Separating Auditor-Provided Tax Planning and Tax Compliance Services: Audit Quality Implications

Abstract

SUMMARY This study uses a unique dataset that separates tax nonaudit services (NAS) into tax planning and compliance NAS to examine how audit quality is affected by these two types of tax NAS. Our main results, which account for decisions to purchase and disclose the breakdown of tax NAS, show that audit quality is unaffected by tax planning NAS but is positively associated with tax compliance NAS. These findings suggest that the knowledge spillovers between tax NAS and audit quality documented in prior studies are attributable to tax compliance NAS. Additional tests reveal that the effect of tax compliance NAS is amplified by auditor industry expertise. Also, tax planning NAS in the presence of powerful chief executive officers (CEOs) and audit firm culture that relies on client advocacy has a negative effect on audit quality. These latter findings are consistent with engagement-level tax planning NAS degrading audit quality in certain settings. JEL Classifications: M40; H25.