Auditor-Provided Tax Services and Clients’ Tax Avoidance: Do Auditors Draw a Line in the Sand for Tax Advisory Services?

51 Pages Posted: 9 Apr 2020

See all articles by Wayne L. Nesbitt

Wayne L. Nesbitt

Michigan State University, Eli Broad College of Business

Anh Persson

University of Illinois at Urbana-Champaign - Department of Accountancy

Joanna Shaw

Michigan State University - Department of Accounting & Information Systems

Date Written: January 8, 2020

Abstract

Recent incidences of audit failures and tax aggressiveness linked to non-audit services have called into question audit firms’ compliance with current restrictions on the provision of aggressive tax planning to their clients. This study investigates whether U.S. audit firms comply with existing regulations. Using quantile regressions, we observe an upper bound in the positive association between auditor-provided tax services (APTS) and tax avoidance. We interpret this bound as evidence of audit firms’ compliance. Interestingly, we observe that the association turns negative for clients with low effective tax rates. This nonlinearity suggests that audit firms take steps to reduce their exposure to these clients. Whereas our main results demonstrate some compliance, trend analysis shows an increase in tax avoidance associated with APTS during our sample period. We also find a more persistent association for larger clients, suggesting that economic bonding influences the tax strategies an audit firm is willing to provide.

Keywords: Auditor-provided tax services, Tax avoidance, PCAOB regulation, Non-audit services

JEL Classification: H25, G30

Suggested Citation

Nesbitt, Wayne L. and Persson, Anh and Shaw, Joanna, Auditor-Provided Tax Services and Clients’ Tax Avoidance: Do Auditors Draw a Line in the Sand for Tax Advisory Services? (January 8, 2020). Available at SSRN: https://ssrn.com/abstract=3556702 or http://dx.doi.org/10.2139/ssrn.3556702

Wayne L. Nesbitt

Michigan State University, Eli Broad College of Business ( email )

North Business College Complex
632 Bogue Street N261
East Lansing, MI 48824-1034
United States
517-432-4407 (Phone)
517-432-1101 (Fax)

Anh Persson

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

283 Wohlers Hall
1206 South Sixth Street
Champaign, IL 61820
United States
217.330.8543 (Phone)

HOME PAGE: http://https://giesbusiness.illinois.edu/profile/anh-vuong-persson

Joanna Shaw (Contact Author)

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States

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