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Tax-Specific Industry Expertise Linked to Tax Avoidance

Mar 3 2014 8:00 AM
Tax-Specific Industry Expertise Linked to Tax Avoidance
University of Nebraska–Lincoln Professor and Delmar Lienemann Sr. Chair of Accounting Thomas Omer and colleagues study whether the tax-specific industry expertise of the external audit firm influences its clients’ level of tax avoidance.
 
Recent research documents substantial variation in the levels of firms’ tax avoidance. While there are obvious benefits associated with avoiding incoming taxes, many of the determinants of firms’ tax avoidance remain unclear. Omer and his colleagues examine a sample of firms that purchase tax services from their external audit firm to investigate one possible determinant of tax avoidance – the tax-specific industry expertise of the external audit firm. In addition, they examine whether overall expertise, the combined audit and tax expertise of the external audit firm, is associated with the level of clients’ tax avoidance.
 
“Although prior research has investigated the influence of auditor industry expertise on financial reporting quality, the relation between the tax-specific industry expertise of the external audit firm and tax avoidance is scarce,” said Omer. “Examining the influence of the external audit firm’s tax-specific industry expertise is important. For many clients, the audit firm likely influences clients’ tax avoidance through two distinct roles, tax consultant and financial statement auditor.”
 
Results from the study suggest clients that purchase tax services from their audit firm engage in higher levels of tax avoidance when their audit firm is a tax expert relative to clients whose audit firm is not a tax expert. Specifically, the tax expert clients report significantly lower book effective tax rates, lower cash effective tax rates, larger book-tax differences, and greater discretionary permanent book-tax differences than clients whose audit firm is not a tax expert.
 
Omer and his colleagues also discover clients of audit firms that are overall experts have significantly lower book effective tax rates and lower cash effective tax rates than clients of audit firms that are not overall experts. These results highlight the role that tax and overall expertise play in the effectiveness of firms’ tax avoidance strategies.
 
The study results suggest the role of the audit firm as an external evaluator of financial statement quality does not necessarily constrain clients’ tax reporting objectives. Overall experts are able to combine their audit and tax expertise to develop tax strategies that benefit clients from both a tax and financial statement perspective and provides evidence of the synergy between one practice area of the external audit firm and another.
 
The study was published in The Accounting Review in 2012. Coauthors of the study include Sean T. McGuire and Dechun Wang, both of Texas A&M University.
 
Research abstract located at: http://aaajournals.org/doi/abs/10.2308/accr-10215

Tax-Specific Industry Expertise Linked to Tax Avoidance

Mar 3 2014 8:00 AM
Tax-Specific Industry Expertise Linked to Tax Avoidance
University of Nebraska–Lincoln Professor and Delmar Lienemann Sr. Chair of Accounting Thomas Omer and colleagues study whether the tax-specific industry expertise of the external audit firm influences its clients’ level of tax avoidance.
 
Recent research documents substantial variation in the levels of firms’ tax avoidance. While there are obvious benefits associated with avoiding incoming taxes, many of the determinants of firms’ tax avoidance remain unclear. Omer and his colleagues examine a sample of firms that purchase tax services from their external audit firm to investigate one possible determinant of tax avoidance – the tax-specific industry expertise of the external audit firm. In addition, they examine whether overall expertise, the combined audit and tax expertise of the external audit firm, is associated with the level of clients’ tax avoidance.
 
“Although prior research has investigated the influence of auditor industry expertise on financial reporting quality, the relation between the tax-specific industry expertise of the external audit firm and tax avoidance is scarce,” said Omer. “Examining the influence of the external audit firm’s tax-specific industry expertise is important. For many clients, the audit firm likely influences clients’ tax avoidance through two distinct roles, tax consultant and financial statement auditor.”
 
Results from the study suggest clients that purchase tax services from their audit firm engage in higher levels of tax avoidance when their audit firm is a tax expert relative to clients whose audit firm is not a tax expert. Specifically, the tax expert clients report significantly lower book effective tax rates, lower cash effective tax rates, larger book-tax differences, and greater discretionary permanent book-tax differences than clients whose audit firm is not a tax expert.
 
Omer and his colleagues also discover clients of audit firms that are overall experts have significantly lower book effective tax rates and lower cash effective tax rates than clients of audit firms that are not overall experts. These results highlight the role that tax and overall expertise play in the effectiveness of firms’ tax avoidance strategies.
 
The study results suggest the role of the audit firm as an external evaluator of financial statement quality does not necessarily constrain clients’ tax reporting objectives. Overall experts are able to combine their audit and tax expertise to develop tax strategies that benefit clients from both a tax and financial statement perspective and provides evidence of the synergy between one practice area of the external audit firm and another.
 
The study was published in The Accounting Review in 2012. Coauthors of the study include Sean T. McGuire and Dechun Wang, both of Texas A&M University.
 
Research abstract located at: http://aaajournals.org/doi/abs/10.2308/accr-10215