Do Auditor-Provided Tax Services Impair the Value Relevance of Earnings?

35 Pages Posted: 9 Feb 2012 Last revised: 13 Feb 2012

See all articles by Gopal V. Krishnan

Gopal V. Krishnan

Bentley University

Gnanakumar Visvanathan

George Mason University - Department of Accounting

Wei Yu

Hunter College - City University of New York

Date Written: February 1, 2012

Abstract

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.

Keywords: Market valuation, Tax fees, Ohlson model, Knowledge spillover

Suggested Citation

Krishnan, Gopal and Visvanathan, Gnanakumar and Yu, Wei, Do Auditor-Provided Tax Services Impair the Value Relevance of Earnings? (February 1, 2012). 2012 American Taxation Association Midyear Meeting: JATA Conference . Available at SSRN: https://ssrn.com/abstract=2001718 or http://dx.doi.org/10.2139/ssrn.2001718

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)

Wei Yu

Hunter College - City University of New York ( email )

695 Park Avenue
New York, NY 10065
United States

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