is defined as a behaviour
involving a direct violation of fiscal rules to escape the payment of tax such as the deliberate
under-reporting of income (e.g. revenues realized in black economy) and the over-claiming of
tax deductions (e.g. recording fictitious expenses) (Richardson, 2008). To be able to combat
such an illegal act, it is necessary for governments to understand the causes behind allowing
them to undertake corrective actions (Richardson, 2008).
Given this importance, several empirical enquiries have been conducted to identify the
determinants of such a phenomenon at country level (for a detailed review concerning
the determinants of tax evasion see Khlif and Achek, 2015). These studies have dealt with EuroMed Journal of Business
economic determinants (e.g. Picur and Riahi-Belkaoui, 2006; Riahi-Belkaoui, 2004; Vol. 13 No. 2, 2018
pp. 149-162
Richardson, 2006), national culture (e.g. Richardson, 2008; Tsakumis et al., 2007) and © Emerald Publishing Limited
1450-2194
sustainability level (Khlif et al., 2016). DOI 10.1108/EMJB-05-2017-0017
 EMJB Although education, through literacy percentage (e.g. Richardson, 2006), has been
13,2 considered as an explanatory variable of tax evasion, no study has refined the analysis by
integrating the quality of business schools as an explanatory variable of tax evasion.
Focussing on the quality of business schools is particularly interesting since higher
education in business provides any economy with future actors who may operate as
managers, fiscal controllers, accountants, auditors and businessmen.
150 On the basis of these intuitions, we try in this study to explore the relationship between
the quality of management schools and tax evasion at a country level. We also test for the
moderating effect of the strength of auditing and reporting standards on such a relationship.
Using a sample of 137 developed and developing countries, we document that the quality
of management schools is negatively and significantly associated with the level of tax
evasion. When we test for the moderating effect of the strength of auditing and reporting
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standards on this relationship, we find that the negative and significant association remains
stable for settings characterised by high level of enforcement of auditing and reporting
standards, while it becomes insignificant for countries having a low auditing and
accounting infrastructure.
We offer two major contributions to tax literature. On the one hand, our study is the first
to explore how higher education system, through the quality of management schools, may
influence tax evasion practices using a cross-country data set. On the other hand, our
empirical findings have policy implications for governments with high levels of tax evasion
since they highlight the importance of the quality of higher educational system in shaping
tax compliance behaviour and how the level of auditing and reporting enforcement may
affect such a relationship.
The rest of the paper is organised as follows. Section 2 develops theoretical underpinning
for the association between the quality of management schools and tax evasion and
formulates research hypotheses. Section 3 describes the research design. Section 4
summarises and analyses the empirical results of this study. Section 5 presents the
conclusions, limitations and future research avenues.

