The impact of forensic accounting, investigation and audit on tax compliance in Malaysia

Rani Diana Othman, Edith Cowan University

Online access restricted to ECU staff and students by author's request


Evidence of success in improving taxpayers‟ compliance behaviour reflects the effectiveness of the enforcement activities of the tax system. The implementation of a Selfassessment System (SAS), together with improvements in tax enforcement functions, are among the recent tax reforms undertaken in Malaysia as part of this effort. Three levels of compliance, namely filing, reporting and payment have been established as performance indicators for international tax administrator (IRS, 2003). Therefore, by applying three compliance models: Return Per Capita (RCAP), Reported Tax Per Return (RTR) and Payment Per Return (PLR), adapted from Plumley (1996) and Dubin (2007), this study‟s objective is to highlight the Malaysian tax authority‟s (IRBM‟s) performance towards enhancing these compliance levels during the pre, post and overall periods of change in the Malaysian tax climate. In doing so, this study focuses on the element of deterrence provided by tax enforcement activities in order to further understand how the enforcement functions provide different levels of deterrence to individual taxpayers. This study also addresses reporting compliance, as one aspect of the quality of compliance, consistent with one of the objectives of the new assessment system: inducing a sense of responsibility and honesty among individual taxpayers.

Using the IRBM‟s unexplored data on individual taxpayers for the period 2002 - 2007, this study pioneers an econometric approach towards Malaysian individual tax compliance studies. In doing so it supports the theoretical findings of parallel survey and experimental studies on Malaysian tax compliance. The „compliance principle‟ is found to be applicable to the Malaysian tax climate, where the costs of compliance, especially filing costs, play an important role in the taxpayers‟ compliance decisions. As for tax enforcement effects, the increased probability of audit detection is found to result in significantly higher reporting compliance, while the civil detection rate is more effective in providing the element of certainty of punishment. The introduction of severity of punishment is found to support the hypothesis on the effectiveness of more severe punishment, specifically Section 114(1) (s114) towards deterring the serious and intentional tax evasion. The empirical findings of this study are expected to lead to more opportunities for exploring Malaysian individual taxpayers‟ compliance behaviour.