The Effect of Disclosing Audit Quality Control Deficiencies on Non-Audit Tax Services: Evidence from Deloitte’s 2007 PCAOB Part II Inspection Report

57 Pages Posted: 4 Jul 2016 Last revised: 25 Mar 2020

See all articles by Jaehan Ahn

Jaehan Ahn

Northeastern University - Accounting Group

Herita T. Akamah

University of Nebraska at Lincoln - School of Accountancy

Sydney Qing Shu

Miami University of Ohio - Department of Accountancy

Date Written: March 23, 2020

Abstract

We examine whether public disclosure of Deloitte 2007 PCAOB Part II report, which identifies quality control deficiencies related to audits of income tax accounts, affects Deloitte’s auditor-provided tax services (APTS). Using a difference-in-differences model, we document a 17 percent lower likelihood of Deloitte’s audit clients employing APTS relative to clients of other annually inspected firms when the report is made public. We also find that the dampening effect of publicly disclosing the Part II report on Deloitte’s APTS is more evident among audit clients paying higher non-audit fees to auditors and those with more complex tax planning. These results suggest that revealing income tax-specific quality control deficiencies prompts audit clients to revise upward (downward) their expected costs (benefits) of perceived auditor independence impairment (knowledge spillover) stemming from APTS. Overall, our study suggests that public disclosure of audit firm-wide quality control deficiencies pertaining to audits of income tax accounts imposes a collateral damage to the inspected firm’s non-audit tax services, thereby providing a more complete understanding of the consequences of the PCAOB’s communications about quality control deficiencies in Part II reports.

Keywords: PCAOB Part II report; auditor-provided tax service; audit quality control deficiency; non-audit service

Suggested Citation

Ahn, Jaehan and Akamah, Herita T. and Shu, Sydney Qing, The Effect of Disclosing Audit Quality Control Deficiencies on Non-Audit Tax Services: Evidence from Deloitte’s 2007 PCAOB Part II Inspection Report (March 23, 2020). Available at SSRN: https://ssrn.com/abstract=2803555 or http://dx.doi.org/10.2139/ssrn.2803555

Jaehan Ahn (Contact Author)

Northeastern University - Accounting Group ( email )

404 Hayden Hall
360 Huntington Ave.
Boston, MA 02115
United States

Herita T. Akamah

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

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

Sydney Qing Shu

Miami University of Ohio - Department of Accountancy

3094 Farmer School of Business
800 E. High St.
Oxford, OH 45056
United States

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