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

Posted: 21 Jul 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: June 25, 2012

Abstract

Recently, some firms have decoupled their audit and tax service providers in an effort to improve the perceived credibility of their financial statements. Many firms, however, continue to rely on their current auditor for tax services. Therefore, we examine whether investors assign a lower valuation to firms that continue to use their auditor for tax services. 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 costs of auditor- provided tax services, i.e., threat to auditor independence. 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 Enhance or Impair the Value Relevance of Earnings? (June 25, 2012). Journal of American Taxation Association, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2114334

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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