The Cost of Compliance: FIN 48 and Audit Fees

Posted: 16 May 2014 Last revised: 26 Oct 2016

See all articles by Matthew Erickson

Matthew Erickson

Virginia Tech

Nathan Goldman

North Carolina State University - Department of Accounting

James Stekelberg

Colorado State University, Fort Collins - Department of Accounting

Date Written: October 24, 2016

Abstract

Effective for fiscal years beginning after December 15, 2006, FIN 48 significantly altered uncertain tax benefit (UTB) recognition and disclosure requirements relative to its predecessor standard, FAS 5. We examine the effect of the new standard on audit pricing. We first document that UTB-related audit fees increased following the implementation of FIN 48. However, we also find that this increase is primarily driven by a spike in the audit pricing of UTBs in 2007. Indeed, we find that the audit pricing of UTBs in the 2008-2012 period is not significantly different from that of the 2002-2006 period. We interpret these results to indicate that although firms incurred significant FIN 48 implementation costs, the ongoing audit pricing of UTBs under FIN 48 is similar to that of FAS 5. Our findings suggest that any potential benefits of FIN 48 may outweigh associated costs related to a temporary increase in audit fees.

Keywords: FIN 48; uncertain tax positions; audit fees

JEL Classification: H25; M40; M41; M42; M48

Suggested Citation

Erickson, Matthew and Goldman, Nathan and Stekelberg, James, The Cost of Compliance: FIN 48 and Audit Fees (October 24, 2016). Journal of American Taxation Association, Vol. 38, Issue 2, pp. 67-85, 2016. Available at SSRN: https://ssrn.com/abstract=2437072 or http://dx.doi.org/10.2139/ssrn.2437072

Matthew Erickson

Virginia Tech ( email )

Pamplin College of Business
Blacksburg, VA 24061
United States

Nathan Goldman

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

James Stekelberg (Contact Author)

Colorado State University, Fort Collins - Department of Accounting ( email )

256 Rockwell Hall
Fort Collins, CO 80523
United States

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