Separation of tax service from audit service, going-concern opinions, and discretionary accruals

Abstract

This paper examines whether separating tax service of auditors from audit service improves audit quality. To some critics, the separation is the only solution to the independence problem created by the joint provision of both services by auditors. However, opponents argue that auditors are likely to have less client-specific knowledge when they only provide audit service, resulting in lower audit quality. The results of this paper show that clients without the purchase of auditor-provided tax service are more likely to have a going-concern modified audit opinion and lower discretionary accruals than clients with such purchase. Additional tests indicate that clients with (without) auditor-provided tax service would have had lower (higher) discretionary accruals or been more (less) likely to receive a going-concern opinion had they had not (had) purchased the tax service. The results are robust to the control for possible self-selection problem of clients’ purchase of tax service of auditors.