Aggressive Tax Spending Leads to Fewer Restatements

Companies that engage their audit firm for significant tax consulting services are less prone to revising their financial statements, an American Accounting Association study has found.

"Companies that spend a large amount on tax services from their audit firm typically had fewer restatements than those who spent small amounts or zero," the study said.

Tax services were spared in the Sarbanes-Oxley Act and subsequent Securities and Exchange Commission interpretations of the law, which sought to eliminate conflicts of interest between accounting firms’ consulting and auditing arms. Members of Congress and other groups argued that providing tax services would put consultants in the position of auditing their own work or being an advocate for their client during the audit.

During the development of Sarbanes-Oxley and the SEC rules, the Big 4 accounting firms lobbied heavily to keep their tax practices, which account for about one-fifth of their revenue. The SEC’s rule allows audit firms to offer tax compliance, tax planning and tax advice as long as the client’s board pre-approves the arrangement.

The AAA study suggests that the practice of auditing tax services may actually improve a company’s audit results.

"Our tax services results do not support that substantial tax services fees to the auditor's firm create an economic dependence on the client that necessarily leads to lax GAAP (generally accepted accounting principles) enforcement by the auditor," the study stated.

The study, "In Auditor Independence and Non-Audit Services: What Do Restatements Suggest," looked at the audit fee data from 944 firms, spanning 1995 to 2000, before Enron, WorldCom and Global Crossing bankruptcies resulted in new bans on the kind of consulting work auditors could do.

The study group was comprised of 432 companies that announced restatements, which was compared against 512 companies that had the same auditor and similar revenue, but didn't restate earnings.

The seven largest U.S. accounting firms provided the data on a confidential agreement. The data comes from a 2001 ruling that required public companies to disclose what they spent on auditors and non-audit fees each year.

The study’s authors are William Kinney, University of Texas, Zoe-Vonnna Palmrose, University of Southern California, and Susan Scholz, University of Kansas.

The American Accounting Association, an academic research and education-based group in Sarasota, FL funded the study.

You may like these other stories...

Treasury prepares options to address tax inversionsDamian Paletta of the Wall Street Journal reported on Monday that US Treasury Department officials are assembling a list of administrative options for Treasury Secretary...
Deloitte CEO Joe Echevarria to retire to pursue public serviceMichael Rapoport of the Wall Street Journal reported that Deloitte LLP CEO Joe Echevarria plans to retire later this month to pursue his interest in public...
If your clients include retailers, pending federal legislation allowing states to tax Internet sales could mean big changes in the way they process and account for their sales and use taxes.In July, the Marketplace and...

Already a member? log in here.

Upcoming CPE Webinars

Aug 21
Meet budgets and client expectations using project management skills geared toward the unique challenges faced by CPAs. Kristen Rampe will share how knowing the keys to structuring and executing a successful project can make the difference between success and repeated failures.
Aug 26
This webcast will include discussions of recently issued, commonly-applicable Accounting Standards Updates for non-public, non-governmental entities.
Aug 28
Excel spreadsheets are often akin to the American Wild West, where users can input anything they want into any worksheet cell. Excel's Data Validation feature allows you to restrict user inputs to selected choices, but there are many nuances to the feature that often trip users up.
Sep 9
In this session we'll discuss the types of technologies and their uses in a small accounting firm office.