Disclosure of Tax-Related Critical Audit Matters and Tax-Related Outcomes

52 Pages Posted: 2 Jun 2020 Last revised: 26 Oct 2023

See all articles by Katharine D. Drake

Katharine D. Drake

University of Arizona - Department of Accounting

Nathan C. Goldman

North Carolina State University - Department of Accounting

Stephen J. Lusch

University of Kentucky - Von Allmen School of Accountancy

Jaime J. Schmidt

University of Texas at Austin

Date Written: October 24, 2023

Abstract

Given that tax-related critical audit matters (tax CAMs) were prevalent among accelerated filers (18.5 percent of observations) during the initial year of CAM disclosures, we examine whether an auditor’s disclosure of tax CAMs is associated with variation in tax-related financial reporting quality, tax avoidance, and tax-related earnings management. Finding an association between tax CAMs and one of these tax outcomes would indicate that the new auditor reporting standard has indirectly affected investors. Examining the first year of CAM disclosures, we do not find that tax CAMs are associated with broad proxies of tax-related audit or financial reporting quality (e.g., restatements, internal control weaknesses, comment letters) or tax avoidance (e.g., effective tax rates or book-to-tax differences). We do find that tax CAMs are associated with a modest increase in tax accrual quality, an increase in the reserve for uncertain tax benefits, and a reduction in the likelihood of tax-related earnings management. However, we do not find these tax CAM effects persist into the second year of CAM reporting. Our evidence is consistent with tax CAM disclosures having a modest but short-lived effect on companies’ reporting of tax accounts. Our findings should inform the PCAOB as they conduct their post-implementation review of the new audit reporting standard.w audit reporting standard.

Keywords: critical audit matters, tax reporting, tax avoidance, tax-related earnings management, expanded audit reports, financial reporting quality

Suggested Citation

Drake, Katharine D. and Goldman, Nathan C. and Lusch, Stephen J. and Schmidt, Jaime J., Disclosure of Tax-Related Critical Audit Matters and Tax-Related Outcomes (October 24, 2023). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3606701 or http://dx.doi.org/10.2139/ssrn.3606701

Katharine D. Drake (Contact Author)

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Nathan C. Goldman

North Carolina State University - Department of Accounting ( email )

Raleigh, NC 27695-8113
United States

Stephen J. Lusch

University of Kentucky - Von Allmen School of Accountancy ( email )

Lexington, KY 40506
United States

Jaime J. Schmidt

University of Texas at Austin ( email )

Austin, TX 78712
United States

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