The Effect of auditor-provided non-audit services on auditor independence and Sarbanes-Oxley: What separates tax services from other non-audit services?

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School of Business | Master's thesis
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Objectives of the Study: The Sarbanes-Oxley Act prohibited a large number of individual auditor-provided non-audit services, which were seen to have a negative effect on auditor independence. Tax services were not included in the list, implying that the effects of these services should somehow differ from those of other consulting services. Research on all non-audit services however has yielded contradictory results. This study sets out to illustrate the possible effects of tax services using prior research on all services as a framework, and attempts to shed some light on the issue whether the effects of tax services actually are significantly different from those of the other non-audit services. Research Method and Data: The methods used in the paper follow the research of Frankel et al. (2002) which approaches independence concerns by examining whether strong economic bonds between auditor and client lead to opportunistic earnings management through the use of discretionary accruals. A modification to the method also allows a separate examination of auditor-provided tax services. The sample used in the models consists of financial statements from 2415 individual North American firms for the financial year 2010. Findings of the Study: This study provides heteroscedasticity-robust evidence that there is no statistically significant association between auditor-provided tax services and earnings management. The results are robust to differences in auditor fee composition, to the direction of earnings management as well as to audit client firm size. Since the goal of this paper and the methods used in it is not to measure possible knowledge spillovers, one can only speculate whether the absence of such an association could mean that there are no audit-quality improving knowledge spillovers retainable from the provision of tax services, or that the provision of tax services simply does not have an effect on auditor independence.
auditor independence, auditor-provided tax services, earnings management
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