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