2. Hypotheses development
2.1 The quality of business schools and tax evasion
Several economic agents operating within an economy in one country come from business
schools including accountants, fiscal controllers, auditors, managers and some
businessmen. Quality business schools may ensure high degree of mastery of technical
knowledge and professional training through the interaction between top researchers in
specific fields and professionals with high level of expertise. Top business schools have
traditions to generally invite well-known qualified experts to display true case studies that
give the opportunities to students to discover the real business world, involve substantive
linkages to practical economic world, consulting activities and other forms of professional
engagements. For auditing professions, they generally invite auditors working for Big 4
audit firms to explain how to discover tax evasion practices through, for example, the
excessive use of transfer pricing practices[1] between affiliated companies or the procedures
used to transfer profits to tax heavens. Critics addressed to business schools claim that
these institutions train future managers or other business actors to be only concerned with
increasing profits or reducing taxes (Ghoshal, 2005; Neubaum et al., 2009). This singular
overriding focus on the concept of “profits-first” would be consistent with lower levels of
idealism (Neubaum et al., 2009).
As a training ground for future managers and CEOs, business schools have come under
increasing scrutiny for the role that they can and should play in developing students’
understanding of ethical considerations in business (Adler, 2002; Rutherford et al., 2012).
In this regard, Rutherford et al. (2012, p. 175) posit that “the concern seems well-founded
 given not only the ethical crisis in the business community, but also the fact that business Reporting
majors make up an increasingly large percentage of undergraduate degrees”. standards and
Beyond technical knowledge and professional training, quality business schools tax evasion
emphasise on business ethics. Highly qualified managers, auditors, accountants and fiscal
controllers may use this fertile background of technical expertise and knowledge to serve
their own interests at the expense of the overall welfare of their country by reinforcing the
practice of tax evasion among investors and providing advisory services in this regard. 151
Accordingly, courses specifically dedicated to business ethics and sustainability will
encourage current students and future economic actors to act ethically to avoid any types of
discretionary tax practices that lead to tax evasion. Emphasising on business ethics may
improve tax moral among individuals and thus tax compliance behaviour. For instance,
Koumbiadis and Pandit (2014) suggest that educational instructions for accounting students
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in ethics may increase their ethical awareness. Longenecker et al. (2006) posit that the
inclusion of business ethics programs may be done through case study illustration and
practice simulations on issues like the failure of Arthur Anderson and Enron. Similarly,
Swanson (2005, p. 247) suggests that there is crisis of legitimacy in business schools due to a
longstanding habit of sidestepping ethics education. She adds that (p. 247) “this crisis can
easily resolved if business schools adopted a three-pronged approach to ethics education
based on foundational coursework. Specifically, business schools should require at least one
ethics course as a fulcrum for integrating ethics across the curriculum. As a third tactic, this
effort should be augmented by other initiatives, such as hosting guest speakers, offering
service-learning projects, and establishing endowed chairs in ethics”. Finally, Rezaee (2004)
posits that auditors should continue to focus on anti-fraud education and training programs
for the audit staff and clients to restore public trust in accounting professions.
From an empirical perspective, Koumbiadis and Pandit (2014) compare between
students who have graduated from the standard 120 credit accountancy programme and
students who have graduated from the American Institute of Certified Public
Accountants-mandated 150 credit accountancy programme which includes 30 extra
credits with a focus on ethics. They document that 150 credit programme graduates
obtained significantly higher scores in ethical perceptions on five fields including
company profit, friendship, team interest, personal morality, and rules. Similarly,
Dellaportas (2006) examines whether the discrete course in accounting ethics may
influence ethical perceptions for Australian accounting students. He provides evidence
that a discrete intervention dealing with fraudulent tax and accounting practices has a
positive and significant effect on students’ ethical reasoning and development.
To sum up, high quality business schools have the following three characteristics which
are high degree of mastery of technical knowledge for their students, good professional
training and a close interaction with practical word and ethical behaviours. These
characteristics will imply that all economic agents getting their degrees from these schools
will normally act ethically to improve firm’s management and reduce tax evasion crimes.
On the basis of this reasoning, we expect that high quality of business schools in one
country will encourage citizens to comply strongly with tax rules and reduce the likelihood
of tax evasion. Thus, we test the following hypothesis:
H1. The quality of business schools is negatively associated with the level of tax evasion.

2.2 The moderating effect of the strength of auditing and reporting standards on the
association between the quality of business schools and tax evasion
Graduates of business schools have a set of prerequisites learned during their studies.
Moving from the world of studies and academic atmosphere to a turbulent business world,
they will be confronted to an economic reality that can either reinforce the principles of
 EMJB ethics acquired in these schools or reduce their willingness to act ethically. The strength of
13,2 auditing and reporting standards plays an important role in this regard since it may shape
the commitments of taxpayers towards transparency. For instance, operating under low
legal enforcement will foster a climate of corruption. Accordingly, graduates of high quality
business schools will be inclined to use their good training and high expertise to facilitate
tax evasion under the pressures exerted by economic actors operating within poor legal
152 environment and low auditing and reporting standards infrastructure. By contrast, if
graduates of high quality business schools find a good economic environment that promotes
transparency and ethical acts, they will follow this trend by complying with tax rules or
inviting their clients to avoid tax evasion practices. Boolaky and Cooper (2015) have
documented that there is a positive relationship between the quality of business schools and
legal enforcement. Accordingly, we expect that the strength of auditing and reporting
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standards may moderate the negative association between the quality of business schools
and tax evasion. Thus, the following hypothesis is tested:
H2. The negative association between the quality of business schools and tax evasion is
more (less) pronounced in settings characterised by high (low) level of auditing and
reporting standards enforcement.
Figure 1 illustrates the conceptual framework for the associations explored in this study.

3. Research design
3.1 Sample
The study represents a cross-country investigation. The paper of Schneider et al. (2010)
includes the score of tax evasion for 162 countries, while the Global competitiveness
report (2014-2015) includes only 144 countries. Accordingly, we focus on 144 countries.
We also exclude 7 other countries since the quality of management schools scores are not

Outputs of Business Schools

Fiscal Some
controllers managers
Accountants Auditors
and fiscal and
advisors investors

Economy actors’ behaviours

Strength of
auditing and As a moderator
reporting standards

Figure 1.
Conceptual framework Tax evasion
 reported in the Global competitiveness report (2014-2015). Thus, our final sample includes Reporting
137 countries. Table I presents more details about the sample selection process and the list standards and
of countries included in our sample. tax evasion
3.2 Dependent variable: tax evasion
In their methodological review, Gemmell and Hasseldine (2012) suggest that two main
approaches have been used to estimate tax evasion including micro-direct and macro-indirect 153
methodologies. While micro-direct approaches are based on taxpayer data or surveys or tax
audit to measure the extent of tax noncompliance, macro-direct approaches estimate the size of
the hidden economy based on macro-economic assumptions and models. Riahi-Belkaoui (2004),
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Sample selection process

