We examine shareholders' perceptions about how external tax advisors contribute to corporate tax planning. As residual claimants of corporate tax planning, shareholders benefit from lower corporate taxes, but also bear the financial and reputational costs of subsequent tax enforcement. Despite the influential advisory role of external tax advisors in corporate tax planning, existing research on how shareholders perceive this role is limited. Using event study methods and exploiting the heightened regulation of tax advice through the covered opinion rules as a setting, we observe average and cross‐sectional stock returns consistent with shareholders perceiving external tax advisors as contributing unfavorably to tax planning by promoting excessively risky strategies. We further find that risky and overall tax planning declined across firms after the enactment of the rules, consistent with shareholders' perceptions about tax advisors' contributions to firms' tax planning. Overall, our findings contribute to research on shareholder perceptions and valuation of tax planning, and have important implications for practice, where regulatory oversight of external tax advisors remains a significant concern.

Prior research shows that contingent liabilities do not accurately predict future cash payments due to the managerial discretion afforded by accounting standards. We examine the extent to which current accounting guidance for a material contingent liability—the reserve for unrecognized tax benefits (UTBs) under Financial Interpretation No. 48 (FIN 48)—generates accruals that are predictive of future income tax cash outflows. We document that UTBs fully unwind as cash tax payments over the subsequent 5 years, suggesting that managers, on average, accurately incorporate their expectations of future tax liabilities. This result persists for firms that are (1) most affected by the implementation of FIN 48, (2) unable to impound detection risk into their reserves, (3) engaged in relatively more ex ante tax avoidance, (4) suspected to have engaged in earnings management through the tax accounts, and (5) subject to plausibly exogenous shocks to tax reporting. Overall, our results suggest that current accounting guidance under FIN 48 for contingent tax liabilities enables managers to accurately report, and financial statement users to reliably predict, future cash obligations.

We examine how the shifting of legal liability between auditors and clients affects financial reporting quality. We exploit the state-level adoption and rejection of a common law doctrine, the Audit Interference Rule (AIR), which shifts legal liability between auditors and clients, while not affecting total legal liability. The likelihood of restatements declines following staggered rejections of the AIR that shift risk to clients. Path analysis indicates that audit fees increase following AIR rejections, suggesting that relatively greater liability exposure for clients leads to a greater demand for assurance services that, in turn, reduces the likelihood of restatements. We further find greater improvements in financial reporting quality following the rejections of the AIR among clients with higher litigation risk and larger clients. Broadly, we provide novel evidence that clients’ incentives relating to increased liability exposure appear to dominate auditors’ disincentives relating to decreased liability exposure on financial reporting quality. Data Availability: Data are available from the public sources cited in the text.