The Cost of Independence: Evidence from Companies' Decisions to Dismiss Audit Firms as Tax-Service Providers

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<jats:title>SYNOPSIS</jats:title> <jats:p>This study examines whether companies' decisions to dismiss or substantially reduce reliance on their audit firms as tax-service providers in the wake of the Sarbanes-Oxley Act affect tax avoidance. We hypothesize that decoupling audit and tax-service provision and subsequently obtaining tax services from a new provider can result in decreased tax avoidance because the new provider lacks familiarity with a client's existing tax planning or does not have the expertise to generate new tax-avoidance opportunities. Consistent with our hypothesis, our results reveal that sample companies' book (cash) effective tax rates increased by economically significant 1.36 (1.63) percentage points in the year after terminating or substantially decreasing purchases of tax services from their audit firms, and discretionary permanent book-tax differences declined significantly. We find that decreases in tax avoidance were larger for companies whose outgoing tax-service providers were tax-specific industry experts.</jats:p>
Publisher
American Accounting Association
Issue Date
2020-06
Language
English
Article Type
Article
Citation

ACCOUNTING HORIZONS, v.34, no.2, pp.83 - 107

ISSN
1558-7975
DOI
10.2308/horizons-18-009
URI
http://hdl.handle.net/10203/291156
Appears in Collection
MG-Journal Papers(저널논문)
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