Auditor-Employed Tax Experts and Audit Quality

ABSTRACT

Using PCAOB data, we examine variation in auditor-employed tax experts’ involvement to assist the audit team. Tax expert hours average 5 percent of total audit hours and are positively associated with several proxies for the complexity of tax estimates. Greater tax expert involvement correlates with a higher detection rate of tax-related internal control material weaknesses (ICMWs) and a greater frequency of subsequent tax-related restatements. However, earlier tax expert involvement is associated with fewer ICMWs, although it is not significantly associated with subsequent restatements. Overall, our findings provide new evidence on how the timing and intensity of tax expert involvement relate to audit outcomes. Although involving tax experts is a typical response to auditing complex estimates, their involvement alone does not fully mitigate restatement risk. Importantly, timely coordination between the audit team and tax experts plays a critical role in ensuring high audit quality.

Data Availability: Audit engagement data from the PCAOB are proprietary; other data are from public sources.

JEL Classifications: M4.