Auditor-Provided Tax Services and Earnings Management in Tax Expense: The Importance of Audit Committees
46 Pages Posted: 22 Sep 2012 Last revised: 28 Jun 2014
Date Written: April 2014
Regulators do not prohibit auditors from providing tax services to their audit clients, provided these services are preapproved by audit committees. I examine whether the association between auditor-provided tax services and earnings management in tax expense varies with audit committee effectiveness. I develop a composite proxy for audit committee effectiveness by combining six audit committee characteristics. I find that auditor-provided tax services are less positively associated with earnings management in tax expense as audit committee effectiveness increases. My findings suggest that the knowledge spillover effect of auditor-provided tax services is more likely to dominate the independence impairment effect when auditor-provided tax services are preapproved by more effective audit committees.
Keywords: audit committee, corporate governance, earnings management, non-audit fees, tax expense
JEL Classification: G30, H25, M41, M42
Suggested Citation: Suggested Citation