The effect of disclosing audit quality control deficiencies on non-audit tax services: Evidence from Deloitte’s 2007 PCAOB Part II inspection report |
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| Institution: | 1. D’Amore-McKim School of Business Northeastern University, United States;2. College of Business Administration University of Nebraska – Lincoln, United States;3. Farmer School of Business Miami University, United States;1. School of Business, University of Connecticut, 2100 Hillside Rd., Unit 1041A, Storrs, CT 06269, United States;2. College of Business, Colorado State University, 501 W. Laurel St., Fort Collins, CO 80523, United States;1. Department of Accounting, Box 8113, North Carolina State University, Raleigh, NC 27695-8113, United States;2. Department of Management, Ca’ Foscari University, Cannaregio 873, 30121 Venice, Italy;1. Oregon State University, United States;2. Purdue University, United States;1. Data & Text Mining Laboratory, Jerusalem School of Business Administration, Israel;2. Rutgers Business School – Newark and New Brunswick, Rutgers University, Department of Accounting and Information Systems, United States;3. Stern School of Business Administration, New York University and, QMA LLC, United States;4. Freeman College of Management, Bucknell University, United States;1. Tampere University, Faculty of Management and Business, 33014 Tampere, Finland;2. University of Vaasa, P.O. Box 700, 65101 Vaasa, Finland;3. The University of Auckland Business School, 12 Grafton Road, Auckland, Private Bag 92019, Auckland 1142, New Zealand |
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| Abstract: | We examine whether public disclosure of Deloitte 2007 PCAOB Part II report, which identifies quality control deficiencies related to audits of income tax accounts, affects Deloitte’s auditor-provided tax services (APTS). Using a difference-in-differences model, we document a 17 percent lower likelihood of Deloitte’s audit clients employing APTS relative to clients of other annually inspected firms when the report is made public. We also find that the dampening effect of publicly disclosing the Part II report on Deloitte’s APTS is more evident among audit clients paying higher non-audit fees to auditors and those with more complex tax planning. These results suggest that revealing income tax-specific quality control deficiencies prompts audit clients to revise upward (downward) their expected costs (benefits) of perceived auditor independence impairment (knowledge spillover) stemming from APTS. Overall, our study suggests that public disclosure of audit firm-wide quality control deficiencies pertaining to audits of income tax accounts imposes a collateral damage to the inspected firm’s non-audit tax services, thereby providing a more complete understanding of the consequences of the PCAOB’s communications about quality control deficiencies in Part II reports. |
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| Keywords: | PCAOB Part II report Auditor-provided tax service Audit quality control deficiency |
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