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Study: Auditors Are More Cautious When Doing Taxes

By:
Chris Gaetano
Published Date:
Feb 2, 2016

STORY No. 1A recent research report says that corporate taxes prepared by external auditors take fewer questionable deductions than those prepared by both their own staff and outside non-audit firms, according to CFO.com 

The Enron scandal and its aftermath led to an increased emphasis on auditor independence and eventually to the passage of the Sarbanes-Oxley Act (SOX) which banned an audit firm from providing such services as accounting, valuation or appraisal, actuarial work, human resources or management, and financial information system design. One service not banned, however, was tax. Outside audit firms, under SOX, were still allowed to perform tax work for their audit clients, provided they first got sign-off from the firm's audit committee.  

The study's authors, according to CFO.com, observed that most research into auditor independence focuses on corporate financial reporting versus tax reporting, and felt that the relationship between an audit firm and a client that hires it to do tax work could be further explored.  

What they found was that outside auditors, instead of being more aggressive in their tax planning, were actually more conservative than if the company had relied on their own internal staff, or outside non-audit tax preparation firms. This was even after controlling for things such as the size and profitability of the 700 companies in their research sample.  

Specifically, according to CFO.com, when auditors prepared the tax return, they claimed 34 percent fewer aggressive tax benefits than outside tax preparers, and 28 percent fewer than internal tax staff. This was after looking at two years worth of filings of 700 firms.  

"Firms preparing their own tax returns or hiring a non-auditor claim more aggressive tax positions than firms using their auditor as the tax preparer," said the study's abstract.