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

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
361
Abstract Views
2,392
Rank
148,854
PlumX Metrics