Local office non-audit tax fee dependence and audit quality: a tax client relationship perspective

Purpose This study aims to examine how audit firms proactively respond to threats to independence posed by non-audit tax services. Specifically, this study adopts a local office non-audit tax service client relationship perspective to investigate whether dependence on non-audit tax fees at the office level affects auditor independence concerning the auditing of income tax accounts. Design/methodology/approach Using a baseline ordinary least squares regression model and additional analyses, this study tests the relationship between tax accrual quality and non-audit tax fee dependence at the office level. Findings This study finds that dependence on non-audit tax fees at the office level increases the accuracy of income tax accrual estimations, thereby supporting the existence of safeguards, such as quality controls over auditing income tax accounts, which protect auditor independence. The results are robust against alternative explanations, such as knowledge spillover, and are more pronounced in settings where local offices have greater reputational concerns or higher-risk engagements, as well as in contexts where regulatory scrutiny related to quality control over income tax accounts is heightened. Practical implications The findings suggest that heightened regulatory scrutiny and restrictions on auditors’ tax services have increased the importance of quality controls and other safeguards that can help ensure auditor independence. Due to reputation concerns, audit firms proactively manage significant non-audit tax service relationships with clients by implementing audit quality control procedures to avoid compromising audit objectivity. Originality/value This study adopts the perspective of local office partners and their reporting decisions related to non-audit tax service client relationships. This study documents how audit firms proactively respond to threats to independence imposed by significant non-audit tax service relationships with clients.