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Do Complexity, Governance, and Auditor Independence Influence Whether Firms Retain Their Auditors for Tax Services?

Journal of the American Taxation Association, Spring 2010

Posted: 25 Jun 2009  

Dennis R. Lassila

Texas A&M University - Department of Accounting

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Marjorie K. Shelley

University of Nebraska at Lincoln - School of Accountancy

Murphy Smith

Texas A&M University-Corpus Christi

Date Written: June 25, 2009

Abstract

This study examines factors that influenced public companies to retain or dismiss their audit firms as tax service providers during the years immediately surrounding the passage of the Sarbanes-Oxley Act (SOX) in 2002. We find a positive relation between a company’s tax and operating complexity and the probability that it retained its auditor-provided tax services, suggesting that complexity increases the potential benefits from knowledge spillover relative to the costs from perceived auditor independence impairment. We find a positive relation between the strength of a company’s corporate governance and the probability that it would retain auditor-provided tax services, suggesting that companies with strong governance expected benefits from knowledge spillover to exceed costs from perceived auditor independence impairment. Although we find no direct relation between auditor tenure and the decision to retain auditor-provided tax services, we do find a significant negative association between auditor retention and high non-tax NAS fees and between auditor retention and the joint effect of long auditor tenure and high non-tax NAS fees. Thus firms with low auditor independence and long audit tenure are less likely to retain their auditor for tax services than firms with high non-tax NAS fees alone.

Keywords: governance, auditor independence, tax services, complexity, nonaudit services

JEL Classification: H25, M40, M41, M49

Suggested Citation

Lassila, Dennis R. and Omer, Thomas C. and Shelley, Marjorie K. and Smith, Murphy, Do Complexity, Governance, and Auditor Independence Influence Whether Firms Retain Their Auditors for Tax Services? (June 25, 2009). Journal of the American Taxation Association, Spring 2010. Available at SSRN: https://ssrn.com/abstract=1425697

Dennis R. Lassila

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845- 4584 (Phone)

Thomas C. Omer (Contact Author)

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Marjorie Shelley

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Murphy Smith

Texas A&M University-Corpus Christi ( email )

6300 Ocean Drive, Unit 5808
O’Conner Building - Room 333,
Corpus Christi, TX 78412
United States

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