Component Auditor and Corporate Tax Aggressiveness
Posted: 9 Mar 2021
Date Written: January 20, 2021
The PCAOB has expressed continuous concerns on the use of component auditors by U.S. multinational corporations. Prior studies mainly focus on the potential negative impact of component auditors on audit quality, but the literature has thus far overlooked the benefits brought about by their superior local knowledge. This study utilizes the new Form AP filings on disclosure of component auditor involvement in group audits to investigate whether and how component auditors contribute their local tax expertise to the lead auditors. Specifically, our analysis focuses on the relations between component auditor use and corporate tax aggressiveness. Using a sample of companies with auditor-provided tax service, we find that component auditor use is negatively related to corporate tax aggressiveness. We further find that this negative relation is more pronounced when the component and lead auditors share the same network, when the corporate income tax systems in the component auditors’ jurisdictions are more complex, and when the component auditors exhibit higher competence. Lastly, we also find the association between component auditor use and corporate tax aggressiveness varies significantly with the institutional environment facing component auditors. Overall, our study demonstrates the positive effect of tax knowledge spillover from the component to the lead auditors when auditors jointly provide both audit and tax services. We provide novel evidence in support of the bright side of component auditor use; component auditors aid the lead auditors in deterring their clients’ aggressive tax planning.
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