Countries included in 162
Schneider et al. (2010)
Countries in the Global Competitiveness 144
Report (2014-2015)
Initial sample Minimum (162; 144) ¼ 144
Countries with quality of management (7)
school scores not reported in the Global
Competitiveness Report (2014-2015)
Final sample 137
List of countries included in the analysis
Albania Dominican Republic Republic of Korea Panama United Arab Emirates
Algeria Egypt Kuwait Paraguay UK
Angola El Salvador Kyrgyz Republic Peru USA
Argentina Estonia Lao PDR Philippines Uruguay
Armenia Ethiopia Latvia Poland Venezuela
Australia Finland Lebanon Portugal Vietnam
Austria France Lesotho Qatar Yemen
Azerbaijan Gabon Libya Romania Zambia
Bahrain The Gambia Lithuania Russian Federation Zimbabwe
Bangladesh Georgia Luxembourg Rwanda
Belgium Germany Madagascar Saudi Arabia
Bhutan Ghana Malawi Senegal
Bolivia Greece Malaysia Sierra Leone
Botswana Guatemala Mali Singapore
Brazil Guinea Malta Slovak Republic
Bulgaria Guyana Mauritania Slovenia
Burkina Faso Haiti Mauritius South Africa
Burundi Honduras Mexico Spain
Cambodia Hong Kong SAR Moldova Sri Lanka
Cameroon Hungary Mongolia Suriname
Canada Iceland Morocco Swaziland
Cape Verde India Mozambique Sweden
Chad Indonesia Myanmar Switzerland
Chile Islamic Republic of Iran Namibia Taiwan, China
China Ireland Nepal Tajikistan
Colombia Israel The Netherlands Tanzania
Costa Rica Italy New Zealand Thailand
Côte d’Ivoire Jamaica Nicaragua Trinidad and Tobago
Croatia Japan Nigeria Tunisia
Cyprus Jordan Norway Turkey
Czech Republic Kazakhstan Oman Uganda Table I.
Denmark Kenya Pakistan Ukraine Sample description
 EMJB Picur and Riahi-Belkaoui (2006), Richardson (2006, 2008) use the individuals’ perceptions about
13,2 tax evasion as a proxy for a country’s tax evasion reported by the World Competitiveness
Reports. By contrast, Tsakumis et al. (2007), Gabor (2012) and Khlif et al. (2016) use the
macro-indirect approach. Recent Global Competiveness reports (e.g. 2014-2015) do not publish
survey concerning individuals’ perceptions about tax evasion. Accordingly, we follow Tsakumis
et al. (2007), Gabor (2012) and Khlif et al. (2016) in using the economic estimate of shadow
154 economy developed by Schneider et al. (2010) based on dynamic multiple-indicators
multiple-causes (DYMIMIC)[2]. Table II displays the estimates of shadow economy in
percentage of gross domestic product (GDP) form low to high percentage for the list of countries
included in the sample. The minimum value for tax evasion is for Switzerland (8.500 per cent),
while the maximum value is for Bolivia (66.100 per cent). The median value for tax evasion is for
Romania (32.600 per cent).
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3.3 Independent variable

The Global Competitiveness Report for 2014-2015 measures the quality of management
schools based on a survey conducted among business leaders who were asked to respond to
the following question “In your country, how would you assess the quality of business
schools? (1 ¼ extremely poor – among the worst in the world; 7 ¼ excellent – among the
best in the world)”. For each country, a weighted average score is computed. The high score
for the quality of management schools is for Switzerland (6.200), the median score is for
Korean republic (4.200) and the lowest score is observed for Egypt (2.000). Table III shows
the scores form high to low level of the quality of management schools for all countries
included in the study.

3.4 The moderating variable: the strength of auditing and reporting standards
The strength of auditing and reporting standards is a score computed to assess the legal
environment and the degree of rules enforcement in one country. Similar to the quality of
business schools, a survey is conducted among business leaders who were asked to score
the strength of auditing and reporting standards on a scale ranging from “1” indicating a
weakest legal enforcement to “7” indicating the strongest standards enforcement. For each
country, a weighted average score is computed. The highest score is obtained for
South Africa (6.700), the median score is obtained for Gabon, Indonesia and Kuwait (4.600)
and the low level of legal enforcement is observed for Libya (2.200).

