Auditor-Provided Tax Services and Accounting for Tax Uncertainty

Abstract

This paper investigates the associations of auditor-provided tax services (APTS) with tax planning and audit quality using a German sample. Our findings differ from those of previous U.S. studies, which we attribute to the fact that prior to 2015, the International Financial Reporting Standards (IFRS) did not contain a clear regulation similar to FIN 48, which requires firms to reserve for tax uncertainties. We find for our IFRS sample a negative association between APTS and tax avoidance, which suggests that auditors are aware that firms might not reserve for tax uncertainties and may advise more conservative tax strategies. Additionally, we find a positive relation between the level of APTS and the sustainability of tax strategies in client firms, consistent with this conservative approach. Furthermore, our results show that APTS are positively related to audit quality for our sample. This finding suggests that auditors, being aware of remaining tax uncertainties that are not reserved for, are more reluctant to accept earnings management, which would further increase the risk of restatement. Taken together, the results of our study suggest the importance of accounting standards regarding tax uncertainties for the implications of APTS.

Determinants and consequences of auditor‐provided tax services: A systematic review of the international literature

“…We also encourage more research in an international (i.e., crosscountry) setting to better understand the role of institutional settings across different jurisdictions in influencing firms' decision to purchase APTS from the incumbent auditors and its associated consequences. et al, 2006), whereas they are associated negatively or insignificantly in other countries (Garcia-Blandon et al, 2021;Watrin et al, 2019).…”

“…Some prior studies attribute the different findings found in their papers to the different institutional environments across jurisdictions, such as book-tax conformity (Aschauer & Quick, 2018), auditor liability (Watrin et al, 2019), enforcement level (Castillo-Merino et al, 2020) and investor protection (van Liempd et al, 2019). To the best of our knowledge, there is no research using an international dataset to examine the determinants and consequences of APTS.…”

“…In However, the new regulation seems unnecessary, considering the empirical findings in the EU, which show little impairment of independence due to APTS, using data from the pre-2016 regime (Castillo-Merino et al, 2020;Eilifsen et al, 2018;Garcia-Blandon et al, 2017Watrin et al, 2019).…”

“…Notably, the EU Regulation (2014) provided a derogation option to member states when implementing these NAS regulations in their local legislations. That is, member states could opt to allow auditors to provide some valuation and certain tax services (i, iv, v, vi (Castillo-Merino et al, 2020) and Germany (Eilifsen et al, 2018;Watrin et al, 2019). Although there are some firms with very high APTS fees, this fee cap regulation may have less or no influence on the purchase or provision of APTS for most of the listed firms in the EU.…”

“…Although Hogan and Noga (2015) support Cook et al's (2020) finding that the termination or substantial reduction in APTS purchases imposes a significant immediate cost on audit clients (i.e., more cash taxes paid), the effects persist for the long run rather than just for 1 year, as found in Cook et al (2020). Instead of focusing on tax minimisation captured by low ETRs, researchers also use ETR volatility (a measure that captures tax sustainability or tax risk) to explore the effect of APTS (e.g., Abernathy et al, 2021;Chyz et al, 2021;Neuman, 2019;Watrin et al, 2019) and Mills (2011) This paper examines whether APTS improve the estimate of tax reserves.…”