The Association between Auditor Provided Tax Planning and Tax Compliance Services and Tax Avoidance and Tax Risk

Abstract

This study examines associations between auditor-provided tax compliance and tax planning services and tax avoidance and tax risk. Collectively, our results suggest that companies paying their auditors for tax planning advice are more effective tax planners (in terms of higher tax avoidance, and lower tax risk) than firms that do not engage their auditor for tax work. Our tax avoidance results are more pronounced for clients of auditors with more tax expertise and longer tenure as well as for firms with higher tax and operational complexity. We also find that our tax avoidance results hold only when firms also engage their auditors for tax compliance work, which is consistent with auditors seeking to minimize reputation threats. Our study’s unique hand-collected panel dataset provides a more precise and nuanced perspective on the role auditors play in tax outcomes.

Keywords: tax non-audit services, effective tax rates, tax volatility

JEL Classification: M41, M42, H25, H26