Abstract

http://ssrn.com/abstract=1549705
 
 

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The Cost of Independence: Evidence from Firms’ Decisions to Dismiss Auditors as Tax-Service Providers


Kirsten A. Cook


Texas Tech University - Area of Accounting

Thomas C. Omer


University of Nebraska at Lincoln - School of Accountancy

July 18, 2013


Abstract:     
This study examines whether firms’ decisions to dismiss (or substantially reduce reliance on) their auditors as tax-service providers affect tax avoidance and the associated financial- and tax-reporting outcomes. We hypothesize that decoupling audit- and tax-service provision and subsequently obtaining tax consulting from a new provider (either internal or external to the firm) may result in a decrease in tax avoidance due to this new provider’s lack of familiarity with the client’s tax-planning opportunities or lack of expertise at generating tax-avoidance strategies. Consistent with our hypotheses, our results reveal that sample firms’ book (cash) effective tax rates increased by an economically significant 1.36 (1.63) percent in the year after terminating or substantially decreasing purchases of tax services from their auditors, and discretionary permanent book-tax differences declined significantly. We also find that performance-matched, non-tax discretionary accruals and the likelihood of a restatement did not change following the tax-service provider shift, suggesting that payments of tax-service fees to auditors do not result in economic bonding that degrades financial-statement quality. Debt and equity markets appear to view dismissals of auditors as tax-service providers negatively: long-term credit ratings and annual buy-and-hold returns both declined following these provider shifts.

Number of Pages in PDF File: 53

Keywords: Auditor Independence, Tax Fees, Tax Avoidance, Financial-Statement Quality

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Date posted: February 8, 2010 ; Last revised: August 3, 2013

Suggested Citation

Cook, Kirsten A. and Omer, Thomas C., The Cost of Independence: Evidence from Firms’ Decisions to Dismiss Auditors as Tax-Service Providers (July 18, 2013). Available at SSRN: http://ssrn.com/abstract=1549705 or http://dx.doi.org/10.2139/ssrn.1549705

Contact Information

Kirsten A. Cook (Contact Author)
Texas Tech University - Area of Accounting ( email )
P.O. Box 42101
Lubbock, TX 79409
United States
Thomas C. Omer
University of Nebraska at Lincoln - School of Accountancy ( email )
307 College of Business Administration
Lincoln, NE 68588-0488
United States
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