Auditor-Provided Tax Services and Clients’ Tax Avoidance: Do Auditors Draw a Line in the Sand for Tax Advisory Services?

Abstract

Recent incidences of audit failures and tax aggressiveness linked to non-audit services have called into question audit firms’ compliance with current restrictions on the provision of aggressive tax planning to their clients. This study investigates whether U.S. audit firms comply with existing regulations. Using quantile regressions, we observe an upper bound in the positive association between auditor-provided tax services (APTS) and tax avoidance. We interpret this bound as evidence of audit firms’ compliance. Interestingly, we observe that the association turns negative for clients with low effective tax rates. This nonlinearity suggests that audit firms take steps to reduce their exposure to these clients. Whereas our main results demonstrate some compliance, trend analysis shows an increase in tax avoidance associated with APTS during our sample period. We also find a more persistent association for larger clients, suggesting that economic bonding influences the tax strategies an audit firm is willing to provide.