The Influence of the Audit Committee on Auditor Provided Tax Planning Services

Abstract

Motivated by the continued allowance of tax non-audit services (NAS), recent studies (e.g., Cook and Omer 2012) document a positive effect of tax NAS fees on tax avoidance. Based on an extensive hand-collected sample of firms voluntarily disclosing the tax planning and compliance components of tax NAS fees, we show that the positive relationship between tax NAS fees and tax avoidance is driven by tax planning NAS fees. However, the impact of tax planning NAS fees on tax avoidance is more pronounced if the auditor provides tax planning services in conjunction with tax compliance services. Such findings are consistent with knowledge spillover effects as the auditor’s tax team most likely provides both tax planning and tax compliance services to an audit client. We also document a positive association between tax planning NAS fees and firm valuation. Finally, our documented effects of tax planning NAS fees on tax avoidance and firm valuation are more pronounced when there is effective audit committee oversight over tax NAS, in the form of accounting experts serving on the audit committee. This study creates new knowledge and provides a more complete view of the roles auditors and audit committees play in an important focal area of interest to regulators, investors and the accounting profession.