This study examines the association between auditor-provided tax services (APTS) and two types of tax-specific regulator scrutiny: tax disclosure scrutiny and tax authority scrutiny. Our results show that APTS are positively associated with tax disclosure scrutiny, measured as the receipt of a tax-related SEC comment letter. We also find that APTS is positively associated with tax authority scrutiny, reflected through relatively greater releases of uncertain tax benefit reserves due to settlements with tax authorities than due to lapses in statutes of limitations. These findings reveal regulator scrutiny as a meaningful cost for firms engaging in APTS because firms must expend valuable resources responding to concerns and defending disclosures and tax positions. In additional analyses, we find that the association between APTS and tax disclosure scrutiny is concentrated in firms where client importance to the auditor is high.

This content is only available via PDF.