Voluntary Disclosure of Auditor-Provided Tax Service Fees

The Journal of the American Taxation Association, Spring 2010

Posted: 24 Jun 2009

See all articles by Jean C. Bedard

Jean C. Bedard

Bentley University - Department of Accountancy

Diana Falsetta

University of Miami - Department of Accounting

Ganesh Krishnamoorthy

Northeastern University

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Date Written: June 23, 2009

Abstract

This study examines the decisions of firms to voluntarily disclose tax fees paid to their external auditors. Although the Securities and Exchange Commission (SEC) began requiring public companies to disclose fees paid to auditors in 2000, separate disclosure of tax service fees as a component of those fees was not required until 2003. During this period there was increased scrutiny by the SEC on many aspects of the auditor-client relationship, and by the Internal Revenue Service (IRS) on the sale of tax shelters by large public accounting firms to their clients. Hence, we predict that the decisions of firms buying tax services from their auditor to voluntarily disclose fees for those services will be significantly influenced by political costs associated with heightened regulatory scrutiny. Results show that the likelihood of separate disclosure of tax fees in 2002 is negatively associated with the ratio of nonaudit service fees (NAS) to total fees, thus supporting the political cost hypothesis. Importantly, we find that the negative association of political cost and disclosure is exacerbated by both audit committee governance and audit firm size. We also find the disclosure decision to be positively associated with agency costs (institutional ownership and size), and negatively associated with the relative amount of deferred taxes, firm profitability, and auditor change. In summary, these results shed light on the roles played by two important players in the corporate governance structure of a firm (the audit committee and the audit firm) in determining a firm's voluntary disclosure practices.

Keywords: Nonaudit services, tax consulting, voluntary disclosure, political costs

JEL Classification: H25, M40, M41, M49

Suggested Citation

Bedard, Jean C. and Falsetta, Diana and Krishnamoorthy, Ganesh and Omer, Thomas C., Voluntary Disclosure of Auditor-Provided Tax Service Fees (June 23, 2009). The Journal of the American Taxation Association, Spring 2010. Available at SSRN: https://ssrn.com/abstract=1424565

Jean C. Bedard (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Diana Falsetta

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305.284.8642 (Phone)
305.284.5737 (Fax)

Ganesh Krishnamoorthy

Northeastern University ( email )

360 Huntington Ave.
Boston, MA 02115
617-373-4651 (Phone)
617-373-8814 (Fax)

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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