3.5 Control variables

On the basis of the previous empirical literature dealing with the determinants of tax
evasion (e.g. Richardson, 2008; Khlif et al., 2016), we consider two control variables[3]
including the level of economic development and market size. With respect to the level of
economic development, Quirk (1997) suggests that countries in the early stages of economic
development represent fertile grounds for tax evasion. Following Richardson (2008), the
proxy for economic development is the GDP per capita. The second control variable deals
with the market size which includes both domestic and foreign markets. According to
Riahi-Belkaoui (2004), larger market size in one country may reduce the scope of shadow
economy. Thus we expect a negative effect of market size on tax evasion. Definition of each
variable and the source of data used to collect information are also provided in Table AI.

3.6 Models specification

To assess the empirical validity of the hypotheses formulated above, the following OLS[4]
regressions are performed.
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Rank from low to high level of shadow economy

Country TEV Country TEV Country TEV Country TEV Country TEV

1 Switzerland 8.500 31 Sweden 18.800 61 Malaysia 30.900 91 Ethiopia 38.600 121 Zambia 47.100
2 USA 8.600 32 Indonesia 18.900 62 Estonia 31.200 92 Paraguay 38.800 122 Gabon 47.500
3 Luxembourg 9.700 33 Chile 19.300 63 Turkey 31.300 93 Brazil 39.000 123 Honduras 48.300
4 Austria 9.800 34 Kuwait 19.400 64 Dominican Republic 31.900 94 Guinea 39.000 124 Cambodia 48.700
5 Japan 11.000 35 Belgium 21.900 65 Cameroon 32.000 95 Burundi 39.500 125 Ukraine 49.700
6 New Zealand 12.400 36 Israel 22.000 66 Lithuania 32.000 96 Mozambique 39.800 126 Myanmar 50.300
7 UK 12.500 37 India 22.200 67 Croatia 32.100 97 Rwanda 40.100 127 Guatemala 50.500
8 China 12.700 38 Spain 22.500 68 Algeria 32.500 98 Kyrgyz Republic 40.400 128 Thailand 50.600
9 Singapore 12.900 39 Mauritius 22.700 69 Romania 32.600 99 Burkina Faso 40.500 129 Uruguay 50.600
10 The Netherlands 13.200 40 Portugal 23.000 70 Botswana 32.900 100 Ghana 40.700 130 Nigeria 56.200
11 Australia 14.000 41 Hungary 24.400 71 Lebanon 33.100 101 Mali 40.700 131 Haiti 56.400
12 Qatar 14.100 42 Taiwan, China 25.000 72 Kenya 33.200 102 Swaziland 40.700 132 Tanzania 56.400
13 France 15.000 43 Argentina 25.300 73 Trinidad and Tobago 33.400 103 Madagascar 40.800 133 Azerbaijan 58.000
14 Vietnam 15.100 44 Costa Rica 25.700 74 Guyana 33.700 104 Kazakhstan 41.100 134 Peru 58.000
15 Iceland 15.600 45 United Arab Emirates 25.900 75 Libya 33.700 105 Philippines 41.600 135 Zimbabwe 61.800
16 Canada 15.700 46 Slovenia 26.200 76 Venezuela 33.800 106 Malawi 41.800 136 Georgia 65.800
17 Ireland 15.800 47 Republic of Korea 26.800 77 Albania 34.300 107 Tajikistan 42.200 137 Bolivia 66.100
18 Germany 16.000 48 Italy 27.000 78 Jamaica 34.800 108 Uganda 42.300
19 Hong Kong SAR 16.000 49 Yemen 27.100 79 Egypt 34.900 109 Chad 43.700
20 Mongolia 17.600 50 Malta 27.200 80 Morocco 34.900 110 Senegal 43.700
21 Denmark 17.700 51 Poland 27.200 81 Mauritania 35.100 111 Russian Federation 43.800
22 Finland 17.700 52 South Africa 27.300 82 Bangladesh 35.300 112 Sri Lanka 43.900
23 Bahrain 17.900 53 Greece 27.500 83 Bulgaria 35.300 113 Armenia 44.000
24 Saudi Arabia 18.100 54 Cyprus 28.000 84 Cape Verde 35.400 114 The Gambia 44.300
25 Slovak Republic 18.100 55 Bhutan 28.800 85 Pakistan 35.700 115 Moldova 44.500
26 Islamic Republic of Iran 18.300 56 Latvia 29.200 86 Panama 36.500 116 Nicaragua 44.600
27 Czech Republic 18.400 57 Lao PDR 29.600 87 Nepal 36.700 117 El Salvador 45.100
28 Oman 18.400 58 Mexico 30.000 88 Tunisia 37.200 118 Côte d’Ivoire 45.200
29 Jordan 18.500 59 Namibia 30.300 89 Colombia 37.300 119 Sierra Leone 45.600
30 Norway 18.700 60 Lesotho 30.500 90 Suriname 37.800 120 Angola 46.500
Reporting

tax evasion

155
standards and

Table II.

