THE IMPLICATIONS OF PCAOB'S LIMITS ON AUDITOR-PROVIDED TAX SERVICES FOR CORPORATE GOVERNANCE, FINANCIAL REPORTING, AND TAXATION

Abstract

Auditor-provided tax services (APTS) purchases by accounting firms to audit clients have been a subject of regulatory concern due to potential conflicts of interests and threats to auditor independence. The enactment of the Sarbanes-Oxley Act of 2002 (SOX) and subsequent regulatory actions have increased public scrutiny on APTS purchases and added restrictions on the types of NAS that accounting firms can provide to audit clients. The PCAOB released three rules to prohibit abusive practices within the US tax shelter industry, including prohibiting accounting firms from performing tax services on a contingent fee basis, providing assistance to clients in connection with aggressive tax transactions, and selling tax services to executives in a financial reporting role.Research on the impacts of APTS on auditor independence has been extensive and mixed. While some studies suggest that NAS purchases impair auditor independence and lead to more aggressive tax strategies, others have found a positive association between APTS fees and the likelihood of correctly issuing a going-concern opinion among firms that have filed for bankruptcy. Additionally, APTS purchases have been found to improve internal control quality, provide more accurate tax reserves, and enhance audit effectiveness through knowledge spillover.This paper provides an overview of the regulatory actions and research on APTS purchases by accounting firms. It highlights the conflicting findings in the literature and emphasizes the need for future research to consider the specific contexts and characteristics of APTS purchases. The paper also calls for a regulatory approach that balances the potential benefits and risks of APTS while ensuring auditor independence and maintaining the trust of investors and stakeholders