Auditor-provided Tax Services Research Articles

Auditor-Provided Tax Services and Clients’ Tax Avoidance: Do Auditors Draw a Line in the Sand for Tax Advisory Services?

Recent incidences of audit failures and tax aggressiveness linked to non-audit services have called into question audit firms’ compliance with current restrictions on the provision of aggressive tax planning to their clients. This study investigates whether U.S. audit firms comply with existing regulations. Using quantile regressions, we observe an upper bound in the positive association between auditor-provided tax services (APTS) and tax avoidance. We interpret this bound as evidence of audit firms’ compliance. Interestingly, we observe that the association turns negative for clients with low effective tax rates. This nonlinearity suggests that audit firms take steps to reduce their exposure to these clients. Whereas our main results demonstrate some compliance, trend analysis shows an increase in tax avoidance associated with APTS during our sample period. We also find a more persistent association for larger clients, suggesting that economic bonding influences the tax strategies an audit firm is willing to provide.

Auditor-provided tax services and tax avoidance: evidence from Spain

ABSTRACT We investigate the relationship between auditor-provided tax services (APTS) and tax avoidance in Spain. As a result of a recently enacted EU legislation, APTS is seriously restricted within the EU. The evidence available so far for the US provides consistent support for a positive relationship between APTS and tax avoidance. However, given the importance of country-specific institutional issues, such as litigation risk, to understand the relationship between auditors and clients, the possibility of generalising the US evidence to other countries is limited. Supporting this view, our results indicate that the positive relationship between APTS and tax avoidance observed in the US does not hold in the Spanish market. This result seems robust, as it holds independently of the proxy utilised for measuring tax avoidance, as well as across an array of sensitivity checks. This study has potentially interesting implications at both theoretical and practical levels.

Effects of auditor-provided tax services on book-tax differences and on investors' mispricing of book-tax differences

Over the last decade, the joint provision of audit and non-audit services has been criticized for compromising auditor independence and affecting audit quality. Since 2005, the SEC has enacted rules restricting the types of non-audit services audit firms can provide clients. While most non-audit services are prohibited, a range of tax services are still allowed. Therefore, if compromises can emerge from allowing non-audit services, permitting tax services could be problematic. This study investigates the effect of auditor-provided tax services (ATS) on firms' levels of book-tax differences and on investors' mispricing of book-tax differences. Using a propensity-score matched sample from 2000 to 2013, I find strong evidence that firms acquiring ATS exhibit a low level of temporary book-tax differences, which in turn mitigate investors' levels of firms' mispricing. These results do not support regulators' claim that the provision of ATS compromises auditor independence. Instead, it suggests that purchasing ATS can improve overall accounting quality through knowledge spillover and thus help investors better price the value of firms.

Auditor-Provided Tax Services and Accounting for Tax Uncertainty

This paper investigates the associations of auditor-provided tax services (APTS) with tax planning and audit quality using a German sample. Our findings differ from those of previous U.S. studies, which we attribute to the fact that prior to 2015, the International Financial Reporting Standards (IFRS) did not contain a clear regulation similar to FIN 48, which requires firms to reserve for tax uncertainties. We find for our IFRS sample a negative association between APTS and tax avoidance, which suggests that auditors are aware that firms might not reserve for tax uncertainties and may advise more conservative tax strategies. Additionally, we find a positive relation between the level of APTS and the sustainability of tax strategies in client firms, consistent with this conservative approach. Furthermore, our results show that APTS are positively related to audit quality for our sample. This finding suggests that auditors, being aware of remaining tax uncertainties that are not reserved for, are more reluctant to accept earnings management, which would further increase the risk of restatement. Taken together, the results of our study suggest the importance of accounting standards regarding tax uncertainties for the implications of APTS.

