The Effects of Jointly-Provided Tax Services and Auditor Size on Restatements

• In Event: Taxation

Abstract

We examine whether the relation between auditor-provided tax services and restatements differs when the auditor is a small or large accounting firm. We also examine whether the Securities Exchange Commission’s restrictions on certain tax consulting practices (SEC 2006) altered this relation. We estimate logistic regressions to determine whether the probability of financial statement restatements varies with (1) variation in accounting firm size (measured as tier I and II versus tier III accounting firms), and (2) the joint-provision of audit and tax services. We find a negative relation between auditor-provided tax services and client financial report restatements. We additionally find that this relation is significantly stronger when the auditor is a small accounting firm. Finally, we find that the lower probability of a restatement associated with the joint provision of audit and tax services persists even after the SEC imposed restrictions on certain tax consulting services in 2006. Our study provides evidence that accounting firms, and particularly small accounting firms, benefit from knowledge spillovers when jointly-providing audit and tax services with the benefits being improved financial reporting and audit quality. Whereas prior research concludes that large auditors provide higher quality, our results suggest that small auditors narrow that quality gap when they jointly-provide tax services. Moreover, the SEC’s recent restrictions on certain tax consulting services has not hampered small accounting firms’ abilities to benefit from the joint-provision of audit and tax services.

Authors

• Matthew Adam Notbohm, University of North Dakota

• Jeffrey S Paterson, Florida State University

• Adrian Valencia, Florida Gulf Coast University