The PCAOB’s 2006 Tax Service Restrictions and Earnings Management

Matthew Notbohm (), Xiaoli Guo and Adrian Valencia
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Matthew Notbohm: Herr School of Accountancy, University of North Dakota, Grand Forks, ND 58202-8097, USA
Xiaoli Guo: Herr School of Accountancy, University of North Dakota, Grand Forks, ND 58202-8097, USA
Adrian Valencia: Department of Accounting, Lutgert College of Business, Florida Gulf Coast University, Fort Myers, FL 33965-6565, USA

JRFM, 2025, vol. 18, issue 2, 1-25

Abstract: In 2006, the PCAOB implemented new restrictions on the auditor provision of some tax and contingent fee services provided to issuer audit clients. These restrictions were implemented to reduce auditor conflicts of interest inherent when the auditor provides any of these specific services and a financial statement audit. Subsequent research found that these tax service restrictions did not impact audit quality, measured as the probabilities of going concern opinions or financial statement restatements. We reexamine this research question in the context of the regulation’s earnings management effects. Our investigation of this question uses a difference-in-difference regression approach and 20,043 issuer company fiscal year observations from 2002 to 2009, consistent with that used in prior studies, and four measures of earnings management (discretionary accruals, abnormal working capital accruals, current accruals, and the likelihood of meeting or slightly beating the zero earnings change benchmark) to proxy for audit quality. We find, consistent with findings in prior studies, no detectable effects of the 2006 PCAOB tax service restrictions. These null results persist through a series of robustness tests that include re-estimating our primary regressions on a Big 4 subsample, adding multiple alternative treatment variable definitions, generating a propensity-score-matched sample, and adding a control for internal control weakness. These findings raise further doubt about the need for these non-audit service restrictions.

Keywords: earnings management; PCAOB; tax; non-audit services; audit quality; regulation (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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