Abstract

Prior research shows that firms engaging in tax avoidance may face reputational costs, yet such consequences may also extend to the tax advisory firms that design these strategies. While earlier studies examine advisors’ role in facilitating tax avoidance, evidence on reputational consequences for them is limited outside settings involving regulatory sanctions. As a result, little is known about reputational consequences following highly publicized tax avoidance scandals that do not result in sanctions against the advisory firm. We address this gap by studying the 2014 LuxLeaks scandal, which revealed PwC’s role in negotiating advance tax rulings in Luxembourg for more than 300 multinational firms and shifted public scrutiny toward tax advisors. Because auditor-provided tax services (APTS) are uniquely visible and serve a signaling function toward external stakeholders, clients may respond by adjusting their APTS purchases. We further hypothesize reputational spillovers to other Big Four firms. Using a difference-in-differences design with entropy balancing on up to 16,102 client-year observations from 2011–2017, we find no evidence that PwC clients were more likely to discontinue APTS than other companies. However, clients were more likely to discontinue APTS from Big Four firms overall, consistent with reputational spillover. These client responses occur primarily at the extensive margin and are concentrated among firms facing greater public scrutiny, while highly tax-avoidant PwC clients respond less.

Keywords: Tax advisors, Reputation, Tax avoidance, Auditor-provided tax services