The Economic Consequences of Tax Service Provider Sanctions: Evidence from KPMG's Deferred Prosecution Agreement

Posted: 23 Apr 2015 Last revised: 1 Apr 2016

See all articles by Andrew Finley

Andrew Finley

Claremont McKenna College - Robert Day School of Economics and Finance

James Stekelberg

Colorado State University, Fort Collins - Department of Accounting

Date Written: March 31, 2016

Abstract

This study investigates the effect of KPMG's Deferred Prosecution Agreement (DPA) on the accounting firm's ability to sell auditor-provided tax services (APTS) and its clients' tax avoidance. We document that following the DPA, clients were more likely to discontinue or reduce purchasing APTS from KPMG relative to the other Big 4 accounting firms. However, we do not find any evidence of a change in tax avoidance among KPMG clients continuing to purchase APTS following the DPA relative to other Big 4 clients. Broadly, our findings highlight how elevated reporting standards and external monitoring impose significant negative economic consequences on the service providers subject to these sanctions. At the same time, it appears clients do not suffer any observable tax costs by continuing to engage a sanctioned tax service provider.

Keywords: Auditor-Provided Tax Services, Tax Reporting Standards, Deferred Prosecution Agreements, Tax Avoidance

Suggested Citation

Finley, Andrew and Stekelberg, James, The Economic Consequences of Tax Service Provider Sanctions: Evidence from KPMG's Deferred Prosecution Agreement (March 31, 2016). Journal of American Taxation Association, Vol. 38, Issue 1, pp. 57-78, 2016. Available at SSRN: https://ssrn.com/abstract=2597368 or http://dx.doi.org/10.2139/ssrn.2597368

Andrew Finley

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
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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