Disclosure of tax-related critical audit matters and tax-related outcomes

Katharine D. Drake, Nathan C. Goldman, Stephen J. Lusch, Jaime J. Schmidt

Research output: Contribution to journalArticlepeer-review

1 Scopus citations

Abstract

Given that tax-related critical audit matters (tax CAMs) were prevalent among accelerated filers (18.5% of observations) during the initial year of CAM disclosures, we examine whether an auditor's disclosure of tax CAMs is associated with variation in tax-related financial reporting quality, tax avoidance, and tax-related earnings management. Finding an association between tax CAMs and one of these tax outcomes would indicate that the new auditor reporting standard has indirectly affected investors. Examining the first year of CAM disclosures, we do not find that tax CAMs are associated with broad proxies of tax-related audit or financial reporting quality (e.g., restatements, internal control weaknesses, comment letters) or tax avoidance (e.g., effective tax rates or book-to-tax differences). We do find that tax CAMs are associated with a modest increase in tax accrual quality, an increase in the reserve for unrecognized tax benefits, and a reduction in the likelihood of tax-related earnings management. However, we do not find these tax CAM effects persist into the second year of CAM reporting. Our evidence is consistent with tax CAM disclosures having a modest but short-lived effect on companies' reporting of tax accounts. Our findings should inform the PCAOB as they conduct their post-implementation review of the new audit reporting standard.

Original languageEnglish (US)
JournalContemporary Accounting Research
DOIs
StateAccepted/In press - 2023

Keywords

  • critical audit matters
  • expanded audit reports
  • financial reporting quality
  • tax avoidance
  • tax reporting
  • tax-related earnings management

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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