March 29, 2016

Auditor-Prepared Tax Returns Are Least Aggressive

Particularly given regulators’ aversion to external auditor-provided tax services, this new study: “The Role of Auditors, Non-Auditors, and Internal Tax Departments in Corporate Tax Aggressiveness” (full study available for purchase) is noteworthy. Among other things, the study found that companies preparing their own tax returns or having them prepared by a firm other than their auditor claim about 30% more aggressive tax positions than companies using their own auditor as the tax preparer, and Big 4 tax preparers in particular are linked to less tax aggressiveness when they are the auditor than when they are not the auditor.

As discussed further in this article, the rationale is that the company’s external auditor has much more at risk (i.e. much more to lose) than either the company or another external preparer by taking an aggressive stance:

The study, based on data from S&P 1,500 companies, offers a rationale: “With the joint provision of audit and tax services, auditor preparers bear greater costs, relative to other preparer parties, if a position is overturned due to a tax audit and court action.” The study notes that auditors bear at least two types of risk that do not apply to other preparer types: (1) the risk of a financial reporting restatement due to an audit failure; and (2) reputation risk, in that an auditor’s work is more visible and sensitive to the firm’s leadership. In short, having more to lose than other preparers, auditors tend to be less aggressive in advancing tax-benefit claims.

The findings are worthy of consideration in the context of other concerns – primarily, auditor independence – that regulators have raised about the auditor’s provision of tax services.

Access oodles of relevant resources in our “Auditor Independence” and “Auditor Engagement” Practice Areas.

Almost Half of “Going Concerns” Issued for IPOs

Almost half of auditors’ 530 new going concern warnings for fiscal 2014 were issued relative to companies filing for an IPO rather than established companies, according to this recent MarketWatch post on 2015 filings. And the top two reasons auditors cite for giving such an opinion – “net losses since inception” or an “absence of significant revenues” – apply to pre-development stage companies. The post cites research that purportedly shows that over half of companies that filed for bankruptcy between 2000 and 2009 had received going concern warnings from their auditors the prior year.

Access resources in our “Going Concern” Practice Area.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Exchanges Get Guidance on Sustainability Disclosure Standards
– Whistleblowers: Speak Now or Get a Smaller Piece
– Audit Committees: Comments to SEC Urge, At Most, Principles-Based Reporting
– Insider Trading: Holiday Card to Directors (With Compliance Reminder)
– Top 10 Mistakes in Selecting D&O Insurance


– by Randi Val Morrison