Costs and Benefits of Accounting Services? Evidence from Europe

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Bravidor, Marcus ; Loy, Thomas:
Costs and Benefits of Accounting Services? Evidence from Europe.
2018
Event: VHB/IAAER Annual Accounting Conference 2018 , February 26–27, 2018 , Berlin.
(Conference item: Conference , Paper )

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We empirically analyze the benefits associated with the costs of accounting-related services in 18 European countries. We use the revenues earned from accounting-related services as an estimate of compliance costs and explore whether the cross-country and temporal variation of these costs is associated with benefits for firms (e.g., in the form of lower corporate tax burdens) and/or the public (e.g., through increased earnings quality). Prior studies focused on audit and non-audit (e.g., tax advisory) fees paid by listed companies. Our dataset also includes SMEs and individuals. Empirical results indicate increased spending on accounting-related services is related to decreasing earnings quality, as measured by accrual-based earnings management and real activities management. However, we find no evidence that companies use discretionary spending to decrease their effective tax rates indicating that accounting services are primarily used to comply with tax laws. Country-level governance mechanisms partially mitigate this relation. Differences in the quality of financial reporting and tax regulation do not alter the benefits from accounting-related services. We attribute these results to an increased demand in accounting advisory services to identify avenues for earnings management and tax planning. Additionally, either the advisory effect of accounting regulation supersedes the effect of audits, which should restrict earnings management, or companies demand accounting services to smooth earnings for tax purposes.