Do Auditor-Provided Tax Services Impair Independence or Generate Knowledge Spillover? Evidence from Assessing Tax Accrual Quality

• In Event: Economic Bonding, Client Size, and Non-audit Fees
  In Paper Session: Economic Bonding, Client Size, and Non-Audit Fees

Abstract

This study examines the association between auditor-provided tax services (APTS) and audit quality to determine if APTS impairs auditor independence or generates knowledge spillover. Lower (higher) audit quality is consistent with auditor independence impairment (knowledge spillover). As audit quality is unobservable, we use the income tax accrual quality measure developed by Choudhary et al. (2013) as our financial reporting proxy for audit quality. The tax provision is where knowledge spillover or independence impairment from APTS, if present, should be most evident. We find a negative association between APTS and tax accrual quality, consistent with APTS impairing auditor independence. Further, we fail to find evidence that economic bonding drives the auditor independence impairment. Cross-sectional tests reveal that auditor characteristics associated with high audit quality do not eliminate the presence of lower tax accrual quality in APTS firms. Our findings support regulatory concerns that APTS have the potential to reduce financial reporting quality and impair auditor independence.

Authors

• Robert Pawlewicz, George Mason University

• Allison Koester, Georgetown University

• Preeti Choudhary, Georgetown University