The Effect of the PCAOB’s Restrictions on Auditor-Provided Tax Services on Audit Quality, Earnings Quality, and Tax Avoidance

• In Event: Break and Research & Education Poster Forum

Abstract

This study examines whether the PCAOB’s restrictions on auditor-provided tax services (APTS) improve a firm’s audit quality, earnings quality and reduce tax avoidance activities. Using a difference-in-differences research design and refined treatment and matched control samples, we find that the likelihood of general restatements and meeting or beating prior year earnings significantly decreases following the PCAOB rules. We also find evidence of reduction in tax avoidance activities after the PCAOB rules as both total effective tax and cash effective tax rates increase. Overall, our results show that compared to the Sarbanes Oxley Act that only required clients’ audit committees to pre-approve APTS purchases, the PCAOB’s restrictions on auditor initiated aggressive tax transactions and tax services to company executives further improve both audit quality and earnings quality and prevent firms from engaging in aggressive tax avoidance activities.

Authors

• Stephen Wen-Jen Lin, Florida International University

• Ran Ling, Florida International University