Tax-Related Financial Statements Restatements and Auditor-Provided Tax Services

Abstract:     
In this study we investigate the association between auditor-provided nonaudit tax services and financial reporting quality for public companies in a post Sarbanes-Oxley environment. We measure the quality of financial reporting by means of appropriately screened financial statement restatements. The Sarbanes-Oxley Act of 2002 restricts the scope of auditor-provided tax services and simultaneously bans other major nonaudit services by the auditor. We argue that the restriction limits the potential financial reporting quality benefits of nonaudit tax services while the ban simultaneously makes those services a relatively more important source of revenue to the auditor, exacerbating the potential for impairment of independence. Consequently, pre-Sarbanes-Oxley results may not hold in a post-Sarbanes-Oxley environment. Upon examination, we find no significant association between auditor-provided nonaudit tax services and general financial statement restatements. However, we find a significant negative association between such services and tax-related financial statement restatements. Thus, in a post-Sarbanes Oxley environment, the benefits of auditor-provided nonaudit tax services seem to manifest themselves in higher quality tax-related financial statement management assertions.

Number of Pages in PDF File: 42

Keywords: nonaudit tax services, SOX, financial reporting quality, financial statements restatements

Accepted Paper Series