The Effect of the PCAOB’s Restrictions on Auditor-Provided Tax Services on Audit Quality, Earnings Quality, and Tax Avoidance

Abstract

This study examines whether the PCAOB’s restrictions on auditor-provided tax services (APTS) in 2005 curtail the potential negative impact on companies’ audit quality, earnings quality, and tax avoidance activities. Using a difference-in-differences research design, this study focuses on firms that retained APTS after the SOX and then significantly reduced APTS purchases after the PCAOB’s restrictions. I find that the PCAOB’s restrictions on APTS are associated with fewer subsequent financial restatements and higher discretionary permanent book-tax differences. Further analysis shows that firms with more effective audit committees are less likely to meet or beat earnings targets and have smaller discretionary permanent book￾tax differences following the PCAOB’s restrictions. This finding supports the notion that audit committee effectiveness plays an important role in alleviating the negative impact of APTS on earnings quality and curtailing aggressive tax planning. The results should be of interest to the U.S. accounting and audit regulators such as the SEC and PCAOB, public accounting firms, auditors, and corporate audit committees.