Content area
Full text
SUMMARY:
This study examines whether auditors' provision of tax services impairs auditor independence by focusing on auditors' going-concern opinions among a sample of bankruptcy filing firms. The evidence from the bankruptcy setting is particularly salient given that the bankruptcy of corporations such as Enron motivated several provisions of the Sarbanes-Oxley Act (SOX) of 2002. More recently, auditors' provision of tax service to their audit clients has been the focus of new rules by the Public Company Accounting Oversight Board (PCAOB). Consistent with improved audit quality from information spillover, the study documents a significant positive correlation between the level of tax services fees and the likelihood of correctly issuing a going-concern opinion prior to the bankruptcy filing. One implication of this result is that restricting tax services by auditors of poorly performing firms may diminish the quality of auditors' reporting decisions without leading to an improvement in auditor independence.
Keywords: auditor independence; tax service fees; going-concern qualification; information spillover.
Data Availability: The data are available from public sources cited in the paper.
INTRODUCTION
Investor confidence in the quality and integrity of publicly available corporate financial information prepared by public companies and certified by independent auditors is considered vital to the proper functioning of U.S. capital markets. Beginning in the late 1990s, the Securities and Exchange Commission (SEC) became increasingly concerned that the growth of nonaudit services provided to audit clients could undermine that confidence. The SEC feared a potential erosion of auditor independence caused by economic self-interests of audit firms in the provision of nonaudit services (NAS). The perceived link between the provision of NAS and degraded independence ultimately encouraged the SEC to impose new rules restricting certain types of NAS that audit firms could provide for their audit clients and requiring new proxy disclosures by registrants of the magnitude of audit fees and several categories of nonaudit fees (SEC 2000).
With the adoption of these new SEC final rules in early 2001, concerns about auditor independence and nonaudit service diminished until the much-publicized bankruptcies of Enron, WorldCom, and Global Crossing catapulted these two issues to the forefront "depicting the audit firm as a collaborator in deception" (Reynolds et al. (2004, 29) and motivated several provisions of die Sarbanes-Oxley Act (SOX) of 2002 (Oates 2002;...