The Changing Role of Auditors in Corporate Tax Planning

Abstract:     
This paper examines changes in the role that auditors play in corporate tax planning following recentevents, including the well-known accounting scandals, passage of the Sarbanes-Oxley Act, andregulatory actions by the SEC and PCAOB. On the whole, these events have increased thesensitivity to and scrutiny of auditor independence. We examine the effects of these events on themarket for tax planning, in particular the longstanding link between audit and tax services. Whilethe effects are recent, they are already being seen in the data. Specifically, there has already beena dramatic shift in the market for tax planning away from obtaining tax planning services from one'sauditor. We estimate that the ratio of tax fees to audit fees paid to the auditors of firms in the S&P500 decline from approximately one in 2001 to one-fourth in 2004. At the same time, we find noevidence of a general decline in spending for tax services. In sum, the evidence indicates adecoupling of the longstanding link between audit and tax services, such that firms are shifting theirpurchase of tax services away from their auditor and towards other providers.

Number of Pages in PDF File: 41

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