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

Research output: Contribution to journalArticlepeer-review

15 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

Funding Information:
We thank Bharat Sarath (editor), Sandra Chamberlain (associate editor), an anonomous reviewer, Gauri Bhat, Amanda Convery, Mark Evans, David Hulse, James Myers, Eddie Riedl, Hong Xie, workshop participants at the University of Arkansas and at the University of Kentucky, and conference participants at the 2012 Financial Accounting and Reporting Section Midyear Meeting, the 2012 American Accounting Association Annual Meeting, and the 2016 Tefler Annual Conference on Accounting and Finance at the University of Ottawa for providing comments on previous versions. This article was previously titled “Fair Value Accounting, Auditor Specialization, and Earnings Management: Evidence from the Banking Industry” and “The Effects of Fair Value Exposure and Auditor Specialization on Banks’ Discretionary Use of the Loan Loss Provision.” The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: Brian Bratten and Monika Causholli gratefully acknowledge financial support from the Von Allmen Research Support Endowment at the University of Kentucky, and Linda A. Myers gratefully acknowledges financial support from the Haslam Chair of Business and from the William B. Stokely Faculty Research Fellowship at the University of Tennessee, and from the Garrison/Wilson Chair while at the University of Arkansas.

Funding Information:
The author(s) disclosed receipt of the following financial support for the research, authorship, and/or publication of this article: Brian Bratten and Monika Causholli gratefully acknowledge financial support from the Von Allmen Research Support Endowment at the University of Kentucky, and Linda A. Myers gratefully acknowledges financial support from the Haslam Chair of Business and from the William B. Stokely Faculty Research Fellowship at the University of Tennessee, and from the Garrison/Wilson Chair while at the University of Arkansas.

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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