The Cost of Independence: Evidence from Companies’ Decisions to Dismiss Audit Firms as Tax-Service Providers

Accounting Horizons

55 Pages Posted: 15 Nov 2019

See all articles by Kirsten A. Cook

Kirsten A. Cook

Texas Tech University - Area of Accounting

Kevin Kim

University of Memphis

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Date Written: November 4, 2019

Abstract

This study examines whether companies’ decisions to dismiss or substantially reduce reliance on their audit firms as tax-service providers in the wake of the Sarbanes-Oxley Act affect tax avoidance. We hypothesize that decoupling audit and tax-service provision and subsequently obtaining tax services from a new provider can result in decreased tax avoidance because the new provider lacks familiarity with client’s existing tax planning or does not have the expertise to generate new tax-avoidance opportunities. Consistent with our hypotheses, our results reveal that sample companies’ book (cash) effective tax rates increased by an economically significant 1.36 (1.63) percentage points in the year after terminating or substantially decreasing purchases of tax services from their audit firms, and discretionary permanent book-tax differences declined significantly. We find that decreases in tax avoidance were larger for companies whose outgoing tax-service providers were tax-specific industry experts. When (1) we examine companies that appointed or substantially increased reliance on their audit firm as tax-service providers and (2) we re-estimate our models in a subsequent period when dismissal decisions were unlikely to stem from regulatory reforms, we do not find an effect on tax avoidance.

Keywords: Auditor Independence, Auditor-Provided Tax Services, Tax Fees, Tax Avoidance

Suggested Citation

Cook, Kirsten A. and Kim, Kevin and Omer, Thomas C., The Cost of Independence: Evidence from Companies’ Decisions to Dismiss Audit Firms as Tax-Service Providers (November 4, 2019). Accounting Horizons. Available at SSRN: https://ssrn.com/abstract=3481929

Kirsten A. Cook (Contact Author)

Texas Tech University - Area of Accounting ( email )

P.O. Box 42101
Lubbock, TX 79409
United States

Kevin Kim

University of Memphis ( email )

Memphis, TN 38152-3370
United States

Thomas C. Omer

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

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

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