Incumbent audit firm-provided tax services and clients with low financial reporting quality

Emma-Riikka Myllymäki ()
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Emma-Riikka Myllymäki: Accounting and Finance University of Vaasa

No 1404, Working Papers from Departament Empresa, Universitat Autònoma de Barcelona

Abstract: This study investigates whether incumbent audit firm-provided tax services enhance or impair the likelihood of acknowledging client companies’ low financial reporting quality. In particular, we examine the association between tax-related fees and the likelihood of timely restatements, and internal control weakness disclosures among a sample of US companies that all have misstatements in financial information. The empirical findings indicate that companies paying higher tax-related fees are less likely to disclose SOX 404 internal control weakness disclosures, implying that underlying control problems are unacknowledged when incumbent audit firmprovided tax-related fees are higher. However, the findings suggest that just providing both audit and tax-related services does not have an impact on audit quality per se, but rather it is the magnitude of the tax-related fees in particular that counts. We also find some evidence suggesting that companies paying higher tax-related fees have higher likelihood of restatement lags, whereas companies paying smaller tax-related fees to their audit firm restate financial statements in a timelier manner. Overall, the findings suggest that audit scrutiny of client companies with low quality financial reporting is weaker when the magnitude of tax-related fees is higher.

Pages: 46 pages
Date: 2014-09, Revised 2014-09
New Economics Papers: this item is included in nep-acc
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Published in Working Papers at the Department of Business, November, pages 1-46

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