AAA Spark Meeting of the Regions

Do Auditor-Provided Tax Services Impair Auditor Independence or Generate Knowledge Spillover? Evidence from the Tax Cuts and Jobs Act of 2017"?

• In Event: Auditor Quality

Abstract

Regulators increasingly express concerns over auditor-provided tax services (APTS) because those services could impair auditor independence. To date, research on APTS impairing auditor independence is mixed, potentially due to endogeneity issues, providing no clear guidance to regulators. I use the Tax Cuts and Jobs Act of 2017 (TCJA), which resulted in an unexpected
shock to tax complexity that increased the demand for APTS by multinational firms, and a difference-in-differences research design to provide new insight on the relation between APTS and audit quality. I document that multinational firms most likely affected by the TCJA have a significant increase in APTS fees and audit quality after the enactment of the TCJA, consistent with knowledge spillover rather than impaired independence. The effect concentrates in clients that are more complex, also suggesting knowledge spillover is a potential channel for APTS to affect audit quality. I fail to find evidence that APTS affect audit quality through independence impairment. My results are robust to several alternative research designs.

Author

• Bo Ren, University of Connecticut