Auditor-Provided Tax Services and Income Tax Estimation Error
58 Pages Posted: 5 Sep 2013 Last revised: 16 Sep 2017
Date Written: July 31, 2017
This paper re-examines whether auditor-provided tax services (APTS) are associated with better or worse audit quality. While some believe that one accounting firm providing both audit and tax services to a client improves audit quality through knowledge spillover, others are concerned that non-audit services inhibit auditor independence by lowering auditors’ professional skepticism. Using a tax-specific measure of audit quality that captures within-GAAP income tax estimation error and more rigorous econometric techniques to address endogeneity than those employed by prior research, we find that greater APTS are associated with worse audit quality. When a company begins purchasing a material amount of APTS, income tax estimation error is 17 percent greater. Exploratory analyses suggest that the greater income tax estimation error is due to compromised auditor ability, not compromised auditor incentives. Our findings inform US and EU initiatives that question whether one accounting firm should provide both audit and tax services to a client.
Keywords: audit quality; income tax estimation error; auditor-provided tax services; professional skepticism
JEL Classification: M49, H25
Suggested Citation: Suggested Citation