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    The Role of Auditors, Non-Auditors, and Internal Tax...
    research summary posted February 17, 2016 by Jennifer M Mueller-Phillips, tagged 04.0 Independence and Ethics, 04.03 Non-Audit Services 
    The Role of Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness.
    Practical Implications:

    The results of this study are important to policymakers as the PCAOB considers whether tax and audit services should be provided by different firms. The results of this study indicate that auditor-provided tax services may actually decrease the tax aggressiveness of companies, especially those serviced by the Big 4. Based on the representative who signs the tax return, tax aggressiveness is higher for internally prepared and non-auditor externally prepared tax returns than auditor-prepared tax returns. Additionally, accounting professionals may be interested in the findings of this study as it provides insights into how tax compliance changes in the presence of an audit. The authors suggest that signing a tax return with aggressive positions is costly to auditors because of reputation risk and financial reporting restatement risk in the tax accounts. As accounting professionals seek to perform effective audits and accurate tax returns, it may be beneficial to consider how tax compliance decisions could be impacted by the same firm providing both services.


    Klassen K. J., P. Lisowsky, and D. Mescall. 2016. The role of auditors, non-auditors, and internal tax departments in corporate tax aggressiveness. The Accounting Review. 91(1): 179-205.

    tax preparer, auditor, tax fee, FIN 48, tax aggressiveness
    Purpose of the Study:

    Corporate tax returns may be prepared by management, an external party who does not perform the audit, or the company’s auditor. There is little evidence to suggest how the type of tax preparer impacts corporate tax decisions. In particular, it is unclear how the dual role of auditor-tax preparer may impact tax compliance outcomes. This study seeks to provide insight into how tax preparer type influences corporate tax aggressiveness. Specifically, the authors:

    • Examine the relationship between the tax return preparer type and corporation tax aggressiveness. 
    • Examine whether tax fees as a representation of tax planning supports the findings of prior academic research.
    • Examine the link between tax aggressiveness and tax preparer type for Big 4 firms.
    Design/Method/ Approach:

    The authors were able to obtain confidential data from the Internal Revenue Service (IRS) for 2008 and 2009. The data provided by the IRS Large Business & International Division included tax return preparer identities and FIN 48 disclosures. Financial statement data were obtained from Compustat, and auditor identity, tax fees, and audit fees were obtained from the Audit Analytics database. The authors proxy for tax aggressiveness using the current-year increase in the tax reserve from FIN 48 disclosures on each company’s tax return. They use the tax return preparer identities in combination with the auditor identities to identify the tax return preparer type for their analysis. Based on the availability of the data, the final sample consisted of 1,533 firm-years (804 firms in 2008 and 729 in 2009).

    • The authors find that tax returns that are internally prepared by management claim more aggressive tax positions than auditor-prepared returns. Tax returns that are prepared by a non-auditor external party also claim more aggressive tax positions than auditor-prepared returns.
    • The authors find that less tax aggressiveness occurs for clients when the tax preparer is also the auditor and a Big 4 firm than when the tax preparer and auditor are different Big 4 firms.
    • The authors corroborate prior academic research that suggests tax fees represent the level of tax planning by the audit firm. The authors find that even after considering the tax return preparer type which accounts for tax compliance costs, higher tax fees paid to the auditor are indicative of more tax aggressive behavior.
    Independence & Ethics
    Non-audit Services