Effect of Purchasing audits on Tax Compliance Among Small and Medium Enterprises in Kenya

Abstract

In recent years, there has been a growing recognition of the need for small and medium enterprises (SMEs) to comply with tax regulations in Kenya. With the increasing government scrutiny, it has become imperative for SMEs to engage in purchasing audits to ensure compliance with tax requirements to minimize the likelihood of facing legal consequences and penalties related to tax fraud. These audits assess a business's procurement and payment procedures to prevent any potential tax evasion. However, Most SMEs operate in the informal economy, making it difficult for tax authorities to track their income and expenses. As a result, a majority of them underreport their income and overstate their expenses, thereby reducing their tax liability. The purpose of the study was to analyze the effect of purchasing audits on tax compliance by SMEs in Kenya. The study used explanatory research design and was anchored on financial theory, performance theory, compliance theory and control theory. The results showed that purchasing audit positively and significantly influence tax compliance by small and medium business enterprises in Kenya. It recommended that for SMEs to achieve better compliance behavior, they should receive adequate training on tax compliance and related matters since training SME employees on the purchasing process, tax compliance, and the related legal framework will ensure that they understand the importance of compliance.