Separating Auditor Provided Tax Compliance and Tax Planning Services: Financial Reporting Implications

• In Event: Accounting Firm Services

Abstract

This study seeks to fill gaps in the literature on how tax knowledge gained through auditor provided tax non-audit services (NAS) improves financial reporting. We focus on the sources and transferability of this knowledge. We begin by showing that the source of positive associations between audit engagement-level tax NAS and financial reporting quality documented in prior studies is attributable to tax compliance NAS and not tax planning NAS. Further, we examine whether the pervasiveness of tax planning or tax compliance NAS provided by the audit office to its other clients also influences financial reporting quality. Consistent with beneficial knowledge spillovers and expertise sharing, we find that higher levels of office level tax compliance services are associated with higher financial reporting quality. However, we also find that higher levels of tax planning provided at the office level is associated with reduced financial reporting quality. This finding is consistent with regulatory concerns that greater reliance on tax planning NAS revenue may signify a shift in the strategic focus of the audit office that could have detrimental financial reporting implications. As such, our findings should be of interest to legislators and regulators who have expressed concern about recent growth in tax planning NAS and its implications for investor protection.

Authors

• Ronen Gal-Or, Northeastern University

• James A Chyz, University of Tennessee-Knoxville

• Vic Naiker, Monash University - Caulfield