We acknowledge the thoughtful comments of conference participants, Robert Bushman, Courtney Edwards, Steve Kaplan, Lil Mills, Jana Raedy, Kevin Raedy, John Robinson, Richard Sansing, Joel Slemrod, and numerous practitioners at leading accounting firms and corporations. We appreciate the research assistance of Scott Dyreng, Allison Evans, and Vincent Thorn. A prior version of this chapter was titled “Corporate Tax Planning in a Sarbanes-Oxley World.”

Introduction

This chapter examines the changing role that auditors play in corporate tax planning in the face of recent events, including the well-known accounting scandals, passage of the Sarbanes-Oxley Act, and regulatory actions by the Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB). Although the events are recent, still being debated, and the data limited, one thing is clear in the preliminary data. The amount of tax services that audit firms provide to their audit clients has declined dramatically during the period 2001–2004. Furthermore, most of the tax work appears to have shifted among accounting firms because the amount of tax work that accounting firms perform for non-audit clients has increased sharply.

We find that in 2001, S&P 500 companies, on average, paid their auditors about the same fees for their audit work as they did for their tax work (i.e., the combination of tax compliance, tax advice, and tax consulting). Two years later, in 2003, the S&P 500 were paying twice as much for audit work as tax work.