Internal Control Quality: The Role of Auditor-Provided Tax Services

Posted: 23 Jul 2012 Last revised: 24 Jul 2015

See all articles by Lisa De Simone

Lisa De Simone

Stanford Graduate School of Business

Matthew Ege

Texas A&M University - Department of Accounting

Bridget Stomberg

Indiana University - Kelley School of Business

Date Written: July 2015

Abstract

We propose that auditor-provided tax services (tax NAS) improve internal control quality by accelerating audit firm awareness of transactions material to the financial statements. Using data from 2004 to 2012, we find robust evidence that companies purchasing tax NAS are significantly less likely to disclose a material weakness and that this result is not due to auditor independence impairment. A one standard-deviation increase in tax NAS is associated with approximately a 13 percent decrease in the rate of material weaknesses relative to the base rate. These results are robust to tests addressing endogeneity concerns. Additional cross-sectional analyses reveal expected increased effects of tax NAS on internal control quality (1) after significant operational changes that require changes to the internal control structure, and (2) earlier in the relationship with the financial statement audit firm, when there are fewer established lines of communication between the audit team and client. This paper contributes to the knowledge spillover literature by identifying a mechanism through which tax NAS improve overall financial reporting quality.

Keywords: Auditor fees, auditor independence, internal controls

JEL Classification: M41, M49, H20

Suggested Citation

De Simone, Lisa and Ege, Matthew and Stomberg, Bridget, Internal Control Quality: The Role of Auditor-Provided Tax Services (July 2015). Accounting Review, Vol. 90, No. 4, 2015. Available at SSRN: https://ssrn.com/abstract=2115775 or http://dx.doi.org/10.2139/ssrn.2115775

Lisa De Simone

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-3874 (Phone)
650-724-3083 (Fax)

HOME PAGE: http://www.gsb.stanford.edu/faculty-research/faculty/lisa-de-simone

Matthew Ege (Contact Author)

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

430 Wehner
College Station, TX 77843-4353
United States

Bridget Stomberg

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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