Auditor-Provided Tax Services and Accounting for Tax Uncertainty

Abstract

This paper investigates the associations of auditor-provided tax services (APTS) with tax planning and audit quality using a German sample. Our findings differ from those of previous U.S. studies, which we attribute to the fact that prior to 2015, the International Financial Reporting Standards (IFRS) did not contain a clear regulation similar to FIN 48, which requires firms to reserve for tax uncertainties. We find for our IFRS sample a negative association between APTS and tax avoidance, which suggests that auditors are aware that firms might not reserve for tax uncertainties and may advise more conservative tax strategies. Additionally, we find a positive relation between the level of APTS and the sustainability of tax strategies in client firms, consistent with this conservative approach. Furthermore, our results show that APTS are positively related to audit quality for our sample. This finding suggests that auditors, being aware of remaining tax uncertainties that are not reserved for, are more reluctant to accept earnings management, which would further increase the risk of restatement. Taken together, the results of our study suggest the importance of accounting standards regarding tax uncertainties for the implications of APTS.