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Taxing audit markets and reputation: An examination of the U.S. tax shelter controversy

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  • Incardona, John
  • Kannan, Yezen
  • Premuroso, Ronald
  • Higgs, Julia L.
  • Huang, Ivy

Abstract

From 2002 to 2007, the nation's largest CPA firms faced allegations of illegal activity related to the sale of tax shelters: EY, KPMG and PwC paid fines; KPMG was investigated by a federal grand jury; and EY faced a criminal inquiry. These shelter events occurred shortly after the 2002 collapse of Arthur Andersen, when policy makers were concerned about audit market concentration. This is the first paper to provide a chronological summary of how the tax shelter controversy started and ended. We investigate the stock market reaction to tax shelter news developments between 2003 and 2005 to make inferences about the market's view of audit competition and CPA firm reputation. Our results are consistent with market concern over large audit firm concentration, evidenced by large negative returns for clients of all audit providers upon the KPMG grand jury investigation announcement. We also find that tax shelter activities impact both the reputation of the accounting profession and the individual CPA firms marketing tax shelter products.

Suggested Citation

  • Incardona, John & Kannan, Yezen & Premuroso, Ronald & Higgs, Julia L. & Huang, Ivy, 2014. "Taxing audit markets and reputation: An examination of the U.S. tax shelter controversy," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 23(1), pages 18-31.
    • Handle: RePEc:eee:jiaata:v:23:y:2014:i:1:p:18-31
    DOI: 10.1016/j.intaccaudtax.2014.02.001
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    1. Friedrich, Christian & Quick, Reiner, 2024. "Do non-audit service failures impair auditor reputation? An analysis of KPMG advisory service scandals in Germany," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 98(C).
    2. Victoria I. Tarasova & Yuri V. Mezdrykov & Svetlana B. Efimova & Elena S. Fedotova & Dmitry A. Dudenkov & Regina V. Skachkova, 2018. "Methodological provision for the assessment of audit risk during the audit of tax reporting," Post-Print hal-02166957, HAL.
    3. Victoria I. Tarasova & Yuri V. Mezdrykov & Svetlana B. Efimova & Elena S. Fedotova & Dmitry A. Dudenkov & Regina V. Skachkova, 2018. "Methodological provision for the assessment of audit risk during the audit of tax reporting," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 6(1), pages 371-397, September.

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