Audit Quality Effects of PCAOB’s 2006 Tax Service Restrictions

• In Event: Research in Taxation

Abstract

Two previous studies investigate the audit quality impacts of the PCAOB’s 2006 auditor-provided tax service restrictions (Notbohm, Paterson and Valencia, 2015 and Lennox, 2016). Both studies find no detectable effects of the 2006 restrictions. Our study investigates the same research question by modifying the methodologies in both studies to better capture the firms that used the restricted services. We find some evidence for the effectiveness of the 2006 restrictions. Specifically, we find the relation between high concern restatements and tax nonaudit service fees strengthened in the post-restriction period for Big 4 clients. We also find that for likely Big 4 client purchasers of the restricted services, the probability of restatement declined in the post-restriction period. This evidence both contributes to the literature in this area and has important practitioner implications.

Authors

• Matthew Adam Notbohm, University of North Dakota

• Adrian Valencia, Florida Gulf Coast University