Corporations--Auditing.

Using tax accrual quality as a proxy for audit quality, I investigate whether
companies that significantly decreased APTS surrounding the effective date of the Public
Company Accounting Oversight Board’s 2006 Rules on Ethics, Independence, and Tax
Services experienced an improvement in audit quality after the change. Given the
specific target of the PCAOB 2006 restrictions is companies aggressively avoiding taxes
with the assistance of APTS, I also investigate whether companies associated with tax
aggressive services are also more likely to experience an improvement in audit quality
following the reductions in APTS.
Results suggest an increase in audit quality due to a reduction in economic
bonding following APTS restrictions. Consistent with the economic bonding theory,
companies that significantly reduced APTS experienced a larger improvement in audit
quality after the change compared to companies that did not significantly reduce APTS. For tax aggressive companies, those that reduced APTS did experience a
significant increase in audit quality after the change compared to tax aggressive
companies that did not significantly reduce APTS. Moreover, companies considered
important tax clients by their audit firms that significantly reduced APTS did experience
a marginally greater increase in audit quality after the change compared to other
important tax clients that did not significantly reduce APTS.
Overall, my results indicate that the PCOAB 2006 restrictions were effective in
decreasing APTS and economic bonding, thereby leading to improved audit quality,
especially among companies associated with tax aggressive services. Accordingly,
concerns for loss of knowledge spillover seem to be minimal. There are few studies that
investigate the effectiveness of the PCAOB 2006 restrictions on audit quality. Therefore,
my study fills this void by using a tax specific measure of audit quality, tax accrual
quality, to specifically examine the target of the restrictions— audit clients that are
associated with aggressive tax services. My study confirms and expands APTS,
economic bonding, audit quality, tax accrual quality, and tax aggressive research, and
also provides insight into and support for current policy debates concerning APTS and
tax aggressive services.

A significant challenge faced by large auditing firms is offering consistent quality
across the global network. Unfortunately, variation in judgments and decision-making,
resulting from cultural differences, can undermine the provision of a uniform level of
audit quality for these international firms. Previous research has determined that national
culture influences an auditors’ professional judgments and decisions. Relying on Social
Identity Theory, I explore whether inducing one’s organizational identification can both
enhance auditor judgment and mitigate any deleterious impact that culture may have on
the provision of a uniform level of audit quality. I also examine current cultural variations
in auditor judgment in order to ensure that the results of earlier studies still typify the
international auditing environment. National culture is assessed using two dimensions
(individualism/collectivism, power distance) included in Hofstede’s 1980 cultural values framework. Participants from the United States are used to represent an
individualistic/low power distance culture while individuals from India are used to
represent a collectivistic/high power distance culture. Firms need mechanisms to elicit
desired behaviors that may not be consistent with cultural tendencies in order to provide a
uniform level of audit quality.
Contrary to expectations, no significant differences are identified between the
judgments of auditors from India and The United States. The results, however, do provide
evidence that enhancing one’s organizational identification can impact certain
professional judgments during the audit process. An association between national culture
and auditor attitudes pertaining to client trust is also found. The implications of these
findings for the professional auditing environment and future academic research are
discussed.