by country
Tax evasion
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13,2

156
EMJB

Quality of
Table III.

by country
management school
Rank from high to low level of quality of business school
Country QMS Country QMS Country QMS Country QMS Country QMS

1 Switzerland 6.200 31 Malta 4.900 61 Czech Republic 4.300 91 Islamic Republic of Iran 3.800 121 Tanzania 3.200
2 Belgium 6.000 32 Argentina 4.800 62 El Salvador 4.300 92 Madagascar 3.800 122 Haiti 3.100
3 Portugal 5.900 33 Côte d’Ivoire 4.800 63 Hungary 4.300 93 Nepal 3.800 123 Paraguay 3.100
4 Spain 5.900 34 Sri Lanka 4.800 64 Pakistan 4.300 94 Nigeria 3.800 124 Sierra Leone 3.100
5 Canada 5.800 35 Taiwan, China 4.800 65 Uruguay 4.300 95 Rwanda 3.800 125 Bolivia 3.000
6 Singapore 5.800 36 Trinidad and Tobago 4.800 66 Croatia 4.200 96 Slovak Republic 3.800 126 Kyrgyz Republic 2.900
7 UK 5.800 37 Guatemala 4.700 67 The Gambia 4.200 97 Turkey 3.800 127 Mongolia 2.900
8 France 5.700 38 Jordan 4.700 68 Japan 4.200 98 Uganda 3.800 128 Mozambique 2.900
9 The Netherlands 5.700 39 Kenya 4.700 69 Republic of Korea 4.200 99 Bangladesh 3.700 129 Yemen 2.900
10 Finland 5.600 40 Luxembourg 4.700 70 Mexico 4.200 100 Cape Verde 3.700 130 Mauritania 2.800
11 Qatar 5.600 41 Philippines 4.700 71 Panama 4.200 101 Nicaragua 3.700 131 Chad 2.700
12 USA 5.600 42 Zambia 4.700 72 Peru 4.200 102 Russian Federation 3.700 132 Burundi 2.600
13 Chile 5.400 43 Austria 4.600 73 Romania 4.200 103 Bhutan 3.600 133 Myanmar 2.600
14 Hong Kong SAR 5.400 44 Estonia 4.600 74 Saudi Arabia 4.200 104 Botswana 3.600 134 Angola 2.300
15 Costa Rica 5.300 45 Ghana 4.600 75 Lao PDR 4.100 105 Dominican Republic 3.600 135 Guinea 2.300
16 Ireland 5.300 46 Guyana 4.600 76 Thailand 4.100 106 Honduras 3.600 136 Libya 2.300
17 Lebanon 5.300 47 Indonesia 4.600 77 Venezuela 4.100 107 Oman 3.600 137 Egypt 2.000
18 Norway 5.300 48 Latvia 4.600 78 Zimbabwe 4.100 108 Tajikistan 3.600
19 United Arab Emirates 5.300 49 Senegal 4.600 79 Poland 4.000 109 Algeria 3.500
20 Denmark 5.200 50 Brazil 4.500 80 Suriname 4.000 110 Armenia 3.500
21 Iceland 5.200 51 Morocco 4.500 81 Albania 3.900 111 Gabon 3.500
22 New Zealand 5.200 52 Bahrain 4.400 82 China 3.900 112 Bulgaria 3.400
23 South Africa 5.200 53 Cameroon 4.400 83 Greece 3.900 113 Mali 3.400
24 Sweden 5.200 54 India 4.400 84 Kazakhstan 3.900 114 Namibia 3.400
25 Australia 5.100 55 Jamaica 4.400 85 Kuwait 3.900 115 Swaziland 3.400
26 Italy 5.100 56 Lithuania 4.400 86 Lesotho 3.900 116 Vietnam 3.400
27 Malaysia 5.100 57 Mauritius 4.400 87 Ukraine 3.900 117 Azerbaijan 3.300
28 Cyprus 5.000 58 Slovenia 4.400 88 Burkina Faso 3.800 118 Cambodia 3.300
29 Germany 5.000 59 Tunisia 4.400 89 Ethiopia 3.800 119 Malawi 3.200
30 Israel 4.900 60 Colombia 4.300 90 Georgia 3.800 120 Moldova 3.200
 Model (1): Reporting
standards and
TEVi ¼ α0 þ α1 QMSi þ α2 SARSi þ α3 GDPi þ α4 MKSi þ εi
tax evasion
Model (2):

TEVi ¼ α0 þ α1 QMSi þ α2 GDPi þ α3 MKSi þ εi

157
Model (3):

TEVi ¼ α0 þ α1 SARSi þ α2 GDPi þ α3 MKSi þ εi

where Dependent variable: TEV ¼ level of tax evasion as proxied by the size of shadow
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economy in one country; Test variable: QMS ¼ the score for the quality of management
schools in one country; Moderating variable: SARS ¼ level of the strength of auditing and
reporting standards in one country; Control variables: GDP ¼ gross domestic product per
capita in one country; MKS ¼ market size in one country.