발생액 이익조정과 실제이익조정 사이의 관계와 감사인제공 세무서비스

발생액 이익조정과 실제이익조정 사이에 음의 관계가 존재할 것으로 쉽게 예상됨에도 불구하고 이러한 예상을 지지하는 실증연구는 아직까지 찾아보기가 곤란하다. 이러한 현상은 필요로 하는 이익조정의 규모가 큰 기업일수록 발생액 이익조정과 실제이익조정 모두가 더 큼에 따라 이들 사이에 양의 관계가 존재하기 때문일 수 있다. 만약에 이처럼 발생액 이익조정과 실제이익조정 사이에 양의 관계가 존재한다면, 이는 실제이익조정의 규모가 얼마나 되는지 가늠해보는 것은 적절하고 충분한 감사업무를 수행함에 있어서 도움이 될 것임을 암시한다. 아울러 감사인제공 세무서비스에 관하여 수행된 다수의 선행연구들은 기업이 실제이익조정을 하였는지 여부 및 그 규모가 어느 정도일지 가늠하는데 감사인제공 세무서비스가 도움을 줄 수 있음을 암시한다. 이상의 언급내용에 따라 본 연구에서는 우리나라의 상장기업들에서 발생액 이익조정과 실제이익조정 사이에 전반적으로 양의 관계가 존재하는지 그리고 감사인제공 세무서비스가 이러한 양의 관계를 완화하는 음의 조절효과를 지니는지에 관한 실증분석을 실시하였다. 실증분석결과 발생액 이익조정과 실제이익조정 사이에는 양의 관계가 존재하며, 감사인제공 세무서비스는 이러한 양의 관계를 완화하는 음의 조절효과를 지니는 것으로 나타났다. 아울러 이와 같은 음의 조절효과는 감사인제공 세무서비스의 보수가 높은 경우에는 존재하는 반면, 감사인제공 세무서비스의 보수가 낮은 경우에는 존재하지 않는 것으로 나타났다. 이러한 실증분석결과는 감사인제공 세무서비스는 기업이 실제이익조정 행위를 하였는지 여부 및 그 규모가 어느 정도일지를 가늠하는데 도움이 되고, 결과적으로 감사품질을 향상시킨다는 긍정적 효과를 지님을 시사한다. 아울러 본 연구는 발생액 이익조정과 실제이익조정 사이의 관계에 대한 실증분석을 감사인제공 세무서비스의 효과라는 측면에서 확대함으로써 이 분야의 연구에 공헌한 것으로 사료된다.

Does Tax Planning Affect Analysts' Forecast Accuracy?

ABSTRACTWe investigate whether firms' tax planning affects the accuracy of analysts' forecasts. Tax planning can exacerbate the complexity of firms' operations through strategic choices to exploit tax laws. Because of its effect on firms' operations, tax planning can influence analysts' efforts to understand and forecast earnings. Specifically, if the additional complexity arising from tax planning makes firm attributes less representative of expected earnings, analysts may issue less accurate forecasts. Using auditor‐provided tax services (APTS) as a measure of tax planning, we find that, as firms spend more on tax planning, the accuracy of analysts' forecasts of both earnings per share and tax expense declines. We also document that firms with higher levels of APTS have greater year‐to‐year volatility in, and lower persistence of, effective tax rates and earnings. Our results suggest that increased firm complexity, due to greater tax planning, makes earnings and tax expense more difficult to forecast and that analysts do not properly adjust for these effects. Thus, when deciding to engage in tax planning, firms appear to make trade‐offs between potential tax savings and negative effects on earnings properties and analysts' forecasts.

The Effect of Voluntary Clawback Adoptions on Corporate Tax Policy

ABSTRACTCompanies are adopting executive compensation recoupment (“clawback”) policies to discourage aggressive financial reporting choices. Recent research suggests clawback policies encourage other means of meeting earnings expectations. We suggest that reducing income tax expense is a means of meeting earnings expectations. We find that effective tax rates are lower after clawback adoption due to increased investments in tax planning. We identify three tax planning activities that clawback companies invest in to lower effective tax rates: purchases of auditor-provided tax services, increased connections to other low-tax companies, and use of tax havens. We provide evidence that effective tax rate decreases do not result from use of opportunistic income tax accruals, and that decreases are stronger among companies that adopt robust clawback policies. Additional tests indicate lower tax outcome volatility and longer, more readable tax footnotes following clawback adoption. Our results suggest a positive spillover effect of clawback adoption on corporate tax policy.

