No Need To Separate Auditing From Tax Services: Study

by Mike Godfrey, Tax-News.com, Washington

04 February 2016

Companies whose tax returns are also prepared by their auditors claim around 30 percent less in "aggressive tax benefits," according to research published in The Accounting Review.

The study, published in the American Accounting Association's journal, was produced by Petro Lisowsky of the University of Illinois, Kenneth J. Klassen of the University of Waterloo, and Devan Mescall of the University of Saskatchewan. It points out that, "under EU rules to go into effect later this year, and likely being monitored closely by regulators across the Atlantic, auditors of corporate financial statements will be prohibited from providing a whole variety of tax-related services to their clients, including the preparation of company tax returns."

However, based on data from firms in the S&P 1500, the research suggests that tax returns prepared by companies' external auditors claimed about 34 percent less in aggressive tax benefits than those that relied on outside accountants, and about 28 percent less than those prepared by the firms' own tax officers.

The co-authors believe that the cause of this difference is that "with the joint provision of audit and tax services, auditor preparers bear greater costs, relative to other preparer parties, if a position is overturned due to a tax audit and court action."

The study also explains that "there are at least two types of risk that are absent in other preparer types: financial reporting restatement risk due to an audit failure related to the tax accounts; and reputation risk, in that the auditor-preparer's work is more visible and sensitive to the firm's leadership. … The board of directors, as well as managers, may bear additional costs if negative tax outcomes result from joint provisioning relative to the case if the tax work was conducted separately from the audit."

Lisowsky commented that "regulators have consistently expressed concern over companies' purchasing both audit and tax services from the same accounting firm. By a wide margin most research on this issue has focused on whether this arrangement reduces audit independence and thereby compromises corporate financial reporting. But relatively little attention has been paid to the question of how this arrangement affects tax reporting."

He concluded that, "given regulators' perennial distrust of auditors providing tax services to their clients, our study will probably come as a surprise."