Auditor-Provided Tax Services: The Effect of PCAOB Identification of Income Tax Related Deficiencies in the Part II Inspection Report

Accounting firm office size and tax aggressiveness

“…This would be a departure from normal operational practices, as the subsidiary is not contributing to the company's operations in any meaningful way and is only being used as a vehicle for tax avoidance. by auditing regulators (Ahn et al, 2016). 10 Due to the greater costs associated with allowing aggressive tax positions (i.e., loss of clients in both the audit market and APTS market), large accounting offices are more likely to be concerned about risky tax aggressive activities and ensure appropriate tax reporting, which indirectly deters clients from engaging in aggressive tax planning.…”

“…Auditors can also attract negative publicity and incur costs, such as losing market share, when clients' tax positions are challenged by regulators (Donohoe & Knechel, 2014; Nagy, 2014; Swanquist & Whited, 2015). For example, Deloitte experienced a reduction in its auditor‐provided tax services ( APTS ) market share after income tax‐related deficiencies were noted in Public Company Accounting Oversight Board (PCAOB) Part II reports (Ahn et al, 2016; Drake et al, 2016).…”

“…Swanquist and Whited (2015) find that the market share of an accounting office declines following client restatements, with the greatest impact observed in highly competitive markets. In addition, reputational impairment could extend to other services provided by the same accounting firms (e.g., APTS market) when their quality control systems are challenged by auditing regulators (Ahn et al, 2016). Due to the greater costs associated with allowing aggressive tax positions (i.e., loss of clients in both the audit market and APTS market), large accounting offices are more likely to be concerned about risky tax aggressive activities and ensure appropriate tax reporting, which indirectly deters clients from engaging in aggressive tax planning.…”

“…The aim of this study is to extend the research cited above by examining whether the size of accounting offices impacts clients' tax aggressiveness. On the one hand, due to their greater client base, large offices are more likely to be concerned about the negative influence on their audit and non‐audit service market share (i.e., a decrease) if their tax aggressiveness is perceived as noncompliance or poses a high risk of restatements (Adams et al, 2022; Ahn et al, 2016; Hanlon & Slemrod, 2009; Swanquist & Whited, 2015). Auditors are often perceived as the ones responsible for misstatements in financial reports; thence, clients' tax aggressiveness can expose large accounting offices to greater litigation and reputation risk (Donohoe & Knechel, 2014; Kanagaretnam et al, 2016).…”

“…For example, audit clients are less likely to retain Deloitte as a tax service provider after income tax-related deficiencies were publicly released Deloitte's 2007 PCAOB Part II reports(Ahn et al, 2016).11Bauer et al (2021) report that tax experts are used in 96% of inspected engagements, accounting for an average of 5% of the total hours worked by the core audit team.12 Prior academic literature also supports this point. Specifically,Goldman et al (2022) argue that the process and knowledge required for auditing tax accounts differs from that for auditing other financial statement accounts.…”