The cost of independence: evidence from companies’ decisions to dismiss audit firms as tax-service providers

Kirsten A. Cook, Kevin Kim, Thomas C. Omer

Research output: Contribution to journalArticlepeer-review

Abstract

SYNOPSIS: 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.

Original languageEnglish
Pages (from-to)83-107
Number of pages25
JournalAccounting Horizons
Volume34
Issue number2
DOIs
StatePublished - Jun 2020

Keywords

  • Auditor independence
  • Auditor-provided tax services
  • Tax avoidance
  • Tax fees

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