Determinants and Consequences of Tax-Related Key Audit Matters

Abstract

This study examines the determinants and unintended consequences of tax-related key audit matters (KAMs). We argue it is important to examine constructs specifically related to KAM topics to draw valid inferences about expanded audit reporting. Tax KAMs provide this opportunity because tax expense is material to most firms, there is substantial risk in the tax function, and tax KAMs are prevalent and discuss a range of issues. Consistent with tax complexity increasing the difficulty of auditing tax expense, we find that firms with greater tax avoidance, greater tax risk, and larger deferred tax asset balances with greater estimation uncertainty are more likely to receive a tax KAM. In consequences analyses, we find that firms that stop receiving tax KAMs increase their future (but not concurrent) purchases of auditor-provided tax services, consistent with economic bond incentives threatening auditor independence. Firms that stop receiving tax KAMs also increase tax avoidance in subsequent years.