감사인 강제교체 기업과 조세회피－세무조정 비감사서비스 제공을 중심으로－

감사인 강제교체 기업과 조세회피－세무조정 비감사서비스 제공을 중심으로－

How Do Auditors Learn to Forecast? Evidence from the Predictive Power of the Deferred Tax Asset Valuation Allowance

This paper investigates auditor influence on the association between discretionary changes in the deferred tax asset valuation allowance (VA) and changes in future pretax earnings. Investors should be able to infer changes in future earnings from changes in the VA because the VA estimation depends on management’s forecast of future taxable earnings. Our study finds discretionary VA changes are significant and persistent predictors of future earnings changes. We focus on the effects of auditor expertise on the relationship between VA changes and future earnings changes, with expertise stemming from industry knowledge (measured by local market share) and firm-specific knowledge (measured by substantial auditor-provided tax services (APTS). We find that both types of knowledge build valuable expertise. However, when we examine a high judgment setting (i.e., VA releases despite ongoing losses), we find that VA predictive value improves with substantial APTS but diminishes with auditor industry expertise.

Does Tax Planning Affect Analysts' Earnings Forecasts?

We investigate whether firms’ tax planning affects the accuracy of analysts’ forecasts. Tax planning can exacerbate the complexity of firms’ operations through strategic choices to exploit tax laws. Because of its effect on firms’ operations, tax planning can influence analysts’ efforts to understand and forecast earnings. Specifically, if the additional complexity arising from tax planning makes firm attributes less representative of expected earnings, analysts may issue less accurate forecasts. Using auditor-provided tax services (APTS) as a measure of tax planning, we find that, as firms spend more on tax planning, the accuracy of analysts’ forecasts of both earnings-per-share and tax expense declines. We also document that firms with higher levels of APTS have greater year-to-year volatility in, and lower persistence of, effective tax rates and earnings. Our results suggest that increased firm complexity, due to greater tax planning, makes earnings and tax expense more difficult to forecast and that analysts do not properly adjust for these effects. Thus, when deciding to engage in tax planning, firms appear to make tradeoffs between potential tax savings and negative effects on earnings properties and analysts’ forecasts.

감사인 제공 세무서비스가 기업의 이익조정에 미치는 영향

감사인 제공 세무서비스가 기업의 이익조정에 미치는 영향

감사인의 세무관련 비감사서비스 제공이 피감기업의 공격적 조세회피성향과 감사보수 및 감사품질 사이의 관계에 미치는 영향

감사인의 세무관련 비감사서비스 제공이 피감기업의 공격적 조세회피성향과 감사보수 및 감사품질 사이의 관계에 미치는 영향

Earnings Management through Tax Reserves and Auditor-Provided Tax Services

This study investigates whether firms continue to use tax reserves to achieve financial reporting objectives in the post-FIN 48 period and the effect of auditor-provided tax services on earnings management through tax reserves. Three types of earnings management incentives are considered in this study: meeting or beating the consensus forecasts, income smoothing, and taking an “earnings bath.” The analyses yield evidence that only non-large firms manipulate tax reserves to meet/beat earnings forecast in the post-FIN 48 period; however, tax reserves are still utilized by both large and non-large firms to smooth earnings. Moreover, evidence is provided that the auditor who provides more tax services facilitates large firms’ earnings smoothing in the post-FIN 48 period, implying independence impairment. But this behavior does not exist within non-large firms, arguably because the auditor does not compromise independence for less important clients.

세액공제 기회의 실현과 감사인 제공 세무서비스

세액공제 기회의 실현과 감사인 제공 세무서비스

The Effect on Firms' Purchase of Auditor－Provided Tax Service in CEO Compensation based on After－Tax

The Effect on Firms' Purchase of Auditor－Provided Tax Service in CEO Compensation based on After－Tax

Auditor-Provided Tax Services: The Effect of PCAOB Identification of Income Tax Related Deficiencies in the Part II Inspection Report

We examine whether quality control deficiencies in auditing income tax accounts publicly released in Deloitte’s 2007 PCAOB Part II report impose costs on the accounting firm’s auditor-provided tax services (ATS). We document that audit clients reduce reliance on ATS upon the public disclosure of Deloitte’s income tax-related audit deficiencies. This suggests that publicly disclosed audit deficiencies in the Part II report have a spillover effect on the inspected firm’s non-audit services. We also find that the decision of terminating ATS is predominantly evident in clients who rely more on Deloitte’s non-audit, non-tax services, and in those who excessively increase deferred tax valuation allowance and reserve for uncertain tax benefits. This is consistent with our expectation that reduced demand for Deloitte’s ATS is driven by stakeholders’ concern about independence impairment and by clients’ concern about ATS quality. In additional analyses, we find that Deloitte’s audit clients are less likely to retain ATS when the auditors lack sufficient tax expertise. We also find that PCAOB-identified income tax-related audit deficiencies are associated with reduced tax fees for clients that choose to retain ATS. Additionally, we document that reported earnings and income tax expenses are more value relevant for Deloitte’s audit clients that drop ATS in response to PCAOB-disclosed deficiencies in auditing income tax accounts. Collectively, our results are consistent with audit clients responding to the PCAOB Part II reports after they are publicly disclosed, suggesting that the PCAOB inspection on overall audit quality control has informational value. Specifically, this inspection report incentivizes audit clients to reconsider the benefits/costs of auditor-provided non-audit services and influences investor perception of financial reporting quality.

Do Auditor-Provided Tax Services Improve Estimates of Tax Reserves in the Post-SOX and Post-FIN 48 Periods?

This paper examines whether the increased accounting guidance and reporting requirements of FIN 48 impact the adequacy and accuracy of tax reserves and the effect of auditor-provided tax services on tax reserves. While we do not find FIN 48 affected the adequacy or accuracy of tax reserves on average, FIN 48 eliminated the differences in the tax reserve adequacy of firms with and without auditor-provided tax services that existed prior to its adoption. We also find evidence of more timely recording and less premature releasing of tax reserves post-FIN 48. Our evidence is consistent with an increase in comparability of reserves for firms that do and do not purchase auditor-provided tax services, consistent with one of the FASB’s objectives for FIN 48.

Compliance Costs and Book-Tax Conformity: Evidence from Audit Fees and Audit Quality

The decade-long debate on required book-tax conformity has centered on three areas: the information content of earnings, the incentive to engage in earnings management, and the costs of compliance. While the first two have been studied extensively, studies on the effect that conformity may have on compliance costs are limited to estimates of the effect that perfect conformity will have on tax-related compliance costs, a near tautology. This lack of research is perhaps attributable to the relative invariance in conformity within the United States and the relative unavailability of compliance-related data outside the United States. This study overcomes those limitations and fills the gap in the extant research by using an international sample of firms with manually collected audit fee data. We focus on audit fees as it is a more economically significant compliance cost with available data and where the effect of book-tax conformity has tension. Test results show that increased conformity is associated with greater audit fees. This provides evidence that the hypothesized decreases in tax-related compliance costs may be offset by increases in audit fees, implying that the actual reduction in compliance costs may be lower than previously thought. The results of a difference-in-differences test using the adoption of IFRS for consolidated purposes only as an exogenous shock to book-tax divergence shows consistent results and supports a causal prediction. We also find evidence that higher conformity is associated with higher fees paid for auditor-provided tax service, an increased likelihood the firm chooses its auditor to provide tax services, and higher audit quality.

The Economic Consequences of Tax Service Provider Sanctions: Evidence from KPMG's Deferred Prosecution Agreement

This study investigates the effect of KPMG's Deferred Prosecution Agreement (DPA) on the accounting firm's ability to sell auditor-provided tax services (APTS) and its clients' tax avoidance. We document that following the DPA, clients were more likely to discontinue or reduce purchasing APTS from KPMG relative to the other Big 4 accounting firms. However, we do not find any evidence of a change in tax avoidance among KPMG clients continuing to purchase APTS following the DPA relative to other Big 4 clients. Broadly, our findings highlight how elevated reporting standards and external monitoring impose significant negative economic consequences on the service providers subject to these sanctions. At the same time, it appears clients do not suffer any observable tax costs by continuing to engage a sanctioned tax service provider.

Did the PCAOB's Restrictions on Auditors' Tax Services Improve Audit Quality?

ABSTRACTIn 2005–2006, the PCAOB imposed restrictions on auditors' tax services in order to strengthen auditor independence and improve audit quality. The restrictions resulted in a significant drop in auditor-provided tax services (APTS). To test the impact on audit quality, I partition the sample into a treatment group (companies whose APTS purchases dropped significantly when the restrictions were introduced) and a control group (companies whose APTS purchases were relatively unaffected) and I measure audit quality using the incidence of accounting misstatements, tax-related misstatements, and auditors' going-concern opinions. Using a difference-in-differences design, I find no change in audit quality for the treatment group relative to the control group after the restrictions are imposed.