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Regulation and Dishonest Behavior: How Controlling Regulatory Mechanisms Prompt Dishonesty in Tax Consulting

We study experimentally how the conflict of interest faced by tax consultants – between telling the truth and pleasing their clients – affects their professional decision-making process, under different levels of scrutiny in the form of an audit. Eighty percent of the experiment’s participants exhibited dishonest behavior. The possibility of being audited by the tax authorities significantly affected the decision-making process of participants when acting dishonestly. While this possibility improved the consulting quality at the beginning of the process, more manipulative efforts followed, leading to an end result similar to that observed in the absence of the risk of an audit. Remarkably, the manipulative efforts increased with the likelihood of an audit.