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

Abstract

We review the empirical literature on the determinants and consequences of auditor-provided tax services (APTS) and provide some directions for future research.We first summarise two theoretical but competing perspectives on APTS provision, namely, the knowledge spillover effect and the impaired independence effect. We then review the evolution of APTS-related disclosures and regulations in selected jurisdictions. Our review of the determinants of APTS suggests that such decisions are related to the cost-benefit trade-off. We then review the literature on the consequences of APTS. This strand of the literature in the United States supports the knowledge spillover effect, but the findings in non-US settings are mixed. The market perceptions of APTS in both the US and non-US settings suggest that market participants react to APTS negatively during uncertain periods, whereas nonarchival studies suggest that the perceptions of APTS vary between stakeholder groups and with the types of APTS provided.

Strategic Deviation and Corporate Tax Avoidance: A Risk Management Perspective

“…Product market competition moderates the positive association between strategic deviation and tax avoidance. Two theoretical perspectives, namely the 'impaired independence' and the 'knowledge spillover' perspectives, support the association between APTS and tax avoidance (Sun and Habib 2021). From the impaired independence perspective, auditor independence could be compromised when they provide tax services.…”

“…When auditors provide tax services, clients are benefited because of the knowledge spill over from the auditing function to the taxation function (Chyz et al 2021;McGuire et al 2012). On the other hand, the impaired independence perspective suggests that auditor independence could be compromised when they provide tax services to their clients (Sun and Habib 2021). Given the extreme firm performance (Tang et al 2011) and cash flow uncertainty (Dong et al 2021), deviant firms may have an incentive to avoid tax to conserve cash.…”

Book-tax conformity and the demand for auditor-provided tax services: European evidence

“…Sharing client-specific knowledge between auditors' tax and audit teams might help auditors increase audit quality and/or help clients achieve certain tax- and non-tax-related benefits (Hux et al. , 2022; Sun and Habib, 2021) [3]. First, purchasing APTS could generate direct benefits to audit clients' tax accounts.…”

“…Enron and WorldCom) at the beginning of this century, the potential benefits and costs of non-audit services (NAS, hereafter), including auditor-provided tax services (APTS, hereafter), have been debated internationally. Prior studies document that the simultaneous provision of audit and APTS leads to significant knowledge spillover benefits to both auditors and audit clients (Sun and Habib, 2021), such as improved pre-audited financial reporting quality (De Simone et al. , 2015) and additional tax savings (McGuire et al.…”

“…Enron and WorldCom) at the beginning of this century, the potential benefits and costs of non-audit services (NAS, hereafter), including auditor-provided tax services (APTS, hereafter), have been debated internationally. Prior studies document that the simultaneous provision of audit and APTS leads to significant knowledge spillover benefits to both auditors and audit clients (Sun and Habib, 2021), such as improved pre-audited financial reporting quality (De Simone et al, 2015) and additional tax savings (McGuire et al, 2012). However, opponents argue that the increased economic bonding resulting from more profitable tax services might encourage auditors to acquiesce, or be perceived to do so, in clients' aggressive accounting and tax practices (Alsadoun et al, 2018;Mishra et al, 2005), which results in adverse market reactions and regulatory scrutiny (e.g.…”