Abstract
This study investigates whether companies purchasing tax services from auditors can improve the relation between tax-related internal controls and book-tax differences. We employ permanent book-tax differences as a proxy of tax avoidance and temporary book-tax differences as a proxy of earnings management via pre-tax accruals. Our findings show that companies with a higher probability of reporting a material weakness regarding tax-related internal controls have larger permanent and temporary differences (i.e. a higher degree of tax avoidance and earnings management activities); however, companies purchasing auditor-provided tax services can mitigate the positive relation between tax-related internal control weaknesses and permanent differences in the post-SOX period, but no effect on temporary differences.
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