Auditor-Provided Tax Services: The Effects of a Changing Regulatory Environment

Posted: 27 May 2006  

Thomas C. Omer

University of Nebraska at Lincoln - School of Accountancy

Jean C. Bedard

Bentley University - Department of Accountancy

Diana Falsetta

University of Miami - Department of Accounting

Abstract

This study investigates auditor-provided tax services from 2000 to 2002, during which fees paid to auditors for nonaudit services (NAS) were disclosed, but separate disclosure of tax service fees was voluntary. We examine changes in the market for tax NAS in 2002, as Congress debated possible prohibition of these services. Using the Heckman MLE procedure to control for selection bias in tax fee disclosure, we find that a strong pre-2002 positive association between tax fees and higher than expected audit fees weakened significantly in 2002, suggesting that some companies paying high audit fees reduced or terminated auditor-provided tax services in 2002. Our findings also suggest that auditor-provided tax services were reduced among new or short-tenure clients. Controlling for tax complexity, we also find some evidence that early "returns" (i.e., tax rate reductions) to companies from auditor-provided tax services were reduced in 2002. Finally, results of our selection model imply that the decision to voluntarily disclose fees paid to the auditor for tax services is positively associated with tax complexity and auditor tenure, and negatively associated with the proportion of NAS fees to total fees. Overall, our findings imply significant change in auditor-provided tax services prior to 2003, when separate disclosure of auditor-provided tax service fees was mandated.

Keywords: Tax fees, tax consulting, audit fees, auditor independence

JEL Classification: H25, M40, M41, M49

Suggested Citation

Omer, Thomas C. and Bedard, Jean C. and Falsetta, Diana, Auditor-Provided Tax Services: The Effects of a Changing Regulatory Environment. Accounting Review, October 2006. Available at SSRN: https://ssrn.com/abstract=904667

Thomas C. Omer (Contact Author)

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

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

Jean C. Bedard

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452
United States
781-891-2410 (Phone)
781-891-2896 (Fax)

Diana Falsetta

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305.284.8642 (Phone)
305.284.5737 (Fax)

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