An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Kirsten A. Cook
Texas A&M University

G. Ryan Huston
Texas A&M University

Thomas C. Omer
Texas A&M University

Abstract: Dhaliwal, Gleason, and Mills (DGM 2004) examine whether firms manage earnings through decreases in their third to fourth quarter ETRs. We examine whether these ETR changes result from investment in tax planning in addition to or rather than earnings management. Our results suggest that, for firms that would miss consensus earnings forecasts in the absence of ETR changes, higher tax fees paid to auditors are associated with greater reductions in third to fourth quarter ETRs. We also document that firms using non-audit providers for tax services that would miss their earnings forecasts also experience greater reductions in third to fourth quarter ETRs than firms that would meet or beat their forecasts. However, we continue to find support for the DGM (2004) earnings management explanation. We also find that the passage of SOX had little impact on the relation between tax fees paid to auditors and third to fourth quarter decreases in ETRs for firms that would miss their earnings targets.

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