3.7 Testing for the moderating effect of strength of auditing and reporting standards
The H2 posits that the level of the strength of auditing and reporting standards may
moderate the association between the quality of management schools and tax evasion.
To test H2, we divide the overall sample into two sub-samples: countries characterised by a
low level of legal enforcement (inferior or equal to the median of strength of auditing and
reporting standards[5]) and countries with high legal enforcement (superior to the median)
and we re-estimate model 2. A test of H2 consists of observing a negative and significant
association between the quality of management schools and tax evasion for countries
characterised by high legal enforcement, while a non-significant relationship between the
quality of management schools and tax evasion is expected for settings with low auditing
and accounting enforcement.

4. Empirical results
4.1 Descriptive statistics
The descriptive statistics are reported in Table IV. For the dependent variable, tax evasion
has a mean of 32.216 per cent and ranges from 8.500 to 66.100 per cent. The quality of
management schools has a mean of 4.213 and ranges from 2.000 to 6.200. The standard
deviation for quality of management schools variable accounts for 0.884.
With respect to the strength of auditing and reporting standards, the mean of this
variable is 4.635 and ranges from 2.200 to 6.700. Concerning control variables, the level of
economic development, as proxied by the GDP per capita for each country, has a mean of
101.261 and varies from 1.016 to 987.000. For market size, the mean amounts to 3.843 and
varies from 1.300 to 6.900.

Variable Observations Mean SD Minimum Maximum

TEV 137 32.216 13.055 8.500 66.100

QMS 137 4.213 0.884 2.000 6.200
SARS 137 4.635 0.912 2.200 6.700
GDP 137 101.261 225.17 1.016 987.000
MKS 137 3.843 1.146 1.300 6.900
Notes: TEV, tax evasion score; QMS, quality of business school score; SARS, strength of auditing and Table IV.
reporting standards score; GDP, GDP per capita in thousands of Dollars; MKS, market size Descriptive statistics
 EMJB 4.2 Univariate analysis
13,2 Table V reports the results of univariate analysis. Findings show that the quality of
management schools is negatively and significantly associated with tax evasion with a
Pearson coefficient amounting to (−0.553). This univariate result provides preliminary
support for H1. The strength of auditing and reporting standards and the market size are
also negatively correlated with tax evasion with Pearson coefficients accounting for (−0.498)
158 and (−0.439), respectively. It should be noted here that the strength of auditing and
reporting standards variable is associated positively with the quality of management
schools with a Pearson coefficient accounting for 0.726.

4.3 Multivariate analyses

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Table VI reports the results of multiple regressions specified in models (1), (2) and (3).
In model 1, our findings show that the quality of management schools is negatively associated
with tax evasion (Coeff ¼ −4.384; t ¼ −2.870). This result confirms our expectation that
higher quality business schools provide the economy with economic agents (e.g. auditors, tax
controllers, accountants and managers) that will combat tax evasion practices and increase
the level of tax compliance among taxpayers. Thus, H1 is confirmed. This result implies that
economic actors graduated from higher quality business schools will have adequate technical
expertise and training and good knowledge about business ethics which in turn will improve
their ethical perceptions with respect to tax compliance implying less tax evasion.

TEV QMS SARS GDP MKS

TEV 1.000
QMS −0.553*** 1.000
SARS −0.498*** 0.726*** 1.000
GDP 0.304** −0.278*** −0.239*** 1.000
MKS −0.439*** 0.425** 0.345** −0.267*** 1.000
Notes: TEV, tax evasion score; QMS, quality of business school score; SARS, strength of auditing and
Table V. reporting standards score; GDP, GDP per capita in thousands of Dollars; MKS, market size.
Correlation matrix *,**,***Significant at 10, 5 and 1 per cent, respectively

Dependent variable: tax evasion

Model 1 Model 2 Model 3 Model 2 Model 2
Overall sample Overall sample Overall sample
(SARS and QMS) (QMS) (SARS) High SARS Low SARS
t- t- t- t- t-
Coeff statistic Coeff statistic Coeff statistic Coeff statistic Coeff statistic

