Do Auditor-Provided Tax Services Impair the Value Relevance of Earnings?
Gopal V. Krishnan
American University; American University - Kogod School of Business
George Mason University - Accounting Program
University of Tennessee
February 1, 2012
2012 American Taxation Association Midyear Meeting: JATA Conference
Lately, several firms have decoupled audit and tax service providers to shore up the credibility of their financial statements. However, a number of other firms rely on the incumbent auditor for tax services. Do investors assign a lower valuation to firms that continue to use the auditor for tax services? We contribute to the literature by examining whether auditor-provided tax services moderate investor perception of earnings. We find that the value-relevance of earnings is increasing in the ratio of tax fees over total fees paid to the auditor. Further, for a sample of firms that switched to other providers of tax services, we find that the value-relevance of earnings is lower in the year of the switch. These findings support the notion that on average, investors perceive the benefits of auditor-provided tax services, i.e., enhanced financial reporting quality due to knowledge spillover to be greater than the likely threat to auditor independence caused by auditor-provided tax services. Our findings have important implications for audit committee chairs, managers, and regulators.
Number of Pages in PDF File: 35
Keywords: Market valuation, Tax fees, Ohlson model, Knowledge spilloverworking papers series
Date posted: February 9, 2012 ; Last revised: February 13, 2012
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