PCAOB Inspections, Knowledge Diffusion, and Corporate Tax Planning Effectiveness

This study examines the impact of auditors’ exposure to PCAOB inspection on their clients’ tax planning effectiveness. PCAOB inspections commonly scrutinize the auditing of income taxes. We posit that auditors’ tax-related knowledge increased in response to the onset of this scrutiny and that this knowledge diffused to their clients, resulting in more effective tax planning. Consistent with this, we estimate that clients’ tax planning effectiveness increased by 4.5 percent on average following their auditor’s initial exposure to PCAOB inspection. This result is stronger for clients whose auditors exhibited superior tax-related knowledge, clients with greater opportunities for knowledge diffusion from their auditor, and clients with greater tax planning incentives. We also document that auditors’ exposure to PCAOB inspection is associated with increased multinational income shifting among affected clients, suggesting one plausible mechanism for our main results. Our study reveals a notable unintended real effect of changes to the audit regulatory regime