Why Do Audit Clients Voluntarily Disclose the Compliance and Planning Components of Auditor Provided Tax Services?

Criticisms of audit firms marketing and devising tax avoidance strategies for their audit clients have led to recent calls from regulators, investors, and proxy advisors for more detailed disclosures on the composition of tax non-audit services (NAS). This study examines the determinants of audit clients providing disclosures that voluntarily bifurcate total tax NAS fees into the tax planning and compliance components, and reveal higher proportions of tax planning services. We find that firms with higher levels of tax NAS are more likely to provide this disclosure, particularly when the tax fees comprise a high proportion of tax planning fees, firms engage in higher levels of tax avoidance, and accounting experts serve on the audit committee. We also find a positive association between firm value and this voluntary disclosure for firms with higher total tax NAS and a high proportion of tax planning fees. Again, the firm valuation finding is significantly larger in the presence of higher tax avoidance, and expert audit committee oversight. Our results suggest that the voluntary disclosure of private information regarding the nature of tax NAS is one mechanism through which firms facing scrutiny over the implications of these services can alleviate information asymmetry and stakeholder skepticism of tax planning NAS.