Why Higher Levels of Auditor-Provided Tax Services Lower the Likelihood of Restatements

Why Higher Levels of Auditor-Provided Tax Services Lower the Likelihood of Restatements
Author: Kevin A. Diehl
Publisher:
Total Pages: 18
Release: 2014
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ISBN:
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Kinney et al. (2004) ask in the Journal of Accounting Research: Why do higher levels of auditor-provided tax services lower the chances of restatements? In resolving this question, this paper investigates the relationship between auditor-provided tax services and restatements with proxies to represent the motivations of the audit committee and chief financial officers. Because Sarbanes-Oxley requires audit committee preapproval for these tax services, the necessity for including these variables is obvious. Logistic regression of seven specifications show that higher levels of auditor-provided tax services, financial experts, and long-term compensation are inversely and statistically significantly related to all restatements and (more strongly) to tax-influential restatements. The cash effective tax rate directly and statistically significantly relates to those specifications, showing that just increasing spending on these tax services cannot signal high-quality financial reporting in the absence of effective utilization.

The Relationship Between Restatements and Auditor-provided Tax Services

The Relationship Between Restatements and Auditor-provided Tax Services
Author: Karim Abdul-Karim Karami
Publisher:
Total Pages: 122
Release: 2009
Genre:
ISBN:
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Restatements have been the concern of many talks and studies in the past decade. Auditors are thought to have participated in the increase in the instances of r estatements as their independence is often seen as impaired. In 2002, the Sarban es Oxley Act (SOX) forbid these auditors of providing consulting services to the same client. Banning tax services was however more controversial as some believ ed that these services enhanced the quality of the audit. This paper is based on the views presented earlier on the effect of tax fees on financial quality and auditor independence. It also presents prior research on corporate governance in order to present empirical results for the above matters . Moreover, this paper investigates the possibility of a changing role of audito r-provided tax fees in different corporate governance environments. The sample s tudied consists of 715 observations for firms that restated earnings between the years 2001 and 2007. Overall, our results show a significant positive relations hip between the magnitude of restatements and the fees paid for auditor-provided tax services. At the level of the structure of corporate governance, our result s fail to find a significant relationship between measures of corporate governan ce and the magnitude of restatements. However, we find that the presence of audi tor-provided tax fees along with a strong corporate governance structure decreas es the magnitude of negative restatements.

Reducing Restatements with Increased Industry Expertise

Reducing Restatements with Increased Industry Expertise
Author: Chen-lung Chin
Publisher:
Total Pages:
Release: 2009
Genre:
ISBN:
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This paper examines whether the likelihood of accounting restatements is associated with the Big 4 industry auditor specialists, measured at both the partnerndash;level and audit firm-level leadership. We focus on a sample of listed firms in Taiwan where audit reports must be audited and signed by the two signing auditors as well as by an audit firm. Extending previous studies (e.g., Francis, Reichelt, and Wang 2005, 2006), we classify industry specialists into three groups: (1) auditors that are industry specialists at both the individual partner-level (i.e. the lead signing auditors) and the firm-level; (2) auditors that are industry specialists at the individual partner-level, but not at the firm-level; and (3) auditors that are industry specialists at the firm-level, but not at the individual partner-level. The results reveal that clients of signing auditor specialists, either alone or in conjunction with firm-level specialists, are less likely to make accounting restatements relative to those of other auditors. We find no evidence that firm-level auditor specialists alone are associated with a smaller likelihood of accounting restatements. However, a firm-level industry expert does matter in the presence of the lead auditor being an expert. The results suggest that differential likelihood of accounting restatements due to the Big 4 industry expertise is primarily attributable to the signing partner specialists rather than to auditor specialists at the firm level. We also find that differential restatement likelihood due to signing auditors' expertise is driven by the lead auditor's expertise, rather than by the concurring auditor's expertise.

