Did the PCAOB's Restrictions on Auditors' Tax Services Improve Audit Quality?

We investigate whether firms' tax planning affects the accuracy of analysts' forecasts. Tax planning can exacerbate the complexity of firms' operations through strategic choices to exploit tax laws. Because of its effect on firms' operations, tax planning can influence analysts' efforts to understand and forecast earnings. Specifically, if the additional complexity arising from tax planning makes firm attributes less representative of expected earnings, analysts may issue less accurate forecasts. Using auditor‐provided tax services (APTS) as a measure of tax planning, we find that, as firms spend more on tax planning, the accuracy of analysts' forecasts of both earnings per share and tax expense declines. We also document that firms with higher levels of APTS have greater year‐to‐year volatility in, and lower persistence of, effective tax rates and earnings. Our results suggest that increased firm complexity, due to greater tax planning, makes earnings and tax expense more difficult to forecast and that analysts do not properly adjust for these effects. Thus, when deciding to engage in tax planning, firms appear to make trade‐offs between potential tax savings and negative effects on earnings properties and analysts' forecasts.

Section: Resultsmentioning

confidence: 99%

Does Tax Planning Affect Analysts' Forecast Accuracy?

Francis

Neuman

Newton

2019

“…Ashbaugh et al (2003) and Chung and Kallapur (2003), however, do not find an association between the provision of nonaudit services to audit clients and earnings quality. Using a difference-in-differences design, Lennox (2016) finds no change in audit quality (measured using misstatements, tax-related misstatements, and going concern opinions) following a quasi-exogenous shock to the amount of auditorprovided tax services. In addition, DeFond et al (2002) do not find a relation between nonaudit fees and auditors' propensity to issue going concern opinions to distressed clients.…”

Section: Background and Related Literaturementioning

confidence: 99%

Do Accounting Firm Consulting Revenues Affect Audit Quality? Evidence from the Pre‐ and Post‐SOX Eras

Lisic

Myers

Pawlewicz

et al. 2018

In recent years, public accounting firms have experienced a steady increase in the proportion of their revenues generated from consulting services. Although growth in consulting revenue following the Sarbanes‐Oxley Act (SOX) has been generated primarily from services provided to nonaudit clients, regulators have expressed concerns about the potential implications of this increase for audit quality. In contrast, accounting firms assert that the expertise developed by their consulting professionals helps them to provide better quality audits. We examine the relation between the proportion of accounting firm consulting revenue to total revenue and audit quality and investor perceptions of audit quality. Because SOX drastically altered the source of consulting revenues for public accounting firms, we also separately examine these relations in the pre‐ and post‐SOX eras. We find evidence suggesting that before SOX, higher proportions of audit firm consulting revenues negatively impacted both audit quality and investor perceptions of audit quality. However, we do not find a statistically significant association between audit firm consulting revenues and either audit quality or investor perceptions of audit quality following SOX. Our analyses suggest that even if these relations exist following SOX, the potential economic magnitude of the effect is small.

“…In addition, we estimate our first‐stage model separately for the pre‐ and post‐FIN 48 periods, which should also help address concerns about the potential changing nature of ATS. In untabulated robustness tests, we reestimate our regressions after removing all firm‐year observations of firms whose ATS purchases appear to have been affected by the PCAOB changes (following Lennox ). Our inferences with respect to H2 are unchanged.…”

mentioning

confidence: 99%

Does FIN 48 Improve Firms' Estimates of Tax Reserves?

Gleason

Mills

Nessa

2017

This paper examines whether the increased accounting guidance and reporting requirements of FIN 48 impact the adequacy and accuracy of tax reserves and the effect of auditor‐provided tax services on tax reserves. While we do not find FIN 48 affected the adequacy or accuracy of tax reserves on average, FIN 48 eliminated the differences in the tax reserve adequacy of firms with and without auditor‐provided tax services that existed prior to its adoption. We also find evidence of less premature releasing of tax reserves post‐FIN 48. Our evidence is consistent with an increase in the comparability of reserves for firms that do and do not purchase auditor‐provided tax services, consistent with one of the FASB's objectives for FIN 48.