Is There an Association Between Earnings Management and Auditor-Provided Tax Services?

Posted: 11 Feb 2011

See all articles by Gopal V. Krishnan

Gopal V. Krishnan

Bentley University

Gnanakumar Visvanathan

George Mason University - Department of Accounting

Date Written: February 9, 2011

Abstract

The issue of whether auditor-provided nonaudit services enhance or exacerbate financial reporting quality has been intensely debated among the regulators, auditors, investors, academic researchers, and the media. In 2006, the SEC approved the rules proposed by the PCAOB limiting the tax services that incumbent auditors can offer to their clients. We contribute to this debate by examining whether auditor-provided tax services mitigate earnings management. We find a negative and significant relation between earnings management (loss avoidance) and tax fee paid to the incumbent auditor. Our results are consistent with knowledge spillover, i.e., when the same audit firm provides both audit and tax services insight learned from providing tax services can contribute to audit quality.

Keywords: Knowledge Spillover, Loss Avoidance, Tax Fee, Tax Avoidance

Suggested Citation

Krishnan, Gopal and Visvanathan, Gnanakumar, Is There an Association Between Earnings Management and Auditor-Provided Tax Services? (February 9, 2011). Journal of American Taxation Association, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1758732

Gopal Krishnan (Contact Author)

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2477 (Phone)

Gnanakumar Visvanathan

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States
703-993-4236 (Phone)

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