Intercept 71.397*** 13.370 67.625*** 13.680 67.883*** 12.720 70.617*** 8.240 56.610*** 8.050
QMS −4.384** −2.870 −6.222*** −5.450 −7.896*** −4.070 −2.549 −1.450
SARS −2.541* −1.780 −5.288*** −4.890
GDP 0.006* 1.670 0.007* 1.740 0.008* 1.940 0.015* 1.780 0.006 1.290
MKS −2.506** −2.870 −2.584** −2.940 −3.120*** −3.600 −1.855 −1.420 −2.901** −2.490
F 20.780*** 26.220*** 23.690*** 12.570** 5.670*
Adj-R2 (%) 36.780 35.750 33.360 34.120 17.090
Max VIF 2.310 1.270 1.180 1.360 1.190
Number of
Table VI. observations 137 137 137 68 69
Multivariate Notes: TEV, tax evasion score; QMS, quality of business school score; SARS, strength of auditing and reporting standards
regression analysis score; GDP, GDP per capita in thousands of Dollars; MKS, market size. *,**,***Significant at 10, 5 and 1 per cent, respectively
 With respect to the remaining variables, the strength of auditing and reporting standards is Reporting
also negatively and significantly associated with tax evasion (Coeff ¼ −2.541; t ¼ −1.780). standards and
Market size is negatively associated with the same variable size (Coeff ¼ −2.506; tax evasion
t ¼ −2.870), while the degree of market development, as proxied by the GDP, is positively
associated with tax evasion (Coeff ¼ 0.006; t ¼ 1.670).
Controlling for muticollinearity problem, the variance inflation factors (VIFs) reported
suggest that model 1 does not suffer from such a problem since the maximum VIF accounts 159
for 2.310. Finally, the overall explanatory power of the model is significantly high
(F ¼ 20.780; p o0.001) and the adjusted-R2 accounts for 36.780 per cent.
In Model 2, we remove the strength of auditing and reporting standards from the
regression. Results show that the negative effect of the quality of management schools on tax
evasion, documented in model 1, becomes more significant (Coeff ¼ −6.222; t ¼ −5.450).
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Similarly, market size is negatively associated with tax evasion. This model does not also
suffer from multicolliniarity problem since all VIFs are inferior to 1.270. The overall
explanatory power model is also significantly high (F ¼ 26.220; po0.001) and the adjusted-R2
accounts for 35.750 per cent.
In model 3, we remove our test variable and include only the strength of auditing and
reporting standards. After the exclusion of the quality of management schools variable from
model 1, the negative effect of the strength of auditing and reporting standards becomes more
significant as compared to model 1 (Coeff ¼ −5.288; t ¼ −4.890). Similarly, market size variable
is negatively and significantly associated with tax evasion. Model 3 does not also suffer from
multicolliniarity problem since the maximum VIF amounts to 1.180. The explanatory power of
the model has witnessed slight decrease moving from 36.780 per cent in model 1 to 35.750
per cent in model 2 to 33.360 per cent in model 3.
The results reported in models 1, 2 and 3 suggest that the quality of management schools
represents the most important variable in explaining tax evasion and that quality of
management schools and the strength of legal enforcement play a complimentary role in
reducing tax evasion.
To test for the moderating effect of the strength of auditing and reporting standards on
the relationship between the quality of management schools and tax evasion (H2), we
divide the overall sample into countries characterised by high and low strength of
auditing and reporting standards. The negative and significant association already
reported in model 1 becomes more significant for settings characterised by high legal
enforcement (Table VI, model 2 High SARS) (Coeff ¼ −7.896; t ¼ −4.070), while it becomes
insignificant for countries with low level of legal enforcement (Table VI, model 2 Low
SARS) (Coeff ¼ −2,549; t ¼ −1.450). Accordingly, the strength of auditing and reporting
standards moderates the association between the quality of management schools and tax
evasion and thus H2 is confirmed. It should be noted that under high legal enforcement,
the explanatory power accounts for 34.120 per cent (model 2 High SARS), while it amounts
to 17.090 per cent under low legal enforcement (model 2 Low SARS). These findings imply
that under poor legal environment and low auditing and reporting standards
infrastructure, graduates of high quality business schools will use their good training
and expertise to facilitate tax evasion under the pressures exerted by other economic
actors operating with them. By contrast, under high legal enforcement, graduates of
quality business schools will be more reluctant to use tax evasion practices and they will
encourage their clients to comply with tax rules.
To sum up, while other studies have focussed on the general education level of
taxpayers and tax evasion (e.g. Richardson, 2006) and documented that higher
education level has its beneficial effect on tax compliance behaviour, our study
corroborates this finding by highlighting the role played by management schools as a
central training place for the main economic actors. In addition, our study shows also that
 EMJB legal environment may affect economic agents’ behaviours with respect to tax evasion and
13,2 this result is also in line with previous empirical findings reported by (Riahi-Belkaoui,
2004; Khlif et al., 2016).

