External Auditor Responses to Tax Risk

John L. Abernathy, Andrew R. Finley, Eric T. Rapley, James Stekelberg

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

Both practitioners and academics are increasingly focusing their attention on the riskiness of firms’ tax planning activities. In this study, we examine how external auditors respond to tax risk, measured using the volatility of firms’ annual cash and GAAP (Generally Accepted Accounting Principles) effective tax rates. Consistent with the notion that tax risk represents a source of engagement risk that is priced by external auditors, we first document a positive association between audit fees and tax risk incremental to fee premiums arising from tax aggressiveness. We also find that knowledge spillover benefits related to the provision of tax nonaudit services moderate this positive association. In supplemental tests, we provide evidence on additional auditor responses to tax risk. In particular, we document that tax risk is positively associated with both audit report lag and the likelihood of the auditor reporting a tax-related material weakness in the client’s internal controls. Our findings add to the growing literature at the intersection of corporate taxation and auditing, and to the literature distinguishing between the level and riskiness of firms’ tax avoidance strategies.

Original languageEnglish (US)
Pages (from-to)489-516
Number of pages28
JournalJournal of Accounting, Auditing and Finance
Volume36
Issue number3
DOIs
StatePublished - Jul 2021
Externally publishedYes

Keywords

  • audit fees
  • auditor-provided tax services
  • effective tax rates
  • nonaudit services
  • tax risk

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

Fingerprint

Dive into the research topics of 'External Auditor Responses to Tax Risk'. Together they form a unique fingerprint.

Cite this