Auditor-Provided Tax Consulting, Knowledge Spillovers, and Reported Weaknesses in Internal Control

Abstract

We examine whether auditor-provided tax consulting services are associated with tax and non-tax internal control material weaknesses consistent with knowledge spillover benefits. We find a positive association between the amounts of consulting fees paid, which should proxy for the scale and/or scope of the engagements, and tax-related internal control weaknesses. However, we also find that auditor-provided tax consulting is even more strongly associated with a reduced likelihood of non-tax internal control weaknesses. Given these results, we perform several additional tests to evaluate the relative importance of auditor-provided tax consulting to tax versus non-tax internal control weaknesses. Surprisingly, not only is the association between auditor-provided tax services much stronger for non-tax internal control weaknesses, but, in fact, there is no significant benefit to tax internal control weaknesses, whatsoever, after properly accounting for non-tax internal control effects. This finding continues to hold after accounting for the distribution of account- versus company-level ICWs.

Keywords: audit, tax, auditor consulting, auditor independence, internal control weakness

JEL Classification: H23, M41, M49, G34