5. Conclusion
The determinants of tax evasion on cross-county basis have been gaining momentum in tax
160 and accounting literature following the pioneering work of Riahi-Belkaoui (2004).
A neglected aspect in the empirical literature is the effect of higher education quality in
business field on tax evasion. Accordingly, this study expands this stream of research by
examining the effect of the quality of business schools on tax evasion. OLS regression
analyses show that the quality of management schools has a significant negative effect on
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tax evasion. This negative association is more significant under high legal enforcement,
while it is non-significant under low legal enforcement.
Our findings are important for policy makers who aim to reduce the level of tax evasion
for two reasons. First, they show that there is negative association between quality higher
education system in business and tax evasion. Second, the level of auditing and reporting
enforcement may affect such a relationship. Accordingly, if governments want to combat
tax evasion practices, they should improve the quality of business schools from technical
and ethical sides, on the one hand. On the other hand, they should create a favourable
environment where graduates of quality business schools (e.g. accountants, auditors, fiscal
controllers, managers and investors) find more incentives to promote transparency and
ethical acts, comply with tax rules and invite their clients to avoid tax evasion practices.
This study has a number of limitations. On the one hand, tax evasion is measured using
the macro-indirect approach while other micro-direct approaches exist. However, these
alternative measures are not available in recent international reports to be integrated in the
analysis. On the other hand, some independent variables (quality of management schools,
strength of auditing and reporting standards) are proxied using survey data measures
which raise concerns about measurement error. However, the data are collected from
reputable sources (e.g World Economic Forum) which may reduce this concern.
Future research recommended on tax evasion can undertake a comparison study
between emerging and development countries. Furthermore, focussing on emerging
economies (e.g. African countries) is required given the fact that these settings are
characterised by poor legal infrastructure and high level of corruption.

Notes
1. Martins (2017) displays a practical case of transfer pricing for two companies operating under
different accounting regimes in the Portuguese setting.
2. According to Mróz (2012), shadow economy is defined as unregistered activities aimed at yielding
tangible benefits, in either natural or in monetary form, generating given consequences of value creating
and/or distribution character. Using shadow economy as proxy for tax evasion may be criticised.
For instance, shadow economy covers only unofficial transactions. However, it uncovers tax evasion
practices undertaken in official economy. such as reducing deliberately revenues, increasing deductible
expenses or choosing to establish the mother company in tax heaven country to reduce tax payment.
In addition, using the sophisticated DYMIMIC estimation approach may suffer from “endogeneity and
causation issues in its two-stage estimation procedure” (Alm, 2012, p. 59). Although these critics,
Schneider et al. (2015) consider the use of shadow economy to estimate tax evasion using DYMIMIC as
the most forthright, notwithstanding its shortcomings since survey approach, for example, may suffer
from several weaknesses. In this regard, Alm (2012, p. 59) suggest that “survey data often have much
useful sociodemographic and taxpayer attitudinal information, but the reliability of their data on tax
evasion is highly suspect because individuals may not remember their reporting decisions, they may not
respond truthfully or at all, and the respondents may not be representative of all taxpayers”.
 3. Other control variables have been considered in tax evasion literature such as national culture. Reporting
However, not all countries included in our sample have cultural dimensions. If we include cultural standards and
dimensions, we have to remove at least 34 countries which will reduce the statistical inferences of
our study. More details about the list of countries included in the Hofstede website https://geert- tax evasion
hofstede.com/countries.html
4. OLS regression is performed in all studies dealing with tax evasion literature since the pioneering
work of Riahi-Belkaoui (2004).
161
5. The median of strength of auditing and reporting standards in our sample accounts for 4.600.

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Further reading
World Economic Forum (2015), The Global Competitiveness Report 2014-2015, World Economic
Forum, Geneva.

Appendix

Variable Description Source

TEV The size of the shadow economy. Data on the size of shadow Collected from table 2 pages 454 to
economy is collected from a World Bank paper prepared by 456, column country average from
Schneider et al. (2010). The size of the shadow economy is the paper Schneider et al. (2010)
estimated as a percentage of “official” GDP
QMS In your country, how do you assess the quality of business The Global Competiveness report
schools? (1 ¼ extremely poor – among the worst in the world; 2014-2015 (Country profiles)
7 ¼ excellent – among the best in the world)
SARS In your country, how strong are financial auditing and The Global Competiveness report
reporting standards? 2014-2015 (Country profiles)
(1 ¼ extremely weak; 7 ¼ extremely strong)
GDP Gross domestic product per capita of population in thousands The Global Competiveness report
Table AI. of Dollars 2014-2015 (Country profiles)
Data description MKS The size of the national domestic and foreign market in an The Global Competiveness report
and sources index ranging from 0 to 7 2014-2015 (Country profiles)

Corresponding author
Achraf Guidara can be contacted at: achraf.guid@tunet.tn

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