The provision of tax services by auditors to their audit clients has long been a topic of debate, particularly concerning the implications for independence and objectivity. A recent study published in the Journal of the American Taxation Association by Zhuoli Axelton, Kerry K. Inger, Mollie E. Mathis, and Abbie E. Sadler, sheds light on how these services influence regulatory scrutiny.
This investigation focuses on the association between auditor-provided tax services (APTS) and two specific forms of tax-related scrutiny: tax disclosure scrutiny by the Securities and Exchange Commission (SEC) and scrutiny by tax authorities. The study finds that APTS are significantly associated with increased scrutiny from both bodies. Specifically, firms that engage auditors for tax services are more likely to receive tax-related SEC comment letters and face greater scrutiny from tax authorities, often resulting in the release of uncertain tax benefit reserves due to settlements rather than expiration of statutes of limitations.
The research highlights that while APTS may offer firms specialized expertise, they also bring about considerable regulatory attention. This scrutiny not only poses a risk to the firm’s reputation but also incurs substantial costs as firms must allocate resources to respond to and defend their tax positions and disclosures.
Additionally, the study notes that the link between APTS and tax disclosure scrutiny is particularly strong in cases where the client’s importance to the auditor is high, suggesting that financial stakes may exacerbate the perception of compromised auditor independence.
These findings are crucial for firms considering auditor-provided tax services, as they highlight the need for careful consideration of the benefits versus the potential regulatory and reputational costs involved.
For those interested in detailed findings and their implications, the full article is available here.