Effects of Auditor-Provided Tax Services on Book-Tax Differences and on Investors’ Mispricing of Book-Tax Differences

Advances in Accounting, Forthcoming

63 Pages Posted: 18 Nov 2019

See all articles by Bing Luo

Bing Luo

San Francisco State University

Date Written: August 25, 2019

Abstract

Over the last decade, the joint provision of audit and non-audit services has been criticized for compromising auditor independence and affecting audit quality. Since 2005, the SEC has enacted rules restricting the types of non-audit services audit firms can provide clients. While most non-audit services are prohibited, a range of tax services are still allowed. Therefore, if compromises can emerge from allowing non-audit services, permitting tax services could be problematic. This study investigates the effect of auditor-provided tax services (ATS) on firms’ levels of book-tax differences and on investors’ mispricing of book-tax differences. Using a propensity-score matched sample from 2000 to 2013, I find strong evidence that firms acquiring ATS exhibit a low level of temporary book-tax differences, which in turn mitigate investors’ levels of firms’ mispricing. These results do not support regulators’ claim that the provision of ATS compromises auditor independence. Instead, it suggests that purchasing ATS can improve overall accounting quality through knowledge spillover and thus help investors better price the value of firms.

Keywords: non-audit services; auditor-provided tax services; book-tax differences; limited attention; mispricing

Suggested Citation

Luo, Bing, Effects of Auditor-Provided Tax Services on Book-Tax Differences and on Investors’ Mispricing of Book-Tax Differences (August 25, 2019). Advances in Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3483229

Bing Luo (Contact Author)

San Francisco State University ( email )

1600 Holloway Avenue
San Francisco, 94132
United States

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