Incumbent Audit Firm-Provided Tax Services and Clients with Low Financial Reporting Quality

Incumbent Audit Firm-Provided Tax Services and Clients with Low Financial Reporting Quality
Author: H. Gin Chong
Publisher:
Total Pages:
Release: 2017
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ISBN:
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This study investigates whether incumbent audit firm-provided tax services enhance or impair the likelihood of acknowledging client companies' low financial reporting quality. In particular, we examine the association between tax-related fees and the likelihood of timely restatements, and internal control weakness disclosures among a sample of US companies that all have misstatements in financial information. The empirical findings indicate that companies paying higher tax-related fees are less likely to disclose SOX 404 internal control weakness disclosures, implying that underlying control problems are unacknowledged when incumbent audit firm provided tax-related fees are higher. However, the findings suggest that just providing both audit and tax-related services does not have an impact on audit quality per se, but rather it is the magnitude of the tax-related fees in particular that counts. We also find some evidence suggesting that companies paying higher tax-related fees have higher likelihood of restatement lags, whereas companies paying smaller tax-related fees to their audit firm restate financial statements in a timelier manner. Overall, the findings suggest that audit scrutiny of client companies with low quality financial reporting is weaker when the magnitude of tax-related fees is higher.

Does Task-Specific Knowledge Improve Audit Quality

Does Task-Specific Knowledge Improve Audit Quality
Author: Nathan C. Goldman
Publisher:
Total Pages: 52
Release: 2019
Genre:
ISBN:
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Two forms of expertise can influence audit quality: industry and task-specific expertise. Anecdotal evidence suggests that tax knowledge is task-specific, rather than industry-specific and audit offices with increased exposure to complex tax issues develop this task-specific expertise. Using outcomes related to audits of the income tax accounts, we examine whether tax task-specific knowledge (TSK) affects the audit quality of the income tax accounts and find that tax TSK increases the audit quality of the income tax accounts. We also find evidence of an improved response to misstatements among audit offices with tax TSK, demonstrated by a decreased likelihood of future tax misstatements following the disclosure of a tax restatement. Finally, we observe the effect of tax TSK among audit offices with lower levels of auditor-provided tax services (APTS). This result suggests that audit offices without the benefit of knowledge spillover from APTS rely more on the tax TSK.

Higher Audit Quality and Higher Restatement Rates

Higher Audit Quality and Higher Restatement Rates
Author: Stephen P. Rowe
Publisher:
Total Pages: 55
Release: 2019
Genre:
ISBN:
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A restatement occurs when a previously issued financial statement contains a misstatement and this misstatement is detected and corrected. Higher audit quality lowers restatement probability by reducing misstatements, but it increases restatement probability by increasing the probability that misstatements will be detected and corrected. Most studies focus on misstatement reduction and equate higher audit quality with lower restatement rates. By contrast, we focus on how audit quality increases the probability that previously issued financial statements are restated. We find that Big Four auditees that have historically been associated with higher financial reporting quality, experienced an increase in restatement rates during the late 2000's resulting in Big Four auditees having higher restatement rates than Non-Big Four auditees. The timing of this increase in restatement rates corresponds with a period of higher public scrutiny of Big Four auditors. We also find that the higher Big Four auditee restatement rate is driven by an increase in less material restatements and does not reflect a decrease in underlying financial reporting quality. Our findings underscore the importance of evaluating whether factors that increase audit quality could also increase restatement rates and highlight the bias that less material restatements introduce when evaluating financial reporting quality.

The Association Between Changes in Auditor Provided Tax Services and Long-Term Corporate Tax Avoidance

The Association Between Changes in Auditor Provided Tax Services and Long-Term Corporate Tax Avoidance
Author: Brian Hogan
Publisher:
Total Pages: 0
Release: 2012
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ISBN:
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This study examines the long-term impact on taxes paid by firms in the time period following the passage of The Sarbanes-Oxley Act of 2002. Legislators, concerned about auditor independence impairment, eliminated the provision of certain non-audit services by auditing firms and required audit committee pre-approval for tax services. As a result, firms decreasingly engaged their audit firms for tax services, instead possibly turning to other accounting firms or internal tax planning, even though information efficiencies may exist by combining the audit-tax function (i.e. knowledge spillover (Gleason and Mills 2011)). Utilizing a sample of 2,240 unique firms covering 2003-2009, we find an economically and statistically significant long-term negative relationship between firm reductions in auditor-provided tax services (APTS) and taxes paid. Further, a portion of this benefit is lost for some firms when returning to their auditor for tax services after a short break. In summary, firms who engage their audit firms for tax services continue to obtain benefits. Firms that reduce or eliminate their APTS, even if retaining other accounting firms for tax engagements, on average pay more taxes over the long-term.

Corporate Tax Aggressiveness, Auditor Provided Tax Services, and Audit Quality

Corporate Tax Aggressiveness, Auditor Provided Tax Services, and Audit Quality
Author: Kellie M. Carr
Publisher:
Total Pages: 145
Release: 2017
Genre: Auditing
ISBN:
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Using tax accrual quality as a proxy for audit quality, I investigate whether companies that significantly decreased APTS surrounding the effective date of the Public Company Accounting Oversight Board's 2006 Rules on Ethics, Independence, and Tax Services experienced an improvement in audit quality after the change. Given the specific target of the PCAOB 2006 restrictions is companies aggressively avoiding taxes with the assistance of APTS, I also investigate whether companies associated with tax aggressive services are also more likely to experience an improvement in audit quality following the reductions in APTS. Results suggest an increase in audit quality due to a reduction in economic bonding following APTS restrictions. Consistent with the economic bonding theory, companies that significantly reduced APTS experienced a larger improvement in audit quality after the change compared to companies that did not significantly reduce APTS. For tax aggressive companies, those that reduced APTS did experience a significant increase in audit quality after the change compared to tax aggressive companies that did not significantly reduce APTS. Moreover, companies considered important tax clients by their audit firms that significantly reduced APTS did experience a marginally greater increase in audit quality after the change compared to other important tax clients that did not significantly reduce APTS. Overall, my results indicate that the PCOAB 2006 restrictions were effective in decreasing APTS and economic bonding, thereby leading to improved audit quality, especially among companies associated with tax aggressive services. Accordingly, concerns for loss of knowledge spillover seem to be minimal. There are few studies that investigate the effectiveness of the PCAOB 2006 restrictions on audit quality. Therefore, my study fills this void by using a tax specific measure of audit quality, tax accrual quality, to specifically examine the target of the restrictions-- audit clients that are associated with aggressive tax services. My study confirms and expands APTS, economic bonding, audit quality, tax accrual quality, and tax aggressive research, and also provides insight into and support for current policy debates concerning APTS and tax aggressive services.

Auditor-Provided Tax Services and Stock Price Crash Risk

Auditor-Provided Tax Services and Stock Price Crash Risk
Author: Ahsan Habib
Publisher:
Total Pages:
Release: 2016
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ISBN:
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This paper examines whether auditor-provided tax services affect stock price crash risk: an important consideration for stock investors. Provision of tax services by incumbent auditors could accentuate or attenuate crash risk depending on whether such services give rise to knowledge spillover or impair auditor independence. The study investigates two channels through which tax services might affect crash risk: earnings management in tax expenses, and tax avoidance. Also examined, is whether the association between tax services and crash risk is moderated by the particular business strategy that organizations pursue. A two-stage model is used to control for the potential endogeneity inherent in the selection of auditors for tax services. Empirical findings reveal that auditor-provided tax services attenuate crash risk by constraining both earnings management in tax expenses and tax avoidance. Further evidence shows that auditor-provided tax services reduce crash risk for firms following innovator business strategies. Taken together, empirical findings reported in this study support knowledge spillover benefits, i.e. insights gained from tax services can enhance audit effectiveness.