Auditor-provided Tax Services Research Articles

Strategic Deviation and Corporate Tax Avoidance: A Risk Management Perspective

We examine the association between strategic deviation—defined as the deviation of firms’ resource allocation from that of industry peers—and corporate tax avoidance. By combining the agency perspective with the risk aspect, we argue that managers of firms with high strategic deviation avoid tax compared with those of firms with low strategic deviation. High-strategic-deviant firms who avoid tax are likely to face the risk of compromising firm value. Based on a large sample of 40,168 US firm-year observations for the period 1987–2020, we find evidence supporting our hypothesis. A series of robustness tests validates our main finding. We further provide evidence to suggest that the positive association between strategic deviation and tax avoidance is stronger for deviant firms with high financial constraints, low institutional ownership, firms operating in more competitive markets, and procuring higher auditor provided tax services from incumbent auditors. Importantly, we show that the capital market penalises tax avoidance strategies undertaken by the deviant firms.

An Examination of Auditor-Provided Tax Services and Tax-Related Regulator Scrutiny

An Examination of Auditor-Provided Tax Services and Tax-Related Regulator Scrutiny

An Examination of Uncertain Tax Position Reserves Around the Purchase of Auditor Provided Tax Services

An Examination of Uncertain Tax Position Reserves Around the Purchase of Auditor Provided Tax Services

Why do audit clients voluntarily disclose the compliance and planning components of auditor provided tax services?

Criticisms of audit firms marketing and devising tax avoidance strategies for their audit clients have led to calls from regulators, investors, and proxy advisors for more detailed disclosures on the composition of tax non-audit services (NAS). Using a hand-collected dataset, we examine the determinants of audit clients’ voluntary bifurcation of total tax NAS fees into the tax planning and compliance components, and the effect of these voluntary disclosures on firm value. We find that firms with higher levels of tax NAS are more likely to provide this disclosure, as well as firms that engage in higher levels of tax avoidance and have accounting experts serve on the audit committee. Using textual analysis, we find that among voluntary tax NAS fee breakdown disclosers, firms with higher total tax and, specifically, tax planning NAS fees have longer and less similar tax NAS fee disclosures relative to the prior period disclosure. Our firm value analyses indicate higher valuations for firms providing voluntary breakdown disclosures when these disclosures reveal high tax NAS fees generally, and high tax planning NAS fees specifically. The firm valuation effects are incrementally more pronounced when voluntary tax NAS fee breakdown firms report higher tax avoidance and expert audit committee oversight. Our results suggest that the voluntary disclosure of private information regarding the nature of tax NAS is one mechanism through which firms facing scrutiny over the implications of these services can alleviate information asymmetry and stakeholder skepticism of tax NAS.

Book-tax conformity and the demand for auditor-provided tax services: European evidence

PurposeThis study aims to examine the impact of different levels of required book-tax conformity (BTC) on audit clients' demand for auditor-provided tax services (APTS). In addition, the authors also investigate the effects of the European Union (EU) Regulation (2014).Design/methodology/approachThis study utilizes a sample of listed companies from 10 EU countries between 2010 and 2019. The final sample consists of 16,049 firm-year observations from 2,515 unique firms, and the authors use both probit and ordinary least square (OLS) regression models in this study.FindingsThe main finding of this paper is that companies listed in countries with a higher level of BTC are less likely to purchase tax services from incumbent auditors and pay fewer auditor-provided tax service fees. Results from further analyses confirm that firms substantially reduced their purchase of APTS after the EU Regulation (2014) was implemented, but these reduced purchases were found to be more pronounced for firms located in countries with low BTC.Originality/valueThis study advances the understanding of the determinants of APTS and the consequences of BTC. Specifically, the authors report that variation in a country-specific feature (i.e. BTC) also affects firms' decision to purchase APTS. Moreover, this paper provides some preliminary evidence of the new regulation and contributes to the literature on APTS regulation. The findings of this study have important policy implications for regulators and are also relevant for various capital market participants.

Knowledge Sharing in Auditor-Provided Tax Services: Experiences of Audit and Tax Personnel

ABSTRACT Research generally finds positive audit and tax outcomes associated with auditor-provided tax services (APTS), attributing knowledge sharing (KS) between tax and audit as the underlying cause but not observing it. This study contributes to the APTS literature by investigating experienced audit and tax professionals’ perspectives about when and how KS occurs. Results imply that KS occurs in two phases and is enhanced or inhibited by multiple factors related to knowledge relevance, motivation, opportunities, and culture. First, audit and tax personnel often share client information and their domain expertise while interacting during the audit, which enables identifying potentially valuable APTS. Second, further KS can occur during/following APTS performance, and APTS results may be shared back to benefit the audit. Our evidence shows that key factors may vary across phases, underscoring the importance of considering the full APTS process. Based on our findings, we suggest a number of future research opportunities. JEL Classifications: M41; M42.

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

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.

Did the public company oversight board's restrictions on auditor-provided tax services reduce companies' tax avoidance

Did the public company oversight board's restrictions on auditor-provided tax services reduce companies' tax avoidance

Do Auditor-Provided Tax Services Impair Auditor Independence or Generate Knowledge Spillover? Evidence from the Tax Cuts and Jobs Act of 2017

Do Auditor-Provided Tax Services Impair Auditor Independence or Generate Knowledge Spillover? Evidence from the Tax Cuts and Jobs Act of 2017

A taxing audit—On the association between auditor workload compression and tax avoidance

This study investigates the association between auditor workload compression and tax avoidance. Heavy auditor workloads can limit the extent to which auditors are able to examine the determination of the income tax provision, creating opportunities for companies to maintain their tax avoidance strategies unimpeded. We find evidence indicating that audits performed by auditors with greater levels of workload compression are associated with greater levels of tax avoidance, as proxied by the cash effective tax rate, the Generally Accepted Accounting Principles (GAAP) effective tax rate and book‐tax differences. We also investigate the role of auditor‐provided tax services (APTS) on the said associations and find evidence generally consistent with knowledge spillover; however, we do not find evidence of a moderating effect from APTS on the association between auditor workload compression and tax avoidance. This study contributes to the auditing and tax literatures by being among the first to investigate whether audit‐related constraints due to workload compression affect the outcomes of management's determination of the tax provision.

Did the public company oversight board's restrictions on auditor-provided tax services reduce companies' tax avoidance

Did the public company oversight board's restrictions on auditor-provided tax services reduce companies' tax avoidance

Law Firms as Tax Planning Service Providers

ABSTRACTWe provide large sample evidence of law firms facilitating U.S. publicly traded companies' tax planning, investigate when evidence of law firm involvement is strongest, and examine some tax planning mechanisms law firms facilitate. Because companies' tax planning relationships with law firms are not publicly observable, we use litigation filings and SEC comment letters to identify companies' observable law firm relationships. We find a positive association between companies' tax planning and the average tax planning of other companies that have a relationship with the same law firm. This association is stronger for companies that are smaller, younger, R&D-intensive, financially constrained, and facing less capital market pressure, but does not vary with auditor-provided tax services. We also find evidence consistent with law firms facilitating the use of tax havens, Double Irish structures, and special purpose entities. Our findings deepen our understanding of companies' tax planning ecosystems.

Summaries of Papers in This Issue

Summaries of Papers in This Issue

Determinants and consequences of auditor‐provided tax services: A systematic review of the international literature

We review the empirical literature on the determinants and consequences of auditor‐provided tax services (APTS) and provide some directions for future research. We first summarise two theoretical but competing perspectives on APTS provision, namely, the knowledge spillover effect and the impaired independence effect. We then review the evolution of APTS‐related disclosures and regulations in selected jurisdictions. Our review of the determinants of APTS suggests that such decisions are related to the cost–benefit trade‐off. We then review the literature on the consequences of APTS. This strand of the literature in the United States supports the knowledge spillover effect, but the findings in non‐US settings are mixed. The market perceptions of APTS in both the US and non‐US settings suggest that market participants react to APTS negatively during uncertain periods, whereas nonarchival studies suggest that the perceptions of APTS vary between stakeholder groups and with the types of APTS provided.

Did PCAOB rules on ethics, independence, and tax services influence financial reporting for income taxes?

The PCAOB Rules on Ethics, Independence, and Tax Services prohibited accounting firms from providing aggressive tax-position transactions to their audit clients. We exploit this setting to examine whether the scrutiny of the PCAOB affects companies’ financial reporting for income tax accounts. We find robust evidence that the overall quality of the income tax accrual increased after companies significantly reduced auditor-provided tax service (APTS) fees in response to the regulation. We show that this improvement is a function of companies’ pre-regulation tax aggressiveness. In addition, we find evidence that after the fee reductions, tax-aggressive companies increased financial statement reserves for uncertain income tax positions without changing tax-aggressive decisions. Overall, our findings are consistent with an improvement in the financial reporting for income taxes under regulatory scrutiny which is more pronounced for companies that were tax aggressive in the pre-regulation period.

The effect of disclosing audit quality control deficiencies on non-audit tax services: Evidence from Deloitte’s 2007 PCAOB Part II inspection report

We examine whether public disclosure of Deloitte 2007 PCAOB Part II report, which identifies quality control deficiencies related to audits of income tax accounts, affects Deloitte’s auditor-provided tax services (APTS). Using a difference-in-differences model, we document a 17 percent lower likelihood of Deloitte’s audit clients employing APTS relative to clients of other annually inspected firms when the report is made public. We also find that the dampening effect of publicly disclosing the Part II report on Deloitte’s APTS is more evident among audit clients paying higher non-audit fees to auditors and those with more complex tax planning. These results suggest that revealing income tax-specific quality control deficiencies prompts audit clients to revise upward (downward) their expected costs (benefits) of perceived auditor independence impairment (knowledge spillover) stemming from APTS. Overall, our study suggests that public disclosure of audit firm-wide quality control deficiencies pertaining to audits of income tax accounts imposes a collateral damage to the inspected firm’s non-audit tax services, thereby providing a more complete understanding of the consequences of the PCAOB’s communications about quality control deficiencies in Part II reports.

Determinants and Consequences of Tax-Related Key Audit Matters

This study examines the determinants and unintended consequences of tax-related key audit matters (KAMs). We argue it is important to examine constructs specifically related to KAM topics to draw valid inferences about expanded audit reporting. Tax KAMs provide this opportunity because tax expense is material to most firms, there is substantial risk in the tax function, and tax KAMs are prevalent and discuss a range of issues. Consistent with tax complexity increasing the difficulty of auditing tax expense, we find that firms with greater tax avoidance, greater tax risk, and larger deferred tax asset balances with greater estimation uncertainty are more likely to receive a tax KAM. In consequences analyses, we find that firms that stop receiving tax KAMs increase their future (but not concurrent) purchases of auditor-provided tax services, consistent with economic bond incentives threatening auditor independence. Firms that stop receiving tax KAMs also increase tax avoidance in subsequent years.

Determinants and Consequences of Auditor Provided Tax Services: A Systematic Review of the International Literature

We review the empirical literature on the determinants and consequences of auditor-provided tax services (APTS) and provide some directions for future research. We first review the evolution of APTS fees disclosures and related regulations in select jurisdictions, followed by a summary of determinants of APTS. We review studies examining firms’ decisions (1) to disclose the APTS information voluntarily; (2) to choose incumbent auditors as the tax service providers; and (3) to retain or dismiss incumbent auditors as the tax service providers. Our review suggests that all these decisions are related to the cost-benefit trade-off. We then review the literature on the consequences of APTS. This strand of the literature in the U.S. supports the knowledge spillover effect, but the findings in the non-U.S. settings are mixed. The market perceptions of APTS in both the U.S. and non-U.S. settings suggest that market participants react to APTS negatively during uncertain periods.

Audit Committee Financial Expertise, Litigation Risk, and Auditor-Provided Tax Services

The Sarbanes-Oxley Act greatly expanded audit committees’ oversight responsibilities by requiring that they preapprove all non-prohibited non-audit services (NAS). Using data from 2003 to 2011, we find that tax NAS are significantly lower when accounting financial experts (ACT-FEs) serve on the audit committee, suggesting that ACT-FEs consider auditor independence risk, perceived and/or real, more than other members, including supervisory experts, to the point of not accepting any tax NAS, not even compliance. However, in firms with higher ex-ante litigation risk, ACT-FEs approve relatively more tax NAS than other members, suggesting that they accept the costs of a perceived lack of auditor independence from tax NAS in return for the potential benefits of increased financial reporting quality arising from tax NAS. Our analysis by sub-period (2003 to 2006 versus 2007 to 2011) shows that this result is significant only in the second period. ACT-FEs’ differential evaluation of the trade-off between the benefits and costs of joint audit and tax NAS provision between the two periods suggests the need for additional research in later post SOX years.

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.