Do income tax-related deficiencies in publicly disclosed PCAOB Part II reports influence audit client financial reporting of income tax accounts?

Katharine D Drake, Nathan C. Goldman, Stephen J. Lusch

Research output: Contribution to journalArticle

6 Citations (Scopus)

Abstract

Deloitte's 2007 PCAOB Part II report identifies, among other issues, concerns related to the audit firm's quality controls with respect to auditing income tax accounts. We investigate whether Deloitte's actions to remediate the PCAOB's concerns are associated with changes to their clients' financial reporting for income taxes. We find that Deloitte's clients increased the reported valuation allowance on deferred tax assets and increased the reported reserve for uncertain tax benefits (UTBs) in response to increased auditor scrutiny over income tax accounts. Additionally, we find that in subsequent periods, Deloitte's clients report valuation allowances and UTB balances that are not significantly different than other annually inspected auditors, consistent with Deloitte changing the quality controls related to audits of income tax accounts after the failed remediation of the 2007 Part II report.

Original languageEnglish (US)
Pages (from-to)1411-1439
Number of pages29
JournalAccounting Review
Volume91
Issue number5
DOIs
StatePublished - Sep 1 2016

Fingerprint

Audit
Income tax
PCAOB
Financial reporting
Quality control
Auditors
Tax
Auditing
Deferred taxes
Remediation
Audit firms
Assets

Keywords

  • Auditor scrutiny
  • Pcaob inspections
  • Uncertain tax benefits
  • Valuation allowances

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

Do income tax-related deficiencies in publicly disclosed PCAOB Part II reports influence audit client financial reporting of income tax accounts? / Drake, Katharine D; Goldman, Nathan C.; Lusch, Stephen J.

In: Accounting Review, Vol. 91, No. 5, 01.09.2016, p. 1411-1439.

Research output: Contribution to journalArticle

@article{d8ce36821fab4ba5952e55054aa642cd,
title = "Do income tax-related deficiencies in publicly disclosed PCAOB Part II reports influence audit client financial reporting of income tax accounts?",
abstract = "Deloitte's 2007 PCAOB Part II report identifies, among other issues, concerns related to the audit firm's quality controls with respect to auditing income tax accounts. We investigate whether Deloitte's actions to remediate the PCAOB's concerns are associated with changes to their clients' financial reporting for income taxes. We find that Deloitte's clients increased the reported valuation allowance on deferred tax assets and increased the reported reserve for uncertain tax benefits (UTBs) in response to increased auditor scrutiny over income tax accounts. Additionally, we find that in subsequent periods, Deloitte's clients report valuation allowances and UTB balances that are not significantly different than other annually inspected auditors, consistent with Deloitte changing the quality controls related to audits of income tax accounts after the failed remediation of the 2007 Part II report.",
keywords = "Auditor scrutiny, Pcaob inspections, Uncertain tax benefits, Valuation allowances",
author = "Drake, {Katharine D} and Goldman, {Nathan C.} and Lusch, {Stephen J.}",
year = "2016",
month = "9",
day = "1",
doi = "10.2308/accr-51338",
language = "English (US)",
volume = "91",
pages = "1411--1439",
journal = "Accounting Review",
issn = "0001-4826",
publisher = "American Accounting Association",
number = "5",

}

TY - JOUR

T1 - Do income tax-related deficiencies in publicly disclosed PCAOB Part II reports influence audit client financial reporting of income tax accounts?

AU - Drake, Katharine D

AU - Goldman, Nathan C.

AU - Lusch, Stephen J.

PY - 2016/9/1

Y1 - 2016/9/1

N2 - Deloitte's 2007 PCAOB Part II report identifies, among other issues, concerns related to the audit firm's quality controls with respect to auditing income tax accounts. We investigate whether Deloitte's actions to remediate the PCAOB's concerns are associated with changes to their clients' financial reporting for income taxes. We find that Deloitte's clients increased the reported valuation allowance on deferred tax assets and increased the reported reserve for uncertain tax benefits (UTBs) in response to increased auditor scrutiny over income tax accounts. Additionally, we find that in subsequent periods, Deloitte's clients report valuation allowances and UTB balances that are not significantly different than other annually inspected auditors, consistent with Deloitte changing the quality controls related to audits of income tax accounts after the failed remediation of the 2007 Part II report.

AB - Deloitte's 2007 PCAOB Part II report identifies, among other issues, concerns related to the audit firm's quality controls with respect to auditing income tax accounts. We investigate whether Deloitte's actions to remediate the PCAOB's concerns are associated with changes to their clients' financial reporting for income taxes. We find that Deloitte's clients increased the reported valuation allowance on deferred tax assets and increased the reported reserve for uncertain tax benefits (UTBs) in response to increased auditor scrutiny over income tax accounts. Additionally, we find that in subsequent periods, Deloitte's clients report valuation allowances and UTB balances that are not significantly different than other annually inspected auditors, consistent with Deloitte changing the quality controls related to audits of income tax accounts after the failed remediation of the 2007 Part II report.

KW - Auditor scrutiny

KW - Pcaob inspections

KW - Uncertain tax benefits

KW - Valuation allowances

UR - http://www.scopus.com/inward/record.url?scp=84983661869&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84983661869&partnerID=8YFLogxK

U2 - 10.2308/accr-51338

DO - 10.2308/accr-51338

M3 - Article

AN - SCOPUS:84983661869

VL - 91

SP - 1411

EP - 1439

JO - Accounting Review

JF - Accounting Review

SN - 0001-4826

IS - 5

ER -