ABSTRACT Deloitte's 2007 PCAOB Part II report identifies, among other issues, concerns related to the audit firm's quality controls with respect to auditing income tax accounts. We investigate whether Deloitte's actions to remediate the PCAOB's concerns are associated with changes to their clients' financial reporting for income taxes. We find that Deloitte's clients increased the reported valuation allowance on deferred tax assets and increased the reported reserve for uncertain tax benefits (UTBs) in response to increased auditor scrutiny over income tax accounts. Additionally, we find that in subsequent periods, Deloitte's clients report valuation allowances and UTB balances that are not significantly different than other annually inspected auditors, consistent with Deloitte changing the quality controls related to audits of income tax accounts after the failed remediation of the 2007 Part II report.

ABSTRACT Although the differential persistence of accruals and operating cash flows is a firm-specific phenomenon, research seeking to exploit the differential persistence of these earnings components typically employs cross-sectional forecasting models. We find that a model based on firm-specific estimates of the differential persistence of accruals and operating cash flows is incrementally useful for out-of-sample forecasting relative to state-of-the-art cross-sectional models. In doing so, we show that firm-specific estimates of differential persistence are particularly useful when forecasting earnings for more stable firms (e.g., more profitable, lower growth, and less levered firms). We also demonstrate that a trading strategy exploiting investors' fixation on earnings and based on firm-specific estimates of differential persistence earns statistically and economically significant excess returns that are incremental to those generated by trading strategies based on the size of accruals. These results suggest that firm-specific estimates of differential persistence are incrementally informative for forecasting and valuation. JEL Classifications: M41.

ABSTRACT This study examines the tax avoidance behavior of firms prior to the issuance, and following the resolution, of SEC tax comment letters. We find that firms that appear to engage in greater tax avoidance are more likely to receive a tax-related SEC comment letter. We also find that firms receiving a tax-related SEC comment letter, relative to firms receiving a non-tax comment letter, subsequently decrease their tax avoidance behavior consistent with an increase in expected tax costs. Additionally, we document evidence consistent with other firms that do not receive a comment letter reacting to multiple publicly disclosed tax-related comment letters within their industry by increasing their reported GAAP ETR, consistent with an indirect effect of regulatory scrutiny on certain types of tax avoidance.