Perception of Auditor Independence, Audit Committee Characteristics, and Auditor Provision of Tax Services

Abstract

The Sarbanes-Oxley Act (SOX) greatly expanded audit committees’ oversight responsibilities by requiring that they pre-approve all non prohibited non-audit services (NAS), effectively making them “the gatekeepers” of auditor independence. Motivated by the SOX requirement and the controversy over the potential independence-impairing nature of tax NAS, we examine factors that are associated with audit committees’ decisions to approve tax NAS purchases for the years 2004 through 2007. We find that accounting financial experts are less likely to approve the purchase of any tax NAS than other audit committee members and, when they do, they approve lower levels relative to audit fees, suggesting that they are sensitive to the perceived threats to auditor independence at least in appearance. We find no such relation with non-accounting financial experts. We also find that audit committee members that hold multiple directorships approve lower levels of tax fees relative to audit fees than non busy members, possibly because they are concerned with the potential negative effects on their reputational capital if they approve high levels. Overall, our results suggest that audit committees make decisions consistent with concerns about independence impairment in appearance, as requested by the SEC.