EFFECT OF BOOK-TAX CONFORMITY ON AUDIT QUALITY: EVIDENCE FROM CANADA Yosra Makni Fourati*, Sana Masmoudi Mardessi** INTRODUCTION This paper examines the efect of Book-Tax Conformity (BTC) on audit quality in Canadian frms. We explore if audit quality measured by audit fees, auditors’ industry specialization, and audit report lag is better when BTC gets higher. Among policymakers, there is a continuous debate in the literature about two sets of income measures, precisely, book income and tax income, which should conform to one common measure. (Hanlon & Shevlin 2005) (Desai, 2003) (Plesko, 2002) (Mills et al., 2002) show that in the United States, there is more attention and more analysis in the growing divergence between book and taxable incomes. This expanding divergence raises concerns about tax reporting or misleading fnancial because it signals that frms may increasingly understate tax liability or overstate book income. A way to mitigate these concerns is to increase the required conformity between book and taxable income measures, because BTC increases the cost for frms to simultaneously manage book income upward and taxable income downward (Yin, 2001) (Desai, 2005). Moreover, book income has to be conformed to taxable income in order to guarantee the credibility and the regularity of the fnancial situation of the company presented to the diverse parts. This conformity can have potential benefts as well as potential costs toward the company. * Department of Accounting, Faculté des Sciences Économiques et de Gestion de Sfax, Tunisia. Email: yosra.makni@fsegs.usf.tn ** Department of Accounting, Ecole Supérieure de Commerce, University of Sfax, Tunisia. Email: masmoudisana@yahoo.fr Abstract This paper investigates the efect of Book-Tax Conformity (BTC) on audit quality regarding the proxies of audit fees, auditors’ industry specialization, and audit report lag. Using a sample of Canadian frms listed on Toronto Stock Exchange spanning the years 2006–2016, we applied a panel data analysis to test hypotheses of this research. The authors fnd that a higher BTC leads to lower audit fees. They also provide evidence that there is a negative association between BTC and auditors’industry specialization, whereas there is a positive association between BTC and audit report lag. Overall, the fndings are prominent to better understanding the efect of BTC on audit quality and are relevant for academic researchers, practitioners, and regulators. This paper contributes to the auditing literature through introducing a diferent determinant of auditors’ industry specialization and audit report lag, highlighting the Canadian setting, to our best knowledge. In addition, the best of our knowledge, this is the frst study to investigate the relationship between the BTC and audit quality in Canadian frms. Keywords: Audit Fees, Auditors’Industry Specialization, Audit Report Lag, Book-Tax Conformity Journal of Commerce & Accounting Research 9 (3) 2020, 51-62 http://publishingindia.com/jcar/ Submitted: 12 February, 2020 Accepted: 14 May, 2020 According to proponents (Desai, 2003), (Desai, 2005), (Whitaker, 2005), and (Shaviro, 2009), BTC constitutes an incentive not to manage earnings opportunistically. Indeed, any manipulation in increasing benefts would be counter balanced by higher taxes, whereas investors would disapprove reducing benefts in order to avoid taxes. Thus, increased BTC allows tax authorities to control more reported incomes and thus allows stakeholders to observe tax payments, making the overall economic performance of the companies more transparent and enhancing earnings’ quality. Opponents argue that the most notable cost associated with high BTC is information loss in accounting earnings that depend on how conformity between book and tax incomes is accomplished (Ali & Hwang, 2000), (Hanlon & Shevlin, 2005), (Plesko, 2006), (Shackelford, 2006), (Hanlon et al., 2008). Furthermore, (Atwood et al., 2010) fnds that earnings have lower persistence and association with future cash fows when conformity is higher. Their evidence suggests that increased BTC may reduce earnings’ quality. We test the association between conformity and audit quality using three separate proxies for audit quality from the prior literature: timelier audit fees, auditors’ industry specialization, and audit report lag. Specifcally, we expect a negative association between BTC and audit fees as well