Audit committee financial expertise, corporate governance, and the voluntary switch from auditor-provided to non-auditor-provided tax servicesby Susan Albring, Dahlia Robinson, Michael Robinson

Advances in Accounting


Finance / Accounting


ra 2 cuse 3362 ed S

Auditor independence is e go d th ing financial expertise, higher stock ownership by directors and institutions, that separate the CEO and Chairman ith higher tax to audit fee ratios are more likely to switch to a non-auditor provider. ed tha tor, Arthur Andersen, investors' concerns about auditor independence scribed NAS is tax service, which remains permissible under the SOX. and not a general decline in tax services. The switch to a non-auditor ostensibly motivated by the need to preserve auditor independence. dit committees' mona focus on audit comce. r independence and ed by two other reguAdvances in Accounting, incorporating Advances in International Accounting xxx (2013) xxx–xxx

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Advances in Accounting, incorporating Advances in

International Accounting j ourna l homepage: www.e lsev ie r .com/ locate /ad iacHowever, the SOX requires that firms obtain specific approval from audit committees before retaining the auditor to perform tax services, essentially delegating oversight responsibilities regarding auditor independence to audit committees.3

Thus, while prior studies have concentrated on au itoring of financial reporting, this setting allows mittees' role in safeguarding auditor independen

Investors' concerns with respect to audito auditor-provided tax services were also heightenmotivated several provisions of the Sarbanes–Oxley Act (U.S. Congress 2002) (SOX). The Securities and Exchange Commission (SEC) subsequently adopted rules aimed at strengthening auditor independence, which prohibited auditors from providing a variety of NAS to their audit clients (SEC, 2002). One noticeable exception to the list of proprovider for tax services presents a unique setting to examine audit committee monitoring post-SOX. In contrast to other settings where audit committee monitoring is measured indirectly (for example, through the quality of firms' accruals), the switch is a direct and observable action from audit committee deliberations. Further, the switch is☆ Data Availability: Data are available from sources iden ⁎ Corresponding author. Tel.: +1 813 974 6888; fax: +

E-mail addresses: (S. Albring), dmro (M. Robinson). 1 Tel.: +1 315 443 3452; fax: + 1 315 443 9517. 2 Tel.: +1 813 528 7247; fax: + 1 813 258 7408. 3 Sections 201 and 202 of the SOX provide that audit co lowable NAS to be performed by the auditor, provided tha tee establish policies and procedures for pre-approval tha continued independence of the auditor.” 0882-6110/$ – see front matter © 2013 Elsevier Ltd. All ri

Please cite this article as: Albring, S., et al., Au provided ..., Advances in Accounting, incorpot auditor-provided nonpendence. Following the lvement of Enron's audi(2006) have documented a significant decline in these services since 2002.4 Maydew and Shackelford (2006) further observe that the trend reflects a shift away from auditor providers to non-auditor providers,audit services (NAS) could impair auditor inde much-publicized failure of Enron, and the invoRegulators have long been concernAudit committee expert 1. Introductionfinancial expertise on audit committees is related to the switch decision, suggesting that the SEC's initial narrow definition of expertise ismore consistent with the objective of the SOX. Overall, our results suggest that accounting financial expertise and strong corporate governance contribute to enhanced audit committee monitoring of auditor independence. © 2013 Elsevier Ltd. All rights reserved.

While auditor-provided tax services remain permissible under the

SOX, Maydew and Shackelford (2006) and Omer, Bedard, and FalsettaKeywords:

Auditor-provided tax service

Further, we document that firms aremore likely to switch prior to issuing equity.Wefind no evidence that broadG34 of the board positions, and wAudit committee financial expertise, corpo voluntary switch from auditor-provided to non-auditor-provided tax services☆

Susan Albring 1, Dahlia Robinson ⁎, Michael Robinson a Martin J. Whitman School of Management, Syracuse University, 721 University Avenue, Syra b College of Business, University of South Florida, 4202 E. Fowler Avenue, BSN3403, Tampa, FL c Sykes College of Business, University of Tampa, 401 W. Kennedy Blvd., Tampa, FL 33606, Unit a b s t r a c ta r t i c l e i n f o

Available online xxxx

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A prime objective of the SOX committee quality, corporat provided tax services.Wefintified in the text. 1 813 974 6528. (D. Robinson), mmittees must pre-approve alt in doing so, the audit committ are “designed to safeguard the ghts reserved. dit committee financial expe rating Advances in Internationte governance, and the , NY 13244-2450, United States 0, United States tates to safeguard auditor independence. We investigate the relation between audit vernance, and audit committees' decision to switch from permissible auditorat firmswithmore independent boards, audit committeeswith greater account-latory initiatives. In 2006, the SEC approved the Public Company Accounting Oversight Board (PCAOB) rules on auditor independence, limiting the types of tax services that independent auditorsmay provide 4 For example, Maydew and Shackelford (2006) estimate that from 2001 to 2004 a typical company went from paying its auditor equal amounts for audit and tax services to paying the auditor only a quarter as much for tax services as for audit service. rtise, corporate governance, and the voluntary switch from auditoral Accounting (2013), to their SEC audit clients (SEC, 2006).5 Also in 2006, the Financial Accounting Standards Board (FASB) promulgated FIN 48, which would now require the disclosure of tax reserves in a company's financial statements. Because FIN 48 requires more judgment in assessing tax reserves (Seigel & Associates LLC, 2008), it may worsen the perception that auditor independence is compromised by auditor-provided tax service. Thus, the renewed regulatory focus specific to the tax function, suggests a need for timely academic research documenting the factors likely to influence the switch to a non-auditor provider for tax services.