ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

The Effects of Auditor－provided Tax Serviceson Firm’s Activity of Real Earnings Management

  • Heuikyu Kim Ph.D. Program, Inha University / Certified Tax Accountant
  • SHIN SEUNG MYO Inha University

Asian Tax Journal Vol. 20 No. 3 (2019), pp. 137-164

Abstract

Auditor－provided tax services(hereinafter, ATS) can enhance audit quality by having knowledge spillover effects, or lower audit quality by impairing auditor independence. In relation to these two possibilities, there are several empirical studies regarding the effects of ATS on the accrual－based earnings management. However, ATS may affect the firm’s activity of real earnings management. This is because the auditor can contribute to restraining the real earnings management by advising the management on the various cost factors that accompany it based on the understanding of the audited company, and because the auditor’s understanding can be promoted by the ATS. Based on the above points, this study conducted empirical analysis for the Korean listed companies on whether the real earnings management is low in case of the firms that purchase ATS. Test results show that the firms who purchase ATS have lower real earnings management than those who did not. And this phenomenon is observed when the fee level of tax services is high, but not when the fee level of tax services is low. These results imply that ATS can reduce distortions in resource allocation by restraining the firm’s activity of real earnings management, and consequently have a positive effect on long term sustainable corporate management. In addition, this study makes an academic contribution by expanding not only the existing research regarding the effects of ATS on earnings management but also the existing research regarding the factors affecting real earnings management of firms.

Keywords

  • Auditor－Provided Tax Services
  • Real Earnings Management
  • Knowledge Spillover Effect
  • Fee Level of Tax Services

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