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

8 Scopus citations

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 2016

Keywords

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

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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