Do Auditor-Provided Tax Services Generate Knowledge Spillover?

• In Event: Taxes and Financial Reporting

Abstract

This paper studies the impact of auditor-provided tax services (APTS) on audit quality following the 2002 Sarbanes Oxley Act (SOX) by investigating the relation between tax fees paid to independent audit firms and the quality of client firms’ tax accrual. Following SOX, legislators and regulators continue to permit APTS under the premise that such services generate knowledge spillover that improves audit quality. We provide large sample evidence that tax accrual quality is worse in the presence of APTS, consistent with APTS impairing independence rather than generating knowledge spillover. We fail to find evidence of economic bonding as an explanation for independence impairment, suggesting the impairment is due to auditors lowering their skepticism when reviewing work by tax professionals from their same accounting firm (i.e., in-group identification). Our results are robust to various proxy specifications and controlling for working capital accruals quality, complexity in financial reporting for income taxes, tax-related internal control weaknesses, and tax-related restatements.

Authors

• Preeti Choudhary, Georgetown University

• Allison Koester, Georgetown University

• Robert Pawlewicz, George Mason University