May 15, 2003
Public Companies May Benefit from Auditor-Provided Tax Services
New Study Links Tax Services to Fewer Restatements
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Austin, Texas – A newly released study by three academic researchers presents empirical evidence of an association between tax services and public company restatements that suggests tax services provided by audit firms to their clients may actually improve the quality of the public company audit. The academic research and education-based American Accounting Association, through a program agreed to by the Securities and Exchange Commission, funded the independent study.
In Auditor Independence and Non-Audit Services: What Do Restatements Suggest, William Kinney (University of Texas), Zoe-Vonna Palmrose (University of Southern California), and Susan Scholz (University of Kansas), examine audit firm fee data for 944 public companies from 1995 to 2000, the five years prior to recent regulatory and legislative action which limits non-audit services. Their work analyzes the relationship between non-audit service fees and restatements as an indicator of compromised auditor independence.
“Tax services fees paid by public companies to their audit firms are negatively associated with restatements, both on average and after adjusting for business and economic factors,” said Kinney of the study’s findings. “This relation holds across various partitions of the data and alternative measures of absolute and relative tax services fees.”
The findings of Kinney, Palmrose and Scholz are supported by The Panel on Audit Effectiveness to the Public Oversight Board (August 31, 2000) and other academic scholars who suggest that audit effectiveness is improved by certain non-audit services due to a “knowledge spillover.” For example, knowledge of a client’s tax accounting could “spillover” to the audit and improve its quality.
“This work is important because many public company audit committees now voluntarily restrict even permitted services, such as tax services, by their audit firm in order to avoid the simple appearance of a conflict of interest,” said Scholz. “However, our evidence suggests that some of these services may enhance the quality of the audit and should increase investor confidence.”
Among the study’s other findings:
- No consistent evidence of a relationship between fees for financial information systems design and implementation, or fees for internal audit services and restatements that would indicate compromised auditor independence;
- While consistent evidence of a positive association between other services and restatements was found, the study also notes that about 72 percent of the companies sampled purchased no other services from their audit firm, with little difference in rates between restatement and non-restatement companies.
The authors of this study concluded: “Our results are consistent with the SEC’s January 2003 ruling allowing independent audit committees to decide how to trade-off possible auditor independence impairment with the value added by tax and some other non-audit services provided by their auditor’s firm. The findings are also consistent with the Sarbanes-Oxley Act that allows audit firms to provide their audit clients with some types of non-audit services if the services are pre-approved by the client’s independent audit committee."
For further information contact Kay Randall (512-232-3910).
For information on specific programs at the McCombs School, consult our contacts page. For media information, contact the Communications Director by phone at 512-471-3314 or by email at CommunicationsDirector@mccombs.utexas.edu.
