Fair Value Exposure, Auditor Specialization, and Banks’ Discretionary Use of the Loan Loss Provision

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29 Scopus citations

Abstract

In this study, we examine whether banks’ use of the loan loss provision (LLP) to manage earnings is associated with (a) the extent to which banks hold assets subject to fair value reporting and (b) the use of an industry specialist auditor. We find that banks with a greater proportion of assets subject to fair value reporting (i.e., higher fair value exposure) use less LLP-based earnings management but more transaction-based earnings management (i.e., earnings management achieved by timing the realization of gains/losses). We also find that banks engaging industry specialist auditors use less LLP-based earnings management. Our findings suggest that banks’ use of the LLP to manage earnings is more limited when they have access to alternative earnings management tools and when they engage an auditor with more industry knowledge. Our results should be informative to regulators, members of the banking industry, and academics interested in the earnings management behavior of banks.

Original languageEnglish
Pages (from-to)318-348
Number of pages31
JournalJournal of Accounting, Auditing and Finance
Volume35
Issue number2
DOIs
StatePublished - Apr 1 2020

Bibliographical note

Publisher Copyright:
© ©The Author(s) 2017.

Keywords

  • auditor specialization
  • earnings management
  • fair value accounting
  • loan loss provision

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics, Econometrics and Finance (miscellaneous)

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