Working Paper: Do Tax Experts Play a Monitoring Role in Audit Engagements?
Paper Authors: Ally Zimmerman, Miguel Minutti-Meza, Saad Siddiqui, and Andrew Bauer
Abstract: Using proprietary data, this study is among the first to provide evidence on the monitoring role of auditors’ in-house tax experts. This role is important due to the relatively high frequency and proportion of tax expert hours in audits, and the salience of tax-related accruals in financial reporting. We show that tax expert effort is associated with client complexity and auditor characteristics. Next, we demonstrate that tax expert effort is associated with the incidence of tax-related internal control weaknesses, but it is not enough to fully mitigate the risk of material misstatements. We also find that tax expert effort is costly, resulting in higher audit fees and lower realization rates. Finally, tax expert effort is associated with conservative tax accruals but not with aggressive tax planning. Overall, although tax expert effort is associated with audit quality and financial reporting quality, it is not a seamless solution to audit tax-related accruals.
The economic research fellows and staff economists generate high-quality working papers that inform the oversight activities of the PCAOB and are disseminated to stimulate discussion and critical comment to the benefit of the public. Working papers are preliminary materials that have not been approved by the Board and reflect only the views of the author(s).
The research topics of economic research fellows, including a description of any nonpublic data sets required for research, are presented to the Board for approval and research papers are reviewed to confirm that the topic of the paper is consistent with the researcher's proposal. That review does not, however, encompass an evaluation of the conclusions reached by researchers.