Auditor-Provided Tax Services and Income Tax Estimation Error

58 Pages Posted: 5 Sep 2013 Last revised: 16 Sep 2017

See all articles by Preeti Choudhary

Preeti Choudhary

University of Arizona, Eller College of Management

Allison Koester

Georgetown University

Robert J. Pawlewicz

George Mason University - Department of Accounting

Date Written: July 31, 2017

Abstract

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

Choudhary, Preeti and Koester, Allison and Pawlewicz, Robert J., Auditor-Provided Tax Services and Income Tax Estimation Error (July 31, 2017). Available at SSRN: https://ssrn.com/abstract=2320479 or http://dx.doi.org/10.2139/ssrn.2320479

Preeti Choudhary

University of Arizona, Eller College of Management ( email )

Department of History
Tucson, AZ 85721
United States

Allison Koester

Georgetown University ( email )

McDonough School of Business
Washington, DC 20057
United States
202.687.6461 (Phone)

HOME PAGE: http://explore.georgetown.edu/people/apk29/

Robert J. Pawlewicz (Contact Author)

George Mason University - Department of Accounting ( email )

Fairfax, VA
United States

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