Tax Internal Control Quality: The Role of Auditor-Provided Tax Services

Simone, Lisa De; Ege, Matthew; Stomberg, Bridget

doi:10.2139/ssrn.2115775

Cited by 21 publications

(29 citation statements)

References 17 publications

(27 reference statements)

Supporting

Mentioning

Contrasting

Order By: Relevance

“…These studies generally find that APTS have a positive (rather than a negative) effect on audits, financial reporting, and managerial discretion. For example, APTS are associated with fewer restatements and internal control weaknesses, less earnings management, and better tax reserves (Kinney et al 2004;Robinson 2008;Gleason and Mills 2011;Krishnan and Visvanathan 2011;De Simone et al 2015). Gal-Or et al (2016) note that that these favorable financial reporting outcomes are likely due to the provision of tax compliance services rather than the provision of tax planning services, but, regardless of this distinction, the literature does not suggest that APTS create a client environment that would reduce analyst forecast accuracy (Lennox 2016). less representative of expected earnings, analyst forecast accuracy could be lower.…”

Section: Resultsmentioning

confidence: 99%

Does Tax Planning Affect Analysts' Forecast Accuracy?

Francis

Neuman

Newton

2019

Contemporary Accting Res

View full text Add to dashboard Cite

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.

show abstract

Section: Resultsmentioning

confidence: 99%

Does Tax Planning Affect Analysts' Forecast Accuracy?

Francis

Neuman

Newton

2019

Contemporary Accting Res

View full text Add to dashboard Cite

show abstract

“…Yet despite their frequent nature and ongoing importance, analysis of tax‐related ICWs is sparse within the academic literature. Several studies examine auditor‐provided tax services as a determinant of ICWs under SOX, including De Simone, Ege, and Stomberg () and Harris and Zhou (). Similarly, Bedard and Graham () focus on the determinants of tax‐related internal control deficiencies, using privately‐disclosed internal control issues.…”

Section: Background and Hypothesesmentioning

confidence: 99%

Tax Avoidance and the Implications of Weak Internal Controls

Bauer

2015

Contemporary Accting Res

125

View full text Add to dashboard Cite

I examine whether corporate tax avoidance is associated with internal control weaknesses (ICWs) disclosed under the Sarbanes-Oxley Act (SOX). ICWs disclosed under SOX are frequently related to a firm's tax function. When pervasive ICWs exist, the likelihood increases that these frequent tax-related ICWs spill over from financial reporting issues to tax avoidance objectives. Thus, my research helps corporate stakeholders understand the implications of internal controls beyond simply financial reporting objectives. Results indicate that, on average, firms with a tax-related ICW have a 4 percent higher three-year cash effective tax rate relative to firms without any such weaknesses. Further estimates reveal that this negative relation stems from pervasive, company-level tax ICWs. Analysis of remediation suggests a causal link. I find that after remediating tax-related ICWs, firms report higher levels of tax avoidance in the future. Broadly, these findings support that internal control quality represents a proxy for internal governance, and thus the strength of alignment between managers and shareholders. Furthermore, tax-related internal controls represent an important underlying determinant of tax avoidance with significant cash flow effects, and implications beyond financial reporting. * Accepted by Lillan Mills. I am grateful for the helpful advice and suggestions of my dissertation committee: Jee-Hae Lim, Alan Macnaughton, Anindya Sen and especially my chair, Ken Klassen. I am also indebted to Tim Bauer, James Chyz, Cristi Gleason and Louise Hayes for their wonderful insight and assistance. This paper has also benefited greatly from the comments of Lillian Mills and two anonymous refereescause a effet. L'auteur constate qu'apr es avoir rem edi e aux DCI li ees a la fonction fiscale, les soci et es affichent ult erieurement des niveaux d'optimisation fiscale sup erieurs. De fac ßon g en erale, ces observations viennent etayer le fait que la qualit e du contrôle interne est une variable de substitution a la gouvernance interne et confirment donc l'ad equation des int erêts des gestionnaires et des actionnaires. Plus encore, les contrôles internes li es a la fonction fiscale sont un important d eterminant de l'optimisation fiscale qui a des r epercussions importantes sur les flux de tr esorerie et dont les cons equences d epassent l'information financi ere. 450 Contemporary Accounting Research CAR Vol. 33 No. 2 (Summer 2016)trols (COSO 2011)-and include weak risk management, lack of key personnel, inadequate communication, "tone at the top," etc. 3 While related to financial reporting of tax provisions, valuation allowances, and other reserves specifically, these ICWs could translate into missed tax-avoidance opportunities. Conversely, they could also reflect inaccurate evaluation of tax jurisdictions and other planning inputs yet to be discovered by tax authorities, or opportunities for management to extract rents. Consequently, I hypothesize that taxrelated ICWs reflect a lack of internal governance for the tax f...

show abstract

“…While audit quality is not directly observable, DeFond and Zhang (2014) note that accounting misstatements and auditors' going-concern opinions are two of the most direct proxies for audit quality. Moreover, these proxies have been used extensively in prior research examining the consequences of tax and other non-audit services (DeFond, Raghunandan, and Subramanyam 2002;Craswell, Stokes, and Laughton 2002;Geiger and Rama 2003;Kinney, Palmrose, and Scholz 2004;Paterson and Valencia 2011;Seetharaman, Sun, and Wang 2011;De Simone, Ege, and Stomberg 2015). Of the two proxies, I expect accounting misstatements to be particularly appropriate for a couple of reasons.…”

Section: Introductionmentioning

confidence: 99%

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

Lennox

2015

The Accounting Review

111

View full text Add to dashboard Cite

In 2005–2006, the PCAOB imposed restrictions on auditors' tax services in order to strengthen auditor independence and improve audit quality. The restrictions resulted in a significant drop in auditor-provided tax services (APTS). To test the impact on audit quality, I partition the sample into a treatment group (companies whose APTS purchases dropped significantly when the restrictions were introduced) and a control group (companies whose APTS purchases were relatively unaffected) and I measure audit quality using the incidence of accounting misstatements, tax-related misstatements, and auditors' going-concern opinions. Using a difference-in-differences design, I find no change in audit quality for the treatment group relative to the control group after the restrictions are imposed.

show abstract

Tax Internal Control Quality: The Role of Auditor-Provided Tax Services

Cited by 21 publications

References 17 publications

Does Tax Planning Affect Analysts' Forecast Accuracy?

Does Tax Planning Affect Analysts' Forecast Accuracy?

Tax Avoidance and the Implications of Weak Internal Controls

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

Contact Info

Product

Resources

About