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Auditor-provided Tax Services and Clients’ Tax Avoidance: Do Auditors Draw a Line in the Sand for Tax Advisory Services?
|Title:||Auditor-provided Tax Services and Clients’ Tax Avoidance: Do Auditors Draw a Line in the Sand for Tax Advisory Services?|
|Keywords:||Auditor-provided tax services|
Effective tax rate
|Date Issued:||30 Aug 2019|
|Abstract:||In this study, we empirically examine the upper bound of the relationship between auditor-provided tax services (APTS) and clients’ level of tax avoidance. This question is of significant interests for regulators because recent incidents of audit firms’ involvement in clients’ tax aggressive activities have reignited concerns about the extent to which non-audit services could impair auditor independence and audit quality. Using quadratic and linear-log regressions, we document a negative association between tax fees paid and clients’ effective tax rates, but the association diminishes as clients become more tax aggressive. Interestingly, using quartile regressions, we find evidence that for the most tax aggressive firms (firms in the lowest quartile of ETR), the association between APTS and ETR turns positive. This positive association is consistent with audit firms reducing their level of tax service engagement when clients become more tax aggressive, possibly due to regulatory, reputational, or litigation concerns. These results are consistent with audit firms adhering to PCAOB’s Rule 3522, which prohibits the provision of tax aggressive services to public clients. In cross-sectional analyses, we find some evidence that large clients influence audit firms to be more tax aggressive, consistent with economic bonding between these parties. These results should be informative to policymakers and regulators in their review of non-audit services.|
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