The Role of Audit Firm Expertise and Knowledge Spillover in Mitigating Earnings Management through the Tax Accounts

57 Pages Posted: 26 May 2013 Last revised: 1 Jun 2016

See all articles by Brant E. Christensen

Brant E. Christensen

University of Oklahoma; Norwegian School of Economics (NHH) - Department of Accounting, Auditing and Law

Adam J. Olson

University of Cincinnati - Department of Accounting

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Date Written: March 20, 2014

Abstract

Tax-related accounts are complex and often the last accounts finalized in the financial reporting process. Accordingly, these accounts can be used as a ‘last chance’ earnings management tool (Dhaliwal, Gleason, and Mills 2004). We investigate the extent to which an audit firm’s industry expertise constrains earnings management through the tax accounts. We find that national industry audit experts constrain earnings management through the tax accounts. We also find that audit firm tax expertise constrains earnings management through the tax accounts when the audit firm is not considered an industry audit expert. Finally, we find evidence that providing both audit and tax services facilitates a non-expert firm’s ability to constrain earnings management through the tax accounts, which suggests that knowledge spillover plays an important role in reducing ‘last chance’ earnings management. All findings hold among smaller clients and when the extent of earnings management is below quantitative materiality thresholds.

Keywords: Earnings Management, Non-Audit Services, Audit Expertise, Knowledge Spillover, Effective Tax Rate, Tax Expertise

Suggested Citation

Christensen, Brant E. and Olson, Adam J. and Omer, Thomas C., The Role of Audit Firm Expertise and Knowledge Spillover in Mitigating Earnings Management through the Tax Accounts (March 20, 2014). Journal of American Taxation Association, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2269877 or http://dx.doi.org/10.2139/ssrn.2269877

Brant E. Christensen

University of Oklahoma ( email )

Norman, OK 73019-4004
United States

Norwegian School of Economics (NHH) - Department of Accounting, Auditing and Law ( email )

Helleveien 30
N-5045 Bergen
Norway

Adam J. Olson (Contact Author)

University of Cincinnati - Department of Accounting ( email )

Cincinnati, OH 45221-0211
United States

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

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