Global tax fraud controversies contextualized in a dynamic framework of corporate fraud pyramid

Purpose This study explores the determinants of corporate tax fraud utilizing a “dynamic framework of the corporate fraud pyramid”. The debate regarding firm-specific and governance-related attributes explaining corporate tax fraud remains inconclusive, particularly during financial crises. Furthermore, few studies have utilized panel data to examine tax aggressiveness and tax evasion. In addition, while some studies have investigated the effect of corporate governance on firm performance during a financial crisis, its impact on corporate tax fraud remains unknown. This study aims to bridge these gaps by examining the effects of these attributes on corporate tax fraud, including in the pre-, during and post-2007–2009 financial crisis. Design/methodology/approach The study uses a sample of 198 matched pairs of tax fraud and non-tax fraud firms from 30 global jurisdictions for the period 2005–2017. The primary data source for this study is the Refinitiv (Thomson Eikon) database. It uses a quantitative research design employing Probit regression analysis to explore the immediate environment related to corporate tax fraud and the contextual, governance and regulatory aspects of the sample firms. The study employs an instrumental variable (IV) approach to control for endogeneity and an alternative specification to ensure that the results are robust. Findings The study finds that strong internal corporate governance mechanisms decrease the probability of tax fraud controversies. However, a strong regulatory environment, large audit fees, Big4 auditors and firm size were positively associated with the probability of tax fraud controversies. Moreover, higher executive compensation tends to curb the incidence of tax fraud controversies. These results were generally consistent for the pre-crisis, crisis and post-crisis periods of the financial crisis of 2007–2009. Research limitations/implications The research contributes to the academic literature on corporate tax fraud and has implications for firm, industry and country level policy regimes. The study contributes to fraud theory by introducing an analytical and ‘dynamic framework of corporate fraud pyramid’. Our research results imply that effective corporate governance mechanisms and higher executive compensation protect shareholders’ interests through intensive monitoring and interest alignment, thereby decreasing the likelihood of tax fraud controversies. We use quantitative data primarily from the Refinitiv database. Future fraud studies could use alternative data with varying sample sizes and periods covering both listed and private firms. Practical implications The findings on tax fraud have important implications for tax authorities, regulators and policymakers, leading to greater transparency and accountability. Regulators will need to pay special attention to corporate board structures and introduce regulatory policies that can guarantee the existence of effective board oversight. Tax authorities in different countries are expected to make further efforts to detect tax fraud, even when firms operate in strong regulatory environments and are audited by large audit firms. Social implications The colossal economic losses caused by corporate tax fraud and its impact on societies worldwide are key motivations for this research. The findings of this study help enhance our understanding of the occurrence of tax fraud in both developed and developing countries, particularly in times of financial crises. Policymakers and regulators can use these insights to develop mitigating strategies that may have important social benefits by reduding the incidence of corporate tax fraud. Originality/value Firstly, the study claims the ideation of a “dynamic framework of corporate fraud pyramid” as a theoretical research contribution. It focuses on four conceptual determinants: internal corporate governance mechanisms, firm-specific attributes, managerial aspects and an external regulatory environment. Secondly, this study contributes to the literature in the context of the 2007–2009 financial crisis and demonstrates that strong internal corporate governance mechanisms and firm-specific attributes moderate the relationship between the crisis and corporate